New Companies Act may hurt non-banking finance companies bond sales
New Companies Act may hurt non-banking finance companies bond sales
KOLKATA: The nascent public bonds market faces a threat from the new Companies Act, which could throw out the most important segment of fund-raisers -- non-banking finance companies -- as the law imposes some impractical conditions.
Companies Act mandating that all bond issuers create a charge on 'specific' moveable asset could lead to finance companies such as SREI Finance, Muthoot, and Shriram Transport reducing their bond floats, say experts. Instead, these companies, which have been using market funds to lower costs, will be forced to go to banks, where the rates are higher.
"The new rules will make it cumbersome for NBFCs to create security interest on loan receivables as the loans either get amortised or prepaid," says company law expert Vinod Kothari.
Typically, NBFCs do not invest in immovable assets. A materially large portion of assets are in the form of receivables from customer loans. The new rule directing NBFCs to create a debenture redemption reserve (DRR) may also deter them from floating bonds.
"If so, existing debentures will also require DRR creation and this will adversely impact divisible profits for this year," said Sunil Kanoria, joint managing director, Srei Equipment Finance.
Existing rules exempt NBFCs from creating the reserve, at least on the money raised via private placement of bonds; in case of other issuers it was 25 per cent. The requirement to create DRR, coupled with the new guideline to create a fund for debentures falling due for redemption by March 31, 2015, has upset the industry.
Companies will be required to transfer at least 15 per cent of such debentures to bank deposits or G-secs. "Since the rate of return on such deposits/G-secs is much less than the cost of debentures, it will create liquidity strain for NBFCs as they need to fund the reserve by April 30, that is almost in the next 30 days," Kothari said.
Fund-raisings through bond sales rose 147 per cent to Rs 41,989 crore this fiscal, up from Rs 16,982 crore mopped up last year through 20 issues, data from Prime Database shows. Its group managing director Prithvi Haldea said a substantial amount was by NBFCs.
Magma Fincorp chief financial officer V Lakshmi Narasimhan feels the rules will only compel them to borrow from banks, thereby increase bank exposure on NBFCs.
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
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KOLKATA: The nascent public bonds market faces a threat from the new Companies Act, which could throw out the most important segment of fund-raisers -- non-banking finance companies -- as the law imposes some impractical conditions.
Companies Act mandating that all bond issuers create a charge on 'specific' moveable asset could lead to finance companies such as SREI Finance, Muthoot, and Shriram Transport reducing their bond floats, say experts. Instead, these companies, which have been using market funds to lower costs, will be forced to go to banks, where the rates are higher.
"The new rules will make it cumbersome for NBFCs to create security interest on loan receivables as the loans either get amortised or prepaid," says company law expert Vinod Kothari.
Typically, NBFCs do not invest in immovable assets. A materially large portion of assets are in the form of receivables from customer loans. The new rule directing NBFCs to create a debenture redemption reserve (DRR) may also deter them from floating bonds.
"If so, existing debentures will also require DRR creation and this will adversely impact divisible profits for this year," said Sunil Kanoria, joint managing director, Srei Equipment Finance.
Existing rules exempt NBFCs from creating the reserve, at least on the money raised via private placement of bonds; in case of other issuers it was 25 per cent. The requirement to create DRR, coupled with the new guideline to create a fund for debentures falling due for redemption by March 31, 2015, has upset the industry.
Companies will be required to transfer at least 15 per cent of such debentures to bank deposits or G-secs. "Since the rate of return on such deposits/G-secs is much less than the cost of debentures, it will create liquidity strain for NBFCs as they need to fund the reserve by April 30, that is almost in the next 30 days," Kothari said.
Fund-raisings through bond sales rose 147 per cent to Rs 41,989 crore this fiscal, up from Rs 16,982 crore mopped up last year through 20 issues, data from Prime Database shows. Its group managing director Prithvi Haldea said a substantial amount was by NBFCs.
Magma Fincorp chief financial officer V Lakshmi Narasimhan feels the rules will only compel them to borrow from banks, thereby increase bank exposure on NBFCs.
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
--
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To unsubscribe from this group and stop receiving emails from it, send an email to Productupdatesforamc+unsubscribe@googlegroups.com.
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