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Market regulator SEBI’s proposal to bar ‘wilful defaulters’ from accessing capital markets to issue debt and most forms of equity is “credit-positive” for Indian banks, global rating agency Moody’s Investor Service has said.
This is because such a restriction would be an additional disincentive to borrowers from becoming wilful defaulters, Moody’s said in a note.
Public sector banks, which have high levels of impaired loans, will be the key beneficiaries of SEBI’s proposal, Moody’s said.
The Securities and Exchange Board of India (SEBI) had, on January 5, put out a discussion paper that proposes restrictions on borrowers who had deliberately not repaid loans despite having adequate resources or who had engaged in fraudulent transactions, such as siphoning of funds.
In SEBI’s proposal, an issuer, its controlling/key shareholder, group company or director on the list of wilful defaulters would be prohibited from a public issue of equity shares, debt securities, and preference shares. It would also be prohibited from controlling any other listed entity. Currently, wilful defaulters are only prohibited from issuing convertible debt instruments. They will, however, be allowed to make a rights issue or a private placement to qualified institutional investors. The list itself would be maintained by a central repository authority, although not SEBI, and banks would provide wilful defaulters’ names to the authority.
Moody’s has also noted that the ability of Indian public sector banks to raise equity from the markets improved this year amid an increase in bank share prices, as reflected by a 90 per cent jump in the National Stock Exchange CNX Bank Nifty Index over the past year.
However, many of the banks still trade at a substantial discount to book value compared with Indian private-sector banks, which traded at price-to-book multiples of 2.5x-4.6x as of December 15.
“We expect those public sector banks trading at higher price-to-book ratios, including State Bank of India at 1.5x, and Bank of Baroda at 1.2x, to have an easier time raising equity capital,” Moody’s said.
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