Bond market: A major source of capital for large corporates

BS Banking Bureau

The corporate bond market is an effective venue for raising funds but is available to only the largest 10-20 per cent of firms. According to the Economic Survey 2001-02, the largest 10 per cent of the firms are least dependent on the funds from financial institutions, including banks.

Institutional borrowings make up only 17 per cent of the borrowings of the largest 10 per cent of the firms, with their highest dependence being on corporate bonds (25 per cent).

The Survey sources information from the Centre for Monitoring Indian Economy, which had used a sample size of 1,730 companies for analysing the role of the securities market in the financing of firms for the year ended March 31, 2001.

The securities market have now become a major source of capital for the largest firms and these firms are now directly accessing the market bypassing the financial institutions. However, the fraction of debt funding that comes from corporate bonds drops off very rapidly for the firms lower down the order.

The larger firms have a debt-equity ratio of 0.76, which goes up to 2.61 for firms at the end of the pecking order. The debt equity ratio of all firms combined, have gone down to 0.90:1 for the financial year 2001-02 from 1.74 in 1992.

This may reflect a combination of firm's decision to assume lower risk, a shift towards more labour intensive industries, and structural weaknesses in the market for credit, the survey says.

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