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CORPORATE BOND MARKET IN INDIA
Saksham Dewan
SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES
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CONTENTS
ABSTRACT……………………………………………………………………………… 2
INTRODUCTION…………………………………………………………………….. 3
RECENT TRENDS IN CORPORATE BOND MARKETS IN INDIA…… 4
REJUVENATING THE CORPORATE BOND MARKET…………………..9
COMPARISON WITH THE ASIAN PEERS………………………………….13
ISSUES AND CHALLENGES IN DEVELOPMENT OF CORPORATE
DEBT MARKET IN INDIA…………………………………………………………21
PROGRESS ON R.H.PATIL COMMITTEE RECOMMENDATIONS..24
POLICY RECOMMENDATIONS………………………………………………..28
CONCLUSION………………………………………………………………………...32
REFERENCES………………………………………………………………………….33
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ABSTRACT Vibrant, well-developed and robust corporate bond markets are essential to enhance stability of financial system of a country, alleviate financial crises and support the credit needs of the corporate sector, which are essential for the growth of an economy. The Indian bond market with particular reference to the corporate bond market is often considered to be under developed when viewed in line with the bond markets across the globe. Our review of research and policy papers on the corporate debt markets in India reveals a incessant absence of an efficient, liquid and a vibrant corporate debt market in India. Recent trends reinforce the need for strong policy measures to develop the corporate debt markets in India. This research aims to put into perspective certain vital aspects of the Indian bond market in the context of bond markets in other Asian countries. Asian economies included in the study are China, Japan, Indonesia, Hong Kong, South Korea, Malaysia, Singapore, Thailand, Philippines and Vietnam further highlights the importance of a strong institutional and regulatory framework, along with support from policymakers for building robust corporate debt markets. Though Japan is a different market, it has been included in this comparative study to provide potential benchmarks that we found were lack of depth and efficiency in the corporate debt market is mainly explained by inadequate infrastructure, illiquidity, regulatory gaps, limited investor and issuer base, and absence of benchmark yield curve across maturities. The recommendations comprises of areas such as taxation, legal and regulatory, public policy, market micro structures, corporate laws, and banking regulations.
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INTRODUCTION The capital structure of a company comprises its debt and equity mix raised to finance its long-term capital needs. An optimal capital structure is of immense importance to maximize the value of the firm, which is a barometer of the firm’s risk profile, and has an important bearing on its cost of capital. Thus, capital structure of a firm highly geared towards equity reduces the incidence of interest payments that may arise from external borrowings, which affects return on equity. Financial leverage influences earning per share and return on equity. A well-developed capital market is an engine for mobilizing finances for companies and firms to optimize their cost and value of capital. To put it differently, well developed capital markets enable high-quality firms to finance themselves from securities (bond and equity) rather than bank loans. Bank loans lock up capital, as loans are seldom traded. In the developed world, corporate bond markets are several times the size of the equity markets. The capital markets in India have made rapid strides in their growth and progress, especially after liberalization in early 1990s. Equity markets have seen a sea change in its landscape, owing to significant reforms in infrastructure, regulatory structures, trading practices, and product innovation. The same holds true for the banking sector which has been a pillar for the growth of financial markets. The Asian corporate Bond Market started developing rather late, after the Asian financial crisis in 1998. Prior to this, Asian bond markets were modestly developed and dominated solely by government issuances. The pace of development accelerated post the financial crisis in 2008 especially in economies like South Korea, Singapore and Malaysia who have extensively developed their bond markets in recent years. Sadly, the corporate bond markets in India have seen little growth and development. Despite many measures to deepen and kick-start the market, it has failed to take off. A peep into resources mobilized from the primary market indicates a significant skew towards the equity market. Corporate bonds make up a small percentage of resource mobilization. This is in stark contrast to the developed world, especially the U.S., Germany and Japan, where bond markets contribute more than 80% of the financing needs of corporate firms.
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I. RECENT TRENDS IN CORPORATE BOND MARKETS IN INDIA A well-developed corporate bond market is supportive of the economic developments in a country. In the Indian context, corporate bond markets have steadily shown encouraging trends in recent times. In 2014-15 too, in line with previous years, the private placement of debt issues outscored that of public issues. Private placement continued to be the preferred route by investors for its perceived advantages of operational ease, minimal disclosures and lower costs. Reporting platforms for corporate bonds were set up and maintained by BSE, NSE and FIMMDA. RBI vide its circular no. RBI/2013-14/500/IDMD. PCD.10/14.03.06/2013-14 dated February 24, 2014 directed its regulated entities to report their OTC trades in corporate bonds and securitised debt instruments on any one of the stock exchanges (NSE, BSE and MSEI) with effect from April 1, 2014. However, reporting of secondary market transactions in corporate bonds has been discontinued at FIMMDA with effect from April 1, 2014. MSEI started the reporting in July 2013, but the volumes reported at the platform are insignificant for 2014-15. NSE has hence emerged as the largest reporting platform for OTC deals in corporate bond markets in 2014-15.NSE’s share in total reporting increased from 28.4 percent in 2013-14 to 81.3 percent in 2014-15. The number of trades reported at NSE more than doubled in 2014-15 to 58,073 and the value of trades more than tripled to Rs. 8,86,788 crore over the previous financial year. During 2014-15, the total value of corporate bond trades reported at BSE approximately doubled to Rs.2,04,506 crore from Rs.1,03,027 crore in 2013-14, while the number of trades increased by 73.8 percent over the previous financial year.(Table 1.1)
Table 1.1: Secondary Market: Corporate Bond Trades
Year
BSE NSE FIMMDA MSEI
No. of Trades
Amount (in Rs. Crore)
No. of Trades
Amount (in Rs. Crore)
No. of Trades
Amount (in Rs. Crore)
No. of Trades
Amount (in Rs. Crore)
1 2 3 4 5 6 7 8 9
2013-14
10,187
1,03,027
20,809
2,75,701
39,891
5,92,071
758
28,139
2014-15
17,710
2,04,506
58,071
8,86,788 Na Na
8
1
Note: Reporting of secondary market transactions in corporate bonds has been discontinued at FIMMDA with effect from April 1, 2014. Source: BSE, NSE, FIMMDA and MSEI
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Since 2009, all trades in corporate bonds between specified entities, namely, mutual funds, foreign institutional investors, venture capital funds, foreign venture capital investors, portfolio managers and RBI regulated entities as specified by RBI have mandatorily been cleared and settled through the clearing houses of exchanges on a DVPI basis namely the National Securities Clearing Corporation Limited (NSCCL) or the Indian Clearing Corporation Limited (ICCL) and now the MSEI Clearing Corporation Limited (MSEI CCL). This provision is applicable to all corporate bonds traded over the counter or on the debt segment of stock exchanges on or after December 1, 2009. The value of corporate bond trades settled through clearing corporations increased by 7.4 percent to Rs. 6,93,903 crore in 2014-15 from Rs. 6,46,288 crore in 2013-14.(Table 1.2)
Table 1.2: Settlement of Corporate Bonds
Year
NSE BSE MSEI
No. of Trades Settled
Settled Value (in Rs. Crore)
No. of Trades Settled
Settled Value
(in Rs. Crore)
No. of Trades Settled
Settled Value
(in Rs. Crore)
1 2 3 4 5 8 9
2013-14
39,695
5,54,682
7,440
64,218
736
27,389
2014-15
46,107
6,51,423
7,737
42,480
8
1
Source: NSE, BSE and MSEI.
10
,18
7
1,0
3,0
27
20
,80
9 2
,75
,70
1
39
,89
1
5,9
2,0
71
75
8
28
,13
9
17
,71
0
2,0
4,5
06
58
,07
1
8,8
6,7
88
- - 8
1
N O . O FT R A D E S
A M O U N T( I N R S . C R O R E )
N O . O FT R A D E S
A M O U N T( I N R S . C R O R E )
N O . O FT R A D E S
A M O U N T( I N R S . C R O R E )
N O . O FT R A D E S
A M O U N T( I N R S . C R O R E )
B S E N S E F I M M D A M S E I
SECONDARY MARKET: CORPORATE BOND TRADES
2013-14 2014-15
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Yields The yields (yield-to-maturity) on government and corporate securities of different maturities of 0–1 year, 5–6 years, 9–10 years, and above 10 years are presented in Table 1.3.
Table 1.3: Yields on Government and Corporate Securities (April 2013–Sep 2014)
Month/ Year
Government Securities Corporate Securities 0-1
year 5-6
years 9-10 years
Above 10 years
0-1 year
5-6 years
9-10 years
Above 10 years
Apr-13 7.71 7.66 7.80 7.98 8.94 9.00 8.76 8.65
May-13 7.39 7.34 7.59 7.58 8.69 8.53 8.31 8.20
Jun-13 7.43 7.53 7.55 7.63 8.72 8.79 8.39 8.41
Jul-13 8.38 8.21 8.13 7.81 9.09 9.39 9.12 8.75
Aug-13 10.80 9.43 8.99 9.01 12.10 10.28 9.67 9.75
Sep-13 9.89 8.92 8.86 9.06 11.65 9.92 9.65 9.72
Oct-13 8.84 8.56 8.70 9.06 9.75 9.42 9.53 9.34
Nov-13 8.82 8.75 8.98 9.15 9.89 9.92 9.67 9.53
Dec-13 8.72 8.81 9.04 9.30 10.31 9.62 9.70 9.62
Jan-14 8.54 8.70 8.84 9.06 9.72 9.50 9.62 9.43
Feb-14 8.77 8.88 8.90 9.25 9.79 9.70 9.73 9.44
Mar-14 9.03 8.82 8.99 9.19 9.93 9.54 9.72 9.43
Apr-14 8.75 8.77 9.10 9.26 9.18 9.47 9.79 9.64
May-14 8.66 8.55 8.79 8.98 9.23 9.23 9.52 9.03
Jun-14 8.55 8.29 8.65 8.66 8.96 9.11 9.23 8.91
Jul-14 8.54 8.52 8.71 8.66 9.02 9.26 9.32 9.14
Aug-14 8.61 8.58 8.72 8.77 9.16 9.22 9.14 0.00
Sep-14 8.53 8.54 8.61 8.70 9.31 9.01 9.18 9.16 Source: NSE
39
,69
5
5,5
4,6
82
7,4
40
64
,21
8
73
6
27
,38
9
46
,10
7
6,5
1,4
23
7,7
37
42
,48
0
8
1
N O . O FT R A D E S S E T T L E D
S E T T L E D V A L U E( I N R S . C R O R E )
N O . O FT R A D E S S E T T L E D
S E T T L E D V A L U E( I N R S . C R O R E )
N O . O FT R A D E S S E T T L E D
S E T T L E D V A L U E( I N R S . C R O R E )
N S E B S E M S E I
SETTLEMENT OF CORPORATE BONDS
2013-14 2014-15
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SOURCE: CRISIL (as on 31 March 2014)
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
YIELD
Government Securities 0-1 year Government Securities 5-6 years
Government Securities 9-10 years Government Securities Above 10 years
Corporate Securities 0-1 year Corporate Securities 5-6 years
Corporate Securities 9-10 years Corporate Securities Above 10 years
52%
21%
15%
7%5%
Composition of Indian Debt Market
Government Securities
Corporate Bonds
SDLs
CPs/CDs
T-Bills
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SOURCE: CRISIL
Sector Wise Summary of Primary Issuances (Amount in Rs. Crore)
Sector FY 2012 % FY 2013 % FY 2014 % FY 2015 %
Financial Institutions and others 1,13,520 45% 1,09,425 31% 82,434 30% 127892 30%
Housing Finance Companies 36,367 14% 57,850 16% 55,106 20% 73938 17%
Private- Non-financial sector 26,946 11% 60,473 17% 43,291 16% 79864 18%
NBFCs 26,697 11% 45,777 13% 38,774 14% 64957 15%
Public Sector Undertakings 27,176 11% 39,851 11% 31,784 12% 31219 7%
Banks 14,974 6% 24,495 7% 14,388 5% 47881 11%
State Level Undertakings 4,184 2% 8,584 2% 3,686 1% 5207 1%
State Financial Institutions 1,575 1% 5,394 2% 1,482 1% 1733 0%
Grand Total 2,51,439 3,51,849 2,70,945 432691
10%1%
16%
14%36%
10%
13%
Holdings Value by Investor Type
EPFO
Pension Funds
Banks
Mutual Funds
Life Insurance Companies
Corporate
FIIs
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II. REJUVENATING THE CORPORATE BOND MARKET The corporate Bond market in India has received constant and improved policy impetus in the last few years and from being in the nascent stage it has now turned into a vibrant market. However, scope of the corporate bond market is still vast. A well-developed corporate bond market not only supports economic development but also balances excessive reliance on the bank finance sector for raising money. SEBI has injected a few procedural and strategic initiatives in the last few years that have provided the desired momentum to the corporate bond market. SEBI notified the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares), Regulations, 2013 to provide a regulatory framework for public issuance of non-convertible redeemable preference shares and also for listing of privately placed redeemable preference shares. Considering the risks involved in the instrument, certain requirements like minimum tenure of the instrument (three years) and minimum rating (AA or equivalent) were specified in case of public issuances. For listing of privately placed non-convertible redeemable preference shares, the minimum application size for each investor was fixed at Rs. 10 lakh. The regulations were also made applicable to non-equity instruments such as perpetual non-cumulative preference shares and innovative perpetual debt instruments, issued by banks (as per Basel III norms), which are in compliance with the criteria specified by RBI for inclusion in additional tier I capital. As a further measure for cost effectiveness and timeliness, SEBI allowed listed entities, including non-banking financial institutions and issuers authorised by the Central Board of Direct Taxes to file shelf prospectuses for public issuance of debt securities while limiting
-
20,000
40,000
60,000
80,000
1,00,000
1,20,000
1,40,000
Sector Wise Summary of Primary Issuances
FY 2012 FY 2013 FY 2014 FY 2015
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the number of issuances to four to keep the issue of fragmentation under control. As a step towards making the bond market more transparent, SEBI advised that with respect to public issues of debt securities, no person connected with the issue shall offer any incentive, whether direct or indirect, in any manner, whether in cash or kind or services or otherwise to any person making an application for allotment of such securities. In August 2011, SEBI amended the regulations for mutual funds, permitting mutual funds to set up infrastructure debt funds under the mutual funds framework. In September 2011, SEBI put in place conditions for issue of structured products. This was done with a view to enhancing disclosures for issue of debt instruments with returns linked to various market indices. Additional norms included restricting eligible issuers to those who have a net worth of Rs. 100 crore, a minimum ticket size of issue at Rs. 1 lakh, selling practices, additional disclosures pertaining to riskiness of such instruments, scenario analysis showing its value under various market conditions and the commission structure embedded therein. Third party valuation by a credit rating agency was also made mandatory and this has to be disclosed to the public. To help develop the market of securitised debt instruments (SDIs) and improving transparency, SEBI directed trades in SDIs to be reported within 15 minutes on the trade reporting platforms of exchanges (NSE, BSE or MSEI). SDIs are instruments created out of a pool of loans with mutual funds, FPIs, AIFs, etc. As a measure to boost investor confidence in securitisation transactions, SEBI approved stricter norms for trustees managing SDI issuances. In order to provide retail investors an opportunity to invest in corporate bonds on a liquid and transparent exchange platform, and institutions to buy and sell corporate bonds, a dedicated debt segment at the exchanges was provided for by SEBI. The segment intends to boost liquidity in the trading of corporate bonds. In view of the fact that historical data on all corporate bonds issued is very crucial for an investor to take informed investment decisions, SEBI mandated both the depositories, NSDL and CDSL to jointly create, host, maintain and disseminate the centralised database of corporate bonds/debentures which are available in demat form. The database can be accessed by the public or any other users without paying any kind of fees or charges. As a significant step to fill the gap in urban infrastructure requirements, SEBI issued norms on issuance of debt securities by municipalities (municipal bonds). This step also brings India in line with advanced nations which use this innovative segment for raising capital. With growth envisaged for the economy as a whole municipal bonds have a significant role to play in meeting the infrastructure needs of urbanisation.
Issuances in the Corporate Bond Market: Trends In the primary market, the total issuance amount increased from Rs. 1,18,485 crore in 2007-08 to Rs. 4,13,558 crore in 2014-15 implying a CAGR of 19.5 percent. There was a gradual rise in the total number of issues from 744 to 2,611 during the same period. In the public issue market, the issuance amount increased from Rs. 1,500 crore during 2008-09 to Rs. 42,383 crore during 2013-14 and decreased to Rs. 9,422 crore during 2014-15. The sudden
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increase in the amount raised through public issues during 2011-12 to 2013-14 was due to the issuance of tax free bonds by infrastructure companies (see Table 2.1).
Among the types of issuers, financial institutions, housing finance companies and NBFC have been frequently tapping into the corporate bond market. During 2011-12 to 2013-14, there was an increase in the proportion of private sector companies tapping into the corporate bond market, which is a good signal.
Table 2.1: Growth in Issuance of Corporate Bonds
Year No. of Public Issues
Amount Raised through Public
Issue (in Rs. Crore)
No. of Private
Placement
Amount Raised through Private
Placement (in Rs. Crore)
Total Amount Raised through Public Issue
and Private Placement (in Rs. Crore)
2007-08 0 0 744 1,18,465 1,18,465
2008-09 1 1,500 1041 1,73,281 1,74,781
2009-10 3 2,500 1278 2,12,635 2,15,135
2010-11 10 9,451 1404 2,18,785 2,28,236
2011-12 20 35,611 1953 2,61,283 2,96,894
2012-13 20 16,892 2489 3,61,462 3,78,354
2013-14 35 42,383 1924 2,76,054 3,18,437
2014-15 24 9,422 2611 4,04,136 4,13,558
With regard to rating of issues, there has been an increase in issue depth as lower rated issues have been successful in accessing corporate bond market. In the public issue market, the proportion of issues rated lower than the AAA rating grew from 12 percent in 2010-11 to 26 percent in 2013-14. In the private placement market, issues with ratings lesser than the investment grade have also been able to raise funds. (Tables 2.2 and 2.3).
Table 2.2: Rating wise Public Issuances
Rating 2011-12 Percent 2012-13 Percent 2013-14 Percent 2014-15 Percent
AAA 8,290 87.7
24,785 70.1
12,210 70.8
31,352 74.0
AA+ 661 7.0
5,693 16.1
2,401 13.9
4,796 11.3
AA 500 5.3
1,775 5.0
1,169 6.8
3,305 7.8
AA- 0.0 3,098 8.8
1,461 8.5
2,334 5.5
A+ 0.0 0.0 0.0 400 0.9
BB+ 0.0 0.0 0.0 196 0.5
Total 9,451 100
35,351 100
17,241 100
42,383 100
Source: CRISIL.
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Table 2.3: Rating wise Private Placement Issuances
Rating 2011-12 Percent 2012-13 Percent 2013-14 Percent 2014-15 Percent
AAA 1,32,075 68.7 1,89,447 75.3 2,26,311 64.2 1,89,396 69.9
AA+ 18,775 9.8 28,054 11.2 54,742 15.5 36,917 13.6
AA 10,851 5.6 12,587 5.0 25,351 7.2 15,360 5.7
AA- 13,856 7.2 6,237 2.5 16,946 4.8 9,404 3.5
A+ 8,178 4.3 2,197 0.9 3,735 1.1 5,880 2.2
A- 5,844 3.0 6,175 2.5 12,015 3.4 5,207 1.9
BBB+ 890 0.5 3,414 1.4 2,536 0.7 2,243 0.8
BBB+ 150 0.1 918 0.4 208 0.1 453 0.2
BBB 507 0.3 32 0.0 884 0.3 1,104 0.4
BBB- 445 0.2 323 0.1 518 0.1 2,501 0.9
BB+ 250 0.1 0.0 192 0.1 450 0.2
BB 0.0 495 0.2 95 0.0 98 0.0
BB- 84 0.0 0.0 2,935 0.8 791 0.3
B+ 0.0 0.0 198 0.1 444 0.2
B 0.0 0.0 155 0.0 6 0.0
B- 0.0 0.0 0.0 17 0.0
C 0.0 53 0.0 477 0.1 571 0.2
A1+ 0.0 0.0 0.0 0.0
A1+ 0.0 0.0 0.0 0.0
Not Rated 222 0.1 1535 0.6 4977 1.4 103 0.0
Grand Total 1,92,127 100 2,51,467 100 3,52,275 100 2,70,945 100 Source: CRISIL/Prime Database.
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2011-12 2012-13 2013-14 2014-15
Rating Wise Public Issuances
AAA AA+ AA AA- A+ BB+ Total
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III. COMPARISON WITH THE ASIAN PEERS Reserve Bank of India (2011) observes that listed corporate debt forms only 2 per cent of
GDP. This is significantly low compared to other emerging economies, such as Malaysia,
Korea and China. Further, Government of India (2009) makes an important observation;
even today most of the large issuers in the corporate debt market segment are “quasi-
government” i.e. banks, public sector oil companies or government sponsored financial
institutions. Of the rest, only a few notable names dominate the market.
Therefore, increasingly, there has been a lot of focus on the development of debt markets in
India and it has garnered a lot of policy and regulatory attention. As such, we see an
evolving institutional setup in the debt markets space (Chart 1).
-
50,000
1,00,000
1,50,000
2,00,000
2,50,000
AAA AA+ AA AA- A+ A-
Rating Wise Placement of A Rated Bonds
2011-12 2012-13 2013-14 2014-15
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Chart 1: Micro-Structure of Corporate Debt Market in India
The Corporate debt market is primarily regulated by three institutions namely the Reserve
Bank of India, the Securities and Exchange Board of India and the IRDA. It is important to
understand the context associated with each of the regulatory institutions. The RBI is the
monetary authority in India and is therefore primarily interested in ensuring an adequate
flow of credit in the economy, maintaining foreign currency market, and managing the twin
objectives of economic development and price stability.
On the other hand the SEBI’s outlook is more narrow- promotion, development and regulation of securities’ markets in India keeping the investors’ interests protected. The backbone of SEBI’s action plan has been the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 in an attempt to reduce costs and improve transparency in the corporate debt market. Since insurance companies are one of the largest components in the demand side of the
corporate debt market, it is essential to note that the governing body, IRDA has kept pace
with the supply side reforms initiated by the RBI and SEBI. IRDA ensures the participation of
insurance companies in the corporate debt setup.
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Three aspects of the bond market are covered in this study, covering Aggregate bond markets:
1. The size and expanse of the bond market, 2. The financing profile of the economy 3. Turnover in the secondary market
1. Size and expanse of the bond market India ranks fourth in size among its Asian peers with a total bond market of US $812 billion as of March 2014 with a strong presence of Government bonds of $569 bn (30.4% in terms of GDP) and a relatively smaller corporate bond market of $242.5 bn (13% in terms of GDP). Corporate bonds in all account for only 30% of total outstanding bonds in India. Interestingly, for almost all the countries, the bond market is dominated by the government sector. This is intuitive since a developed government bond market is often considered to be a pre-requisite for the development of the corporate bond market where interest rate benchmarks of GSecs are used to reckon the spreads. The table 3.1 and 3.2 below give an overview of the size of bond markets in Asian countries.
The largest among the sample is Japan with $9,990 billion which is not a surprise since it has an extensive bond market analogous to those of western developed countries. However, the Japanese bond market is dominated by government bonds (92% of total). The corporate bond market is miniscule in comparison ($786 bn) and is only 17% in terms of GDP (government bonds in comparison are 203% of GDP).
China stands ahead of India as it has the second largest bond market with net outstanding debt of $4,724 bn which is 50.3% of GDP, higher than India by 7%. The Chinese bond market also follows the Convention of government domination as corporates account to only 35% of the total bond market.
South Korea is third with a Size of $1,641 bn. However, it is an exception in the sample as it has a larger corporate bond market relative to the government bond market. Corporate bonds account for around 61% of outstanding bonds in the country and was 125 % of the GDP of the country suggesting the bond market is extensively developed for the size of the economy.
Malaysia, Thailand and Singapore, the medium sized economies within this Asian group have a bond market worth $ 312 bn, $ 275 bn and $ 242 bn respectively. Hong Kong and Indonesia have a much smaller bond market at $ 195 bn and $ 108 bn. Vietnam is the smallest in the sample with a bond market size of $ 29 bn only.
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Table 3.1: Size of the Bond Market*(in USD Billion)
Countries Outstanding Government
Bonds
Outstanding Corporate
Bonds
Total Bond Market
China 3,072.6 1,651.7 4,724
Hong Kong 108.5 86.2 195
Indonesia 89.7 17.9 108
Japan 9203.4 786.6 9,990
South Korea 626.1 1014.9 1,641
Malaysia 182.4 129.7 312
Philippines 87.3 13.3 101
Singapore 149.6 92.1 242
Thailand 213.7 61.5 275
Vietnam 28.01 0.7 29
India 569 242.5 812
Source: ASIAN BONDS ONLINE, SEBI and Ministry of Finance *Figures are as of December ’13 for all countries and as of March ’14 for India
0%10%20%30%40%50%60%70%80%90%
100%
Ratio of Government and Corporate Bonds
Outstanding Government Bonds Outstanding Corporate Bonds Total Bond Market
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Table 3.2: Government and Corporate Bonds as Percentage of GDP*
Debt as % of GDP
Government Corporate Total
China 33.1 13 46.1
Hong Kong 37.8 31.4 69.2
Indonesia 11.4 2.3 13.7
Japan 48.7 77.5 126.2
Malaysia 62.4 43.1 105.5
Philippines 32.2 4.9 37.1
Singapore 53.1 37 90.1
Thailand 58.6 15.9 74.5
Vietnam 19.8 0.7 20.5
India 49.1 5.4 54.5 Source: Asian Development Bank (Asian Bonds Online) and RBI *As of March 2013
2. Domestic Financing Profile This section gives an overview of the financing profile in these countries. Excluding the government sector, there are three sources of finance which is represented by outstanding bank credit, bonds and equity. Upon comparison, it is evident that some countries primarily rely on domestic credit and some look to equity as the important source of domestic financing. However, corporate bonds do not emerge as the preferred source for financing for any of the countries in the sample.
0
20
40
60
80
100
120
140
Debt as Percentage of GDP
Government Corporate
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The table 3.3 below depicts the nature of domestic financing in India and its Asian peers.
Domestic credit (i.e. credit disbursed by banks) is the primary source for financing in China (73.9%) and South Korea (73.9%) followed by India which is second with a share of 71.5%.
The role of domestic credit is less important in Hong Kong and Singapore which have a larger share for equity.
For Indonesia and Malaysia, equity is still the preferred route followed by bank credit.
In case of Thailand, bank credit has the largest share.
Corporate bonds are not significant in these countries with India having a higher share with 18.4% followed by Malaysia with 12.4% and China, S Korea and Singapore with 8% each. Interestingly, relative to other countries, India lends the most through corporate bond issuances at 18.4% standing well above its peer countries in the sample. Hence, despite a smaller contribution of corporate bonds in India (in terms of outstanding issuances) relative to other countries, they play a larger role in satisfying the finance needs compared with other countries in the sample.
Table 3.3: Domestic Financing Profile (% share of total)
Country Bank Credit Corporate Bonds Equity
China 73.9 8.0 18.1
Hong Kong 17.5 2.5 80.0
Indonesia 41.9 2.4 55.7
South Korea 73.9 8.0 18.1
Malaysia 40.1 12.4 47.5
Singapore 26.2 8.0 65.8
Thailand 51.1 6.3 42.6
India 71.5 18.4 10.1 Source: ASIAN BONDS ONLINE, RBI, ACE Equity
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3. Turnover in the Secondary Market The turnover ratio is the value of bonds traded in the secondary market to the total outstanding bonds. It is indicative of the liquidity in the bonds market as it captures the extent of trading in the secondary market relative to the amount of bonds outstanding. Hence, higher the turnover ratio, more active is the secondary market. The table 3.4 below gives an overview of the turnover ratios in the government bonds, corporate bonds and the aggregate bonds in the Asian countries.
Japan has the highest turnover ratio of 4.56 with government bonds having a multiple of 4.9. The turnover in the corporate bond market is relatively lower at 0.3.
India is second with a healthy turnover in the bond market at 3.46. There is a strong secondary government securities turnover of 4.7. India’s position in terms of turnover is mirrored in the corporate bonds market as well with a turnover ratio of 0.67, which is still higher than that of Japan.
China leads in the corporate segment with a multiple of 1.6. In fact, China has a turnover ratio of above 1 in both the segments.
Thailand is third with a total turnover of 2.5, with a 3.1 turnover in government bonds and corporate bonds turnover being 0.26.
While South Korea has a larger corporate debt market size relative to GSecs, the turnover ratio is higher for gilts at 3.73 compared with 0.54 for corporate bonds.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
China Hong Kong Indonesia South Korea Malaysia Singapore Thailand India
Domestic FInancing Profile
Bank Credit Corporate Bonds Equity
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Table 3.4: Trading volume in the Secondary Market relative to bonds outstanding
Countries Government
Bonds Corporate
Bonds All Bonds
China 1.08 1.55 1.24
Indonesia 0.97 0.48 0.89
Japan 4.92 0.31 4.56
South Korea 3.73 0.54 1.76
Singapore 1.77 1.10
Thailand 3.09 0.26 2.46
India 4.66 0.66 3.46 Source: ASIAN BONDS ONLINE, RBI
The above analysis indicates that despite having a large bond market, countries like China
and South Korea have a relatively passive secondary market as opposed to India which
stands fourth in terms of the size of bond market, but is second with respect the turnover in
bond market as a whole and also in the individual government and corporate bond markets.
0.00
1.00
2.00
3.00
4.00
5.00
6.00
China Indonesia Japan South Korea Singapore Thailand India
Trading Volume relative to Bonds outstanding
Government Bonds Corporate Bonds All Bonds
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IV. ISSUES AND CHALLENGES IN DEVELOPMENT OF CORPORATE DEBT MARKET IN INDIA
1. Multiple and overlapping financial supervisory bodies The Indian financial regulatory structure is quite complex with a lot of overlapping and ambiguous regulatory jurisdictions. With multiple agencies entrusted with the task of regulation and supervision, the lines of jurisdiction become blurred often leading to inefficiencies in the regulatory process. This sometimes has regulatory bodies working at cross purposes to each other often causing friction.
2. Legal impediments Several missing and inadequate legal structures are observed in the context of corporate bond markets, the most prominent being those relating to enforcement contracts and corporate insolvency. A corporate bond is essentially a debt and the expeditious enforcement of debt contracts is a natural concern for lenders. In India enforcement contract litigation is often embroiled in delays and deficiencies of India’s overburdened legal system, not the least of which are prohibitive costs. This lack of remedial opportunities increases the risk of corporate bond lending. Similar inefficiencies have been observed in cases of corporate insolvency. Analogous to enforcement contracts, the process of liquidation and winding up of companies is important because it determines the distribution of assets to the lenders. In India, the RDBF Act and the SARFAESI Act form the pillars of insolvency laws. However, these are not sufficient since they address only debts due to banks and financial institutions and not ordinary creditors. As far as ordinary creditors are concerned, the only recourse available is ordinary civil court litigation.
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3. Lack of a benchmark yield curve The availability of a liquid government securities market is often observed to be a prerequisite for the development of corporate debt markets in India. The presence of a well-defined yield curve provides a price discovery mechanism for private institutions. The government securities market yield curve provides a natural floor for the borrowing costs of the private sector and facilitates the pricing of cash flows off the curve. With a dependable yield curve, the private issuer only needs to concentrate on the credit spread for its issue. The Government’s and investing banks’ preference for 10 year securities has resulted in a lack of a reliable yield curve across maturities, which has in turn hampered the pricing of corporate bonds. Indian government bonds are generally 10 year bonds with a few issues of longer issues stretching to 25 or 30 years. The corporate bond market mirrors this behaviour and maturities typically range in the 5 to 10 year range6. The lack of yield curve has also been stressed in the Financial Stability Report (RBI, 2013).
4. Nelson’s Low Level Equilibrium The Indian debt market is trapped in a low level equilibrium succinctly depicted in the
following figure.
5. Small investor and trader base Participants in the bond market are fewer than those in the equity market. The typical participants in the bond market are mostly banks, insurance companies, mutual funds, and primary dealers. Pension funds are typically present only in the primary market. Also, among insurance companies, LIC is the dominant player. Banks are more focused on government securities. Hedge funds, and institution investors are almost absent, especially in the secondary market.
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6. Higher costs Corporate bonds are issued and traded at literally wafer-thin margins. Any transaction cost only adds to the illiquidity, as incentive to trade reduces. Different duties and taxes like varying stamp duty from state to state, withholding tax, etc. act as severe constraints. Rationalization of stamp duty across states may help in developing the corporate bond market. Similarly, cut in withholding tax on foreign institutional investors (FIIs), and other overseas investors would encourage their increased participation. Reduction in taxes, such as stamp duty and withholding taxes on corporate debt investments, which are currently higher than those in neighbouring countries, and even higher than on equity, would also help in improving liquidity in the market.
7. Only partially convertible rupee Domestic (onshore) corporate bond issuances are far from regular because of huge differences in borrowing costs on domestic and overseas exchanges. Hence, companies prefer to issue corporate bonds abroad to issuing them domestically. Moreover, FCCBs (Foreign Currency Convertible Bonds) are quite liquid outside India.
8. Lack of a credit default swap (CDS) market The absence of a well-developed CDS market is yet another constraint. CDS hedges would have enabled buyers of corporate bonds to avoid default risk of the issuers, leaving them holding only interest rate risks. Once the corporate bond market becomes deep and liquid, interest rate risks could be hedged in it by going short. No doubt, the Reserve Bank of India (RBI) has taken initial steps to develop a credit default swap market, but there is a long way to go. For reasons of lower taxes, ease of issuance, less onerous regulations, availability of securities, and ease of trading, the market for CDS on Indian corporations is more developed outside India (at centres like Singapore, Hong Kong, and London) than inside India.
9. Lack of awareness among retail investors Financial awareness and financial inclusion are often discussed these days. These issues are relevant for corporate bonds, too. Investors lack awareness about corporate bonds. Another challenge is the lack of a distribution network for bonds in the far reaches of the country. In developed countries, banks act as distributors. In India, because of conflict of interest between raising fixed deposit and selling bonds, banks, by and large, stay away from selling bonds to their customers.
10. Regulatory barriers Multiple regulators govern different financial markets with their own mandates. Insurance companies are regulated by the Insurance Regulatory Development Authority (IRDA), which mandates the proportion of funds an insurance company can invest in different securities. Similar restrictions exist in the pension fund industry, which is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Most of these norms do not allow for trading of securities, restraining the development of the secondary market in corporate bonds.
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V. PROGRESS ON R.H.PATIL COMMITTEE RECOMMENDATIONS
For the development of the corporate bond market, the Government of India set up a Committee under late R.H. Patil to suggest recommendations for the corporate bond and securitisation. The impediments being faced by Indian corporate bond market were highlighted by the report of the Committee. The following table summarises the recommendations for the development of corporate debt market only. Although most of the recommendations have been implemented, no progress has been made on some crucial recommendations like stamp duty rationalisation and limiting the number of fresh issuances of corporate bonds in one year
Action taken on the Recommendations of R.H. Patil Committee Report
Sr. No
Recommendations Progress
Development of Primary Market
1 • Stamp duties on corporate bonds to be made uniform across states, be linked to the tenor of the securities with an overall cap on the stamp duties
• No significant progress
2 • TDS rules for corporate bonds to be removed • Almost done
3 • Time and cost for public issuance, and the disclosure and listing requirements for private placements to be reduced and be made simpler
• For public/rights issues of debt instruments, rating of one rating agency is permitted instead of two earlier.
• Banks be allowed to issue bonds of maturities over 5 years for ALM purpose (and not for infrastructure only)
• Banks are now allowed to issue bonds of any maturities (if it is for subordinated debt for Tier II capital then the minimum maturity is five years).
• Regulatory limits to be set for the banks when they subscribe to bonds issued by other banks so that other entities be encouraged to subscribe to bonds issued by banks
• A bank’s investment in all types of instruments, eligible for capital status of investee banks, is not allowed to exceed 10 per cent of the investing bank’s capital funds.
4 • Evolvement of market-makers for corporate bonds
• Only in January 2013, SEBI has announced the creation of market makers though they are yet to take shape.
5 • For already listed entities, disclosure to be substantially abridged. Only some incremental disclosures to be made required
• When equity of a company is listed, and such company wishes to issue debt instruments, only minimal incremental disclosures are required now.
• The role of debenture trustees to be strengthened
• In 2007 August, SEBI made it mandatory for debenture trustees (DTs) to disseminate all information.
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• Companies to pay interest and redemption amounts, in respect of corporate bonds issued by them, to the concerned depositories who would then pass them on to the investors through ECS/warrants
• Companies now- a-days pay the interest and redemption amounts through ECS.
• Mandatory for the issuers to get privately placed bonds listed within 7 days from the date of allotment
• When the issuer has disclosed the intention to seek listing of debt securities issued on private placement basis, the issuer shall forward the listing application along with the disclosures to two recognized stock exchanges within fifteen days from the date of allotment of such debt securities.
• The credit to the demat account within 2 days from the date of allotment to be made mandatory
• The credit to the demat account takes up to 15 days.
6
• The scope of investment by provident / pension /gratuity funds and insurance companies in corporate bonds be enhanced and rating to form the basis of such investments
• Some progress already made (in April 2010, the EPFO trustees were allowed to invest funds in joint sector companies where GOI is having 26 percent stake).
• Recently, EPFO has been allowed to invest in bonds of private firms that are AAA rated, listed, have made profit in last five years, and have a net worth of Rs.3000 crore, have declared at least 15 per cent dividend for preceding five years and with maturity period of its bonds at least 10 years.
• Investment guidelines for these entities to be common across different issuer categories
• No significant progress
• Retail investors to be encouraged to participate in the market through stock exchange
• Awareness programmes are being conducted for investors,
• Tax exemption on infrastructure bonds was also another step in that direction,
• RBI direction to banks to issue subordinated debt to retail investors is another step.
• In January 2013 guidelines of SEBI, a separate dedicated debt segment has been created for retail investors.
• Allowing separate higher limit for FIIs on a yearly basis for investment in corporate bonds
• FIIs investment limit has been increased to $51 billion.
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• In order to encourage banks to invest in corporate bonds, investment in corporate bonds to be considered as part of total bank credit while computing credit deposit ratio
• No significant progress
7 There should be a guideline limiting the number of fresh issuances
• No significant progress
8 • Creation of a centralised database of all bonds issued by a corporate. This database is to also track rating migration
• There has been some progress (broadly data is available on SEBI website but not in detail as prescribed by the committee).
• In October 2013, SEBI has announced the creation of a centralised database but it is yet to take shape.
• Appropriate enabling regulations for setting up and licensing of platforms for non-competitive bidding and order collection for facilitation of an electronic bidding process for primary issuance of bonds
• No significant progress.
Development of Secondary Market
9 • Establishment of a system to capture all information related to trading in corporate bonds in real time basis
• Reporting platforms are provided by NSE, BSE, and FIMMDA.
• SEBI places secondary market trade data on its website at regular interval.
• Different regulators to mandate the entities to report the details of transaction within specified time of the trade to the trade reporting system
• To promote transparency in corporate debt market, a reporting platform was developed by FIMMDA and it was mandated that all RBI-regulated entities report the OTC trades in corporate bonds on this platform. Other regulators have also prescribed such reporting requirement in respect of their regulated entities.
10
• Clearing and settlement of the trades to be made according to the IOSCO standard (Phase wise movement from DVP1 to DVP3). RBI may grant access of the RTGS to the concerned clearing and settlement entities
• DVP I settlement for secondary market OTC trades is already in place (Transitory pooling facility has been provided by RBI).
• The guideline of January 2013 have made announcement in the direction for DVPIII.
• Appropriate approvals may be given by the concerned regulators to enable free participation on the trading platform through limited membership by the concerned entities for the purpose of proprietary trading
• Scheduled Commercial Banks (SCBs) are permitted by RBI from November 2012 to become members of SEBI approved stock exchanges for the purpose of undertaking proprietary transactions in the corporate bond market.
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11 • Development of an Online order matching platform for corporate bonds by exchanges or jointly by regulated institutions
• Till December 2012, Non-functional (BSE and NSE trading platforms are operational where trade matching are order driven with essential features of OTC market).
• A new order matching platform has been allowed in January 2013 by SEBI, and the platform of NSE has gone live in May 2013; though it is yet to achieve liquidity.
12
• Introduction of tri-partite repo contract, securities lending and borrowing , DVP III settlement and STP enabled order matching system
• No significant progress on tripartite repo contract.
• DVP III settlement and STP enabled order matching have been allowed by SEBI in the recently approved dedicated debt segment.
13 • Reduction in shut period
• As per January 2013 SEBI guideline, shut period has been done away with for interest payment, but issuers have been allowed to specify shut period for corporate actions such as redemptions.
14 • Unified market convention
• All issuers are directed to use interest rate convention of Actual/ Actual, though other conventions are still in practice.
15 • Permission for Repos in Corporate Bonds
• Permitted by RBI since March 2010 (recently MFs and Insurance companies have been permitted to participate in it by respective regulators).
16 • Reporting of the OTC Interest Rate Derivatives, and introduction of the exchange traded derivatives
• OTC Interest rate Derivatives trades are being reported over CCIL.
• Delivery based Interest rate futures (IRFs) have been introduced in the exchanges, though it is yet to achieve liquidity.
• Reserve Bank has recently announced to introduce cash settled 10 year IRF contracts.
17 • Reduction in the market lot from Rs.10 lakh to Rs. 1 lakh
• The tradable lot has been reduced to Rs. 1 lakh.
• Now with the development of separate debt segment in the exchanges, the lot size for institutional investors has been fixed at minimum Rs.1 crore.
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VI. POLICY RECOMMENDATIONS Though it is reasonable to infer that once a logical set of recommendations are implemented the problems plaguing corporate debt in India would be eliminated paving the way for a vibrant bond market, these are difficult issues. There have been numerous academic and government of India reports dedicated to the issue and the possible recommendations have been accepted by one and all. However, our focus below is to harp on a few recommendations which we believe are crucial in the entire reform process. While a few of them are independent, in light of recent developments, the others represent critical proposals that have not received the required amount of policy attention in recent times.
1. Tax Reforms
It is widely acknowledged that favourable tax regulations often positively impact the development of financial markets in an economy. India’s efforts to develop the corporate debt markets could enjoy a similar success story by replicating the liberal tax mechanism provided to the equity market. Specifically, the following reforms could be helpful.
a. For Retail Investors: The only corporate bonds allowed for eligibility under section 80C of the income tax act are those of companies in the infrastructure space. The scope could be expanded to include corporate bonds of other entities as well. Alternatively, a separate window like the one created for infrastructure bonds under section 80CCF could be created for corporate debt investments. Till the time Indian corporate debt markets are conducive to direct retail participation, such investments could be mandatorily through debt mutual funds (on the lines of tax exemptions to ELSS) with a 3 to 5 year lock-in period. This will provide investors a tax efficient higher yield alternative to bank fixed deposits.
b. For Foreign Investors: Currently tax deduction at source on interest payments (to FIIs) stand at 5 per cent on investments in rupee denominated corporate bonds. This comes as a very recent amendment, and the withholding tax rates till May 2013 were quite high at 20 per cent. It may be worthwhile to award exemption to foreign investors from withholding tax, to incentivize their participation in corporate bonds. The trend to date suggests that FIIs have generally been biased toward equities and government securities, both of which provide better liquidity; hence such incentives might be necessary to make corporate bonds competitive as an investment option. This will not only improve non-resident participation in the domestic market but also pave the way for increased offshore corporate bond issuances.
c. For all investors: Corporate bonds and debentures could be brought on level grounds with equity as far as tax on long term capital gains is concerned. As per existing regulation a long term equity share (held for more than 1 year and on which Securities Transaction Tax (STT) is paid) is exempt
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from tax (section 10(38) of the Income Tax Act); however, the same provision has not been extended for corporate bonds. A similar provision for listed corporate debt securities will improve participation from all investors. Though in the short term these measures are bound to reduce the Centre’s revenues, in the long term the revenues from additional STT (due to increased turnover) and benefits to the economy of a vibrant corporate bond market are substantial.
2. Participation from Insurance Companies and Pension funds
At present, at least half of the exposure of insurance companies is required to be made in government securities, 15 per cent in infrastructure bonds and the rest in equity markets, mutual funds, debt and money market instruments.
Insurance companies inherently face the problem of asset liability mismatch and are on a constant tight rope to balance assets and claims and withdrawals. Therefore it is imperative that they invest in instruments with wide ranging maturities. If insurance companies are allowed sufficient headroom for investment in corporate bonds, it will provide issuers with a huge and diverse investor base, effectively providing a means to break Nelson’s low level equilibrium. Secondly, the proposals to allow insurance companies repos in corporate bonds and proprietary trading membership for debt trading on stock exchanges should be rolled out as soon as possible.
On similar lines pension funds face the problem of asset liability mismatch and therefore there is an urgent need for their presence in the corporate debt market space. This will result in a healthy competition for funds between the government securities market and the corporate debt market; with the government no longer enjoying monopoly over cheap domestic funds. This will prompt the government bond market towards better price discovery through correct pricing and establishing a benchmark yield curve. Further, as one of its indirect effects, the rising cost of borrowing for the government will trigger fiscal discipline.
3. Credit enhancement
While the twelfth five year plan requires infrastructure funding of almost $1 trillion, it is highly improbable that the Indian banking system is capable of taking this up on their balance sheet. There is a desperate need to arrange for low cost funds for the infrastructure sector through new products, one of which is credit enhancement. Credit enhancement is a technique used to upgrade the credit rating of an asset backed security to improve its marketability8. Bank issued letters of credit (LOC) are another one of the most common methods of credit enhancement. The LOC attaches the banks strength and rating to the issue and provides the borrower with a lower cost of borrowing9. Credit enhancement schemes are especially critical in the Indian context because, currently insurance companies and pension funds are not permitted to invest in corporate bonds below investment grade. Since a credit
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enhancement mechanism allows companies with lower ratings to issue investment grade bonds, it will encourage participation of such institutional investors in the bond market.
4. Creation of Corporate Bond Indices
A bond index should be created to measure the performance of corporate bonds issued in the country. Single or multiple indices can be created and bonds of similar maturity or rating can be grouped together to allow investors to gauge the performance of bonds. These indices should also be made investible so that investors can invest in a basket of bonds. Goltz and Campani (2004) state that corporate bond indices can perform three major roles. Firstly, they act as a measure of market performance. Secondly, corporate bond indices can be used as a medium for investment. Finally, they can be used to benchmark performance where index returns are considered as neutral performance.
5. Measures for attracting retail investors
Regulators and policymakers, especially SEBI have consistently focused on ensuring retail participation in equity markets and had achieved a fair amount of success in the same. Similar measures need to be implemented to draw retail investors to corporate bond markets.
a. On lines of equity markets, the regulators should consider higher quota for direct investment by retail investors in debt issues.
b. Further, it has been observed that retail investors prefer investing in the markets via mutual funds. In fact, due to lacklustre performance of equity markets retail investors are increasingly favouring debt mutual funds over equity mutual funds.10 an indirect impetus can be provided to retail participation in bond markets by offering quotas to mutual funds in debt issues. This will also encourage mutual funds to invest in corporate debt markets alongside G-Secs.
c. The large lot sizes act as deterrents to retail participants who would prefer the smaller and easily tradable equity securities. An analysis of publicly issued corporate bonds and listed on NSE reveals that only 6 out of 157 bonds have face value below Rs. 1000. Hence, bonds of smaller lot sizes should be made available to retail investors.
d. Increase the ease of trading and reduction in transaction costs through encouragement of demat trading for listed bonds.
e. Variety of tax benefits to retail investors on lines of those provided to equity investments. This has been discussed in detail below.
As discussed above the current corporate debt market scenario is not conducive to retail participation, and will require quite a few reforms to make it so. This is bound to be a time consuming process. In the meanwhile, it will be worthwhile to explore the possibility of carving out a specialized retail bond market following the Australian experience.
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6. Public issue and listing of corporate bank borrowings
In the private equity market, funds invest in strong private companies for a period of 4-5 years and help the companies achieve their potential growth. At the end of their investment horizon, the funds typically achieve their exit and make gains through a public issue of the shares of the investee company. Post an IPO, the private equity fund either achieve a complete stake sale or continue to retain a reduced stake to further participate in the growth of the company An attempt can be made to replicate this model in the corporate debt market. Banks (or consortium of banks) and corporate borrowers can make a public issue of the whole or part of the existing bank loans. The gains from this are manifold. Firstly, the presence of bank exposure to the corporate issuer is likely to bolster investor confidence in the quality of the debt issue and hence attract participation from investors. Secondly, it can reduce the cost of borrowing for corporate debt issuers. Third, banks can make a gain through the listing of corporate loan, either in form of commissions/fees on listing or through a share in the interest savings that accrue to the corporate issuer through the listing. The listing of bank loans will help banks reduce their exposure to certain corporates or corporate groups, if desired, and also release liquidity to lend at higher yields to other borrowers. Further, listing of securities on an exchange and the accompanying compliance and disclosure requirements are in themselves, mechanisms that monitor and discipline corporate governance and performance. This is likely to reduce transaction and monitoring costs for banks and other investors.
7. Developing municipal bond market in India There is a huge untapped potential for the municipal bond market in India. Various measures can be undertaken to meet urban infrastructure financing through capital markets such as creating a national body that can act as financial intermediary and issue municipal bonds on behalf of its members (local urban bodies), remove the fixed cap on coupon rates and allow bonds to be issued at market rates. Further, several experts are of the view that ‘soft financing’ through JNNURM had adversely impacted the fiscal discipline of urban local bodies. Tightening of funds or imposition of additional restriction on loans from JNNURM would force urban local bodies to approach capital markets for funding. This will compel issuers to manage projects schedules and revenues judiciously.
8. Enactment of new robust bankruptcy laws India needs to setup robust bankruptcy laws similar to Chapter 11 of the United States Bankruptcy Code which will allow financially distressed companies to anticipate insolvency and attempt a turnaround before it gets worse. The current insolvency infrastructure under Board for Industrial and Financial Reconstruction (BIFR) applies only to industrial companies and is plagued by poor enforcement mechanisms. The criterion for “sickness” is erosion of net worth for a period of more than 5 years. However, the firms that generally end up applying for BIFR do so only on complete erosion of their Net worth. Inevitably this has slowed down liquidation of hopelessly insolvent companies and resulted in institutional creditor losses.
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Therefore India needs a bankruptcy law which will help such companies turn around faster. Further, these laws should extend to all companies and not only be restricted to industrial companies. If these laws provide satisfactory recourse to lenders, it will greatly benefit the corporate debt market in India. Recognizing this fact, Reserve Bank of India Executive Director R. Gandhi recently said that India needs an efficient bankruptcy law in the corporate debt market segment.
CONCLUSION Development of long-term debt markets is critical for the mobilisation of the huge magnitude of funding required to finance potential businesses as well as infrastructure expansion. Despite a plethora of measures adopted by the authorities over the last few years, India has been distinctly lagging behind other developed as well as emerging economies in developing its corporate debt market. The domestic corporate debt market suffers from deficiencies in products, participants and institutional framework. The Indian bond market is reasonably large in Asia. However, like most other countries in Asia it is dominated by government securities. Going ahead, attention should be transfixed upon bringing about further growth and diversification in the corporate bond market since it is currently lagging in terms of value of outstanding bonds relative to peer countries. Relative to size of GDP the overall bond market size needs to be improved as the ratio of 43% is low which is mainly due to the preference for bank finance. For India to have a well-developed, vibrant, and internationally comparable corporate debt market that is able to meet the growing financing requirements of the country’s dynamic private sector, there needs to be effective co-ordination and co-operation between the market participants that include investors and corporates issuing bonds as well as the regulators. Issues such as crowding of debt markets by government securities cannot be addressed by market participants and regulators alone. Better management of public debt and cash could result in a reduction in the debt requirements of the government, which in turn would provide more market space and create greater demand for corporate debt securities. The objective of this paper has been to address the urgent need to fast track the development of Corporate Debt markets in India. For this purpose we tried to draw lessons for the same from both mature and other emerging markets of Asia and identified several important issues to form a backdrop for our policy recommendations. The study has analysed the various stages of the development of corporate bond market in India in detail, with a cross-country comparison. This study has found that the corporate bond market of India is not deep. In Indian context, a combination of factors such as procedural hassles, legal issues, and preference of the corporates for private placement in issuance is not helping the cause of the corporate bond market. Finding ways to make public offerings more attractive will help to bring in the retail investors, and address the liquidity problem in the secondary market of this segment.
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