Strengthening Corporate Bond Market

The corporate bond market in India has failed to take off in spite of measures in successive budgets and at least half a dozen committees mandated by the government, the RBI and the Securities and Exchange Board of India (SEBI) to work out measures to develop this market.

Importance of a corporate debt market

• In most international markets trading volumes in the debt market are much higher than those in stocks.
• As a result, liquidity is quite high with enough buyers and sellers willing to buy bonds with low credit ratings in the hope of receiving a big payoff.
• This higher liquidity enables companies to raise funds across different maturities including for infrastructure projects with long gestation periods.

Why corporate bond market didn’t take off?

• The investor base of the corporate bond market which is marked by banks, insurance companies, pension retirement funds and mutual funds has been narrow.
• Most of these investors do not trade and hold these investments until maturity.
• With limited buyers in the market or market makers who offer buy or sell quotes constantly, there is little liquidity.
• Further, a majority of the bonds issued by companies are privately placed with a select set of investors rather than through a public issue. This is done to both save time as well as avoid greater disclosures.

Measures announced in Budget

• The government has proposed an action plan to deepen the market for long term bonds including for deepening markets of corporate bond repos, credit default swaps etc, with a specific focus on the infrastructure sector.
• Foreign Portfolio Investors (or FPIs) will be allowed to invest in debt securities issued by Infrastructure Debt Funds.
• Setting up of Credit Guarantee Enhancement Corporation to help companies to boost their credit rating. This will enable them to raise funds at cheaper rates.

Measures by RBI

• The new norm of RBI has made it mandatory for companies with large exposures to raise 25 per cent of their incremental or fresh borrowings from the bond market.
• The new norm force corporates to go to the bond market and to ease the pressure on banks.
• To improve transparency RBI has made it mandatory for companies which plan to raise debt funds of over Rs 200 crore to execute it on an electronic platform.

As a result of the absence of a well functioning corporate bond market, the burden of financing infrastructure projects such as roads, ports, and airports in India is more on banks and the general government.

This has led to pressure on banks since they are buying long-term assets, such as a highway, with short term liabilities, that is deposits of three- to five-year maturities. The measures were announced in the budget to address this mismatch.