The country’s nascent corporate bond market has seen extremely limited retail investor participation till now. In a bid to reverse this trend, the RBI is considering a slew of options that include encouraging issuance of zero coupon bonds, providing clarity on taxation issues, including the provision of special quota for retail investors in debt issues and providing reduced transactions costs for retail investors.
A well-developed corporate bond market is widely seen as a means of addressing the travails of the existing bank-dominated financial system.
In India, total issuance last year was worth less than 3 per cent of GDP, which places the country below most of its Asian peers with the sole exception of Indonesia.
In India, the development of a corporate bond market has lagged in comparison with other financial market segments due to a number of certain structural issues that include the dominance of the corporate bond issuance by private placements, which accounted for more than 95 per cent of the total issuance of corporate debt in 2014-15, and the issuances being concentrated in the ‘AA’ or higher rating, largely by public sector entities and financial institutions.
Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a number of purposes, such as setting up a new plant, buying equipment, or investing in organic growth of the business. When investors buy a corporate bond, they effectively lend money to the issuer, or the company that issued the bond. In exchange, the company promises to return the principal amount on a specified maturity date. Until that date, the company usually pays a stated rate of interest, generally semi-annually.
In recent months, the corporate bond yields have seen a hardening trend despite growing expectations that the RBI will continue to maintain an accommodative monetary policy stance. This also comes at a time when there are growing concerns over the finances of a number of domestic companies, with these worries having been precipitated by the sudden paring down of the credit rating of Amtek Auto Ltd after the company admitted that it was battling cash-flow problems. A downgrade of Jindal Steel and Power Ltd followed, creating more turmoil in the corporate bond market.
Apart from these short-term worries, continuing lack of activity in India’s bond markets stem from the fact that a majority of new bond issuances are concentrated in the 2-5 year tenor. There is also limited investor base as the investment mandates of institutional investors such as insurance companies, pension funds and provident funds do not permit large investment in corporate bonds. Reissuance of bonds has not picked up and the lack of functional trading platform with Central Counter Party facility like NDS-OM — a screen based electronic anonymous order matching system for secondary market trading in Government securities owned by RBI — impedes the growth of secondary market. Further, non-standardized stamp duties on corporate bonds across various states also affects issuances.
RBI Deputy Governor Harun R Khan, in an October 27 address at a FICCI event in Mumbai was emphatic in his assertion that the development of an efficient and robust bond markets was a challenge globally and only a few jurisdictions can claim to have genuine local currency bond markets. “Even in those markets, the concerns relating to market illiquidity are increasingly being highlighted,” he said.
Steps such as putting in place an efficient trading platforms for corporate bonds could make a difference in increasing the penetration of these instruments. But that, by itself, may not be enough. NSE, for instance, has developed a dedicated trading platform for privately placed corporate bonds but there is negligible activity on this platform. Although the system provides for guaranteed settlement, problems such as high margin, high penalty for default, non-availability of all the issued bonds on the platform are proving to be stumbling blocks.
On the positive side, the RBI is already working on addressing some of the market infrastructure issues, including development of an electronic platform for repo in corporate bonds. ‘Market making’ in corporate bonds, according to Khan, has proved to be a challenging issue, particularly the funding of brokers.