For bond market liquidity, FinMin looking at institution for buying debt

The proposed special purpose vehicle is likely to be an alternate investment fund, which will buy investment-grade bonds from mutual funds and other institutional investors. The fund is likely to be set up with contributions from mutual funds and other institutional investors, with a PSU fund getting majority stake.

This institution is expected to play a crucial role during stressed times, taking a leaf out of the book of a bad bank, promoted by banks, which got approval from the RBI and kicked off operations recently. While bad bank takes over non-performing assets of banks, the proposed bond institution will take over illiquid investment-grade bonds during the period of stress.

However, there’s no clarity about the capital requirement of the institution. It is likely to deepen the bond market and create liquidity. Such an entity will be especially useful during stress — such as in case of default on payment by DHFL, which led to significant stress in the bond market in recent years.

Sebi has also proposed to create a set of market makers for further deepening and strengthening the country’s corporate bond market. In a consultation paper issued in November 2021, Sebi said these market makers will help bring liquidity to secondary market for corporate bonds, where trading is limited to a small number of highly-rated notes or restricted to trades by financial institutions, banks and mutual funds.

This proposal was announced in the previous Budget, released in February 2021. “To instill confidence amongst the participants in the Corporate Bond Market during times of stress and to generally enhance secondary market liquidity, it is proposed to create a permanent institutional framework. The proposed body would purchase investment grade debt securities both in stressed and normal times and help in the development of the Bond market,” Finance Minister Nirmala Sitharaman had said in her Budget speech last year.

With equity markets remaining buoyant in the current year, fundraising through corporate bonds was lower during the April-November period. Companies raised around Rs 3.7 lakh crore in April- November 2021 through issuance corporate bonds. The amount raised through public issues in debt doubled as 20 public issues raised Rs 9,132 crore during April-November 2021, as compared to 10 issues which raised Rs 3,871 crore during the corresponding period of previous year.

However, the number of issues and amount mobilised through private placement declined as Rs 3.6 lakh crore was raised through 851 issues during April-November 2021, as compared to Rs 4.9 lakh crore mobilized through 1,299 issues during April-November 2020, as per data presented in the Economic Survey 2021-22.