RBI has increased the cap on foreign institutional investment in corporate bonds to $20 billion from $15 billion,and the development of a vibrant corporate bond market remains a key priority for Indias policymakers. This market is still at a nascent stage and accounts for just about 2% of the GDP and state-owned public sector companies account for around 80% of the total market. In contrast,corporate bonds in 2009 accounted for about 5% of GDP in China and around 8% in Korea. Though the bond market has seen significantly increased activity this year both in the primary and secondary markets,a report by Goldman Sachs underlines that to develop the corporate bond market several policy-related issues such as high stamp duty for issuers,disclosure requirements and investment restrictions on pensions and insurance funds need to be addressed. Stamp duties vary from state to state and investors seek out those places where they are lower or where there is a flat tax rather than ad valorem rates. Stamp duty,the report says,leads to an increase in the cost of issuance and ideally there should be a national rate with a maximum cap. Pension funds and insurance companies could play a lead role in developing the corporate bond market,but the absence of pension funds and low insurance penetration has meant limited demand for long-term bonds. Indian insurance companies hold just 7% in private bonds as norms restrict them to investing only in paper rated AAA. Globally,insurance funds are among the largest sources of demand for corporate bonds. In the US,insurance funds hold around 45% of their assets in corporate bond,the figure is 40% and 25% for Korea and the UK,respectively. While the main reason for insurance firms to invest in Central and state government paper is the low probability of default,the report notes that the average cumulative default for A-rated paper between 2000-09 was just 1.3%. This shows that expanding the window of investments for insurance funds will help develop the bond market in India. An efficient bond market will help companies to reduce their financing costs and enable them to borrow directly from investors.
