Monday, December 04, 2006

Deepening corporate bond markets

We have seen earlier (on 15.10.2006 and 22.11.2006 in Indian Current Affairs blog) very briefly that there is a need to deepen the corporate bond market for ensuring adequate funding for the huge infrastructure requirements of the country. Now we will see where does India stand among the BRIC (Brazil, Russia, India & China) countries with regard to the depth of the corporate bond markets. We will also take a look at some of the measures that are being suggested for enabling this and finally look at our beloved FM Chidambaram’s take on this subject.

India’s outstanding corporate debt is around $2 bn compared with $4 bn of Brazil, $10 bn of Russia and $12 bn of communist China. The communist regimes seem to be offering better markets for the corporates than do the non-communist regimes!!

The main problem as confessed by our Finance Minster is that there are too many obstacles – political, legal and policy-related – for the emergence of a vibrant corporate bond market. For instance there are about 78 laws that need to be amended to usher in a decent bond market. The other is the implementation aspect. Should we wait for the laws to be amended and to keep the policy regime in place before we unshackle the bond market or do we attempt it simultaneously? Experience shows that waiting for all the right things to be put in place before we attempt to herald in a good system is fraught with the risk of the intended policy regime not taking shape.

So what steps need to be taken for deepening the bond market?

  1. The government needs to encourage more players and simultaneously take steps to improve liquidity and transparency so that secondary market transactions become easier.
  2. Hasten the pending pension and insurance sector reform to bring in more players seeking long-term paper. Investment guidelines for existing superannuation funds could be relaxed in line with those for employees PF. It could also raise the FII limit for investment in corporate bonds.
  3. Varying stamp duty levies on corporate bonds by the states could be addressed by SEBI mandating that all bond issues as well as subsequent trading would be in demat form, as with euities.
  4. TDS could be done away with as has been done for government securities.
  5. Easier listing requirements, shelf prospectuses and less stringent disclosure norms for already listed entities to remove the edge that private placements have over public issues of bonds.

The FM has already taken the following steps so far:

  1. Obtained cabinet approval to remove legal ambiguities over asset backed securitization. This will enable SPVs (Special Purpose Vehicles i.e., companies formed for carrying forward specific projects) to issue asset backed securities for trading. This will also partially address the issue of poor volumes on the supply side, apart from improving the quality of the paper.
  2. Urged the IRDA and RBI to let insurance companies and banks deploy a fixed percentage of their investments in low-rated bonds. Asked them to amend their regulations to remove an existing bar on insurance companies and banks that mandates them to park their funds only in AAA rated bonds.