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Corporate Bond Market in India

Published on Thursday, September 05, 2019
Corporate Bond Market in India
  • Corporate bonds are debt securities issued by private and public corporations. These are issued to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business. Successive budgets and various committees mandated by the government, the RBI and the Securities and Exchange Board of India had worked out measures to develop this market but have largely failed. The growth rate of corporate bonds has generally been slowing since 2017 and marked its lowest rate in over a decade in May 2019 at 9.7%. On the other hand, bank lending grew 12.7% in the last year.

Issues with Corporate Bond Market in India

  • Less penetration: The size of India’s corporate bond market is just 16 per cent of GDP, compared with 46 per cent in Malaysia, and 73 per cent in South Korea.
  • Low Investor Base: Investor base is marked by banks, insurance companies, pension retirement funds and now mutual funds. A majority of the bonds issued by companies are privately placed with a select set of investors in India rather than through a public issue; this is done to both save time as well as avoid greater disclosures.
  • Low Liquidity: There is little or no incentive for market making.
  • Lack of trading platforms: No such platform is available for corporate bonds as available for government securities, which restrict the availability of corporate bonds and their trading.
  • Lack of confidence in corporate bonds: Due to weakening balance sheets of the companies in India creating suspicion on their growth potential.
  • Lack of standardization across states: There is no standard for providing a uniform architecture for the corporate bond market across Indian states like stamp duties on corporate bonds.

Need for a Corporate Bond Market in India

  • In the absence of a well-functioning corporate bond market, the burden of financing infrastructure projects is more on banks and the general government.
  • A mature corporate bond market enables companies to raise funds across different maturities including for infrastructure projects with long gestation periods.

Measures announced by the Government to deepen the market

  • Deepening markets for corporate bond repos, credit default swaps etc, with a specific focus on the infrastructure sector
  • Foreign Portfolio Investors will also be allowed to invest in debt securities issued by Infrastructure Debt Funds.
  • Credit Guarantee Enhancement Corporation, for which regulations have been notified by the RBI, will be set up in 2019- 20.
  • Establishment of a platform for listing social enterprises and voluntary organizations to raise capital as equity, debt or units like mutual funds
  • There is also a proposal to increase minimum public shareholding in companies to 35 per cent from 25 per cent.

Way Forward

  • A well-developed corporate bond market is essential for the efficiency and stability of a country's financial system and the overall growth of its economy. The corporate need to refine their debt instruments using different mechanisms like greater securitization, credit enhancement and derivatives. There needs to be greater investor awareness on the availability of corporate bonds, the risks associated and the security measures present to secure the investments.
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