Another attempt to think on reviving India’s corp bond markets. The paper is by Sanjay Banerji, Krishna Gangopadhyay, Ila Patnaik and Ajay Shah.
In this paper, we examine the factors behind underdevelopment of corporate bond market in India. We assess that one of the major bottlenecks to the development of this market lies in relatively larger costs of financing which dissuade the firms to raise finance from this avenue. We argue that the lack of transparency, inefficient market making and illiquidity of the instrument not only lead to such extra costs of financing that hampers investment in the real sector but can trap the bond market in a low level equilibrium.
To alleviate such problems, we prescribe policies that ensure better production of information and increased volume of transactions that will lessen both liquidity and transparency problems and ensure efficient market making. A combination of such policies include mandatory disclosure of ratings by firms and assignment of multiple agencies for rating an issue at different points of time, minimum size of placements of (infrastructure) bonds, establishing stop loss threshold, among others will help breaking the trap and improve quality of issues and would eventually lead to a vibrant bond market with reduced costs of financing investment.
First, why it has not developed.
Analytical view on debt market and economic theory indicate that –
a) Though issuing bond could be a preferred mode of financing in a wide array of situations, high costs of funds has been a key deterrent to growth of Indian corporate bond market. This in turn affects the mobilization of funds to the most productive sector and cut down investment via higher costs of financing. Key factors alleviating cost of funds are liquidity and transparency
b) The current market structure for corporate bonds is not an efficient response to transparency and liquidity issues but rather reinforces it further. As a result, changes to improve efficiency of the bond market will not emerge spontaneously from the market given the current market structure but would require external impetus in the form of regulatory / policy intervention
c) Any policy intervention should be holistic and focus on simultaneous combination of initiatives that would bring about step change in the corporate bond market rather than attempt incremental piecemeal changes sequentially. This will enable the market to transform from current equilibrium (albeit low level) to a higher level equilibrium
Hmmm…Not really satisfactory reasons. One has read the before as well. There seems to be a lot of inertia amidst members to develop this market.
What are the suggestions?
- Transform Credit Rating Agencies and the credit rating process towards ensuring greater transparency
- Improve reliability of benchmark yield curve
- encourage SMEs to issue bonds and raise funds from the debt market
- Broaden investor base by encouraging participation of retail, QIIs, HNW investors, offer additional tax break on interest income
- Establish stop loss threshold during volatile and illiquid market to mitigate risks of market makers.
- Encourage public issue of bonds over private placement
The authors call it new thinking on corporate bond market. I am not sure as we have heard these in previous reports/analysis as well.
I recall hearing a speech from Late Dr RH Patil who made similar points as well. Infact, it was in a day-long seminar where corp bond markets was the last topic. So morning sessions were all full and people moaned over lack of corp bond market in different themes. However, when corp bond theme came, there was hardly anyone! Dr. Patil was not amused and did make this point. So that is what corp bond is all about. All talk and no real play…