The need for a large savings pool to fund India’s growth story is a well acknowledged fact. Equally well discussed is the need to develop a large and active corporate bond market which can channelise savings, both from India and abroad, through the bond route and complement the banking sector lending. For these reasons, over the years, a lot of attention has gone into increasing the size of India’s corporate bond market. Regulators, issuers and investors have helped define the contours of this market and widen its scope and scale.

A quick look back summary would show that there has, indeed, been good progress. The market has shown significant growth over the past few years. The outstanding size of corporate bonds has increased at an annual growth rate of 16% from R12.90 trillion in March 2013 to R20.19 trillion in March 2016. The number of issuers and investors and the diversity of bond structures have increased. More significantly, market infrastructure has improved dramatically and, in some areas, is on par with the best in the world.

However, in these times of stretched fiscal and banking balance sheets, it would seem that there is a need for ensuring even faster growth in the corporate bond markets, with a greater spread of issuer ratings and a more broad based investor participation. For this to occur, the market would have to undergo structural shifts.A trio of legislative and regulatory changes, currently being implemented by various policy-making authorities and agencies, might actually be the triggers that converge to create a new ecosystem for corporate bonds.

Firstly, the RBI has issued a discussion paper with a view to mitigate credit concentration risks in the banking system. According to the proposed framework, large corporates would need to rely on debt capital markets for their incremental funding requirements. Of course, this is still in a discussion stage. However, directionally, it would require greater issuance of bonds from a wider set of market participants. Crucially, it would also raise the debate about the availability of large bond investor pools with credit appetite across the rating curve.

This investor perspective is addressed by a regulation that SEBI has issued. We see this as a second critical policy change as it mandates greater levels of portfolio diversification. This is done through the tightening of the single issuer and sector level exposure limits and by introducing a group level exposure limit for investments in debt instruments by mutual funds. Currently, the market did see a fair amount of sector and borrower concentration and hence, this development may create hurdles for new fund launches in the short term. However, in the long term, this amendment would help mitigate concentration of credit risks and would result in diversification of the issuer base. Mutual funds have over the last few years been an important source of channelising retail savings into debt markets. Thus, this policy change is a crucial one.

Thirdly, in a very significant development, Parliament has recently passed the Insolvency and Bankruptcy Code, 2016. The key benefits include time-bound resolution of corporate defaults (much on the lines of Chapter 11 filing in the US) and providing a forum to capital market participants for resolution of disputes relating to corporate bankruptcies. This is a very positive development, and once implemented, investors are expected to view lower rated companies more favorably. This is expected to lead to greater demand for lower rated papers, which usually do not find takers easily. However, it should be kept in mind that the success of the Bankruptcy Code would depend upon the implementation of the associated legal infrastructure to support the new framework. The progress on this front will be crucial to the bond market and will be watched closely.

These three developments are going to be of crucial importance in helping to broaden the issuer and investor base and would be instrumental in creating a paradigm shift for the corporate bond markets in India. This will result in increasing the number of market participants and in deepening of market liquidity. A virtuous loop will then encourage more investors to take confidence in a liquid, transparent market and bring in more participants, both from India and from global markets.

In short, these three policy changes could serve as a trigger that would help to increase the momentum of the corporate bond market and make it even more relevant in funding India’s growth.

The author is group executive, ICICI Bank. Views are personal