Column : The market for debt

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: flows, volume, etc. without delays. Countries like Korea and Malaysia have required traders to report such information within 10-15 minutes of completion of a transaction and transparencies of this kind trimmed bid-ask spread to 2-5 basis points and has made the market more liquid. While implementing transparencies in trades and disseminating information via technology is relatively easier in India, the harder part of the task is to reform the legal process of bankruptcy.

So far, India’s record in this area is far from satisfactory. The latest World Bank index of “closing a business” states that time to resolve bankruptcies in India takes almost 10 years with 9% cost of estate values and the recovery rate is 12.8 cents a dollar. Hence, mandatory disclosures of information on the part of issuers, efficient distribution of pre and post trade information to all traders via electronic medium together with a large scale reform in bankruptcy procedures are needed to make this market active. Such coordinated efforts will lead to price discovery of heterogeneous assets (with different maturity, seniority, security), infusion of liquidity, and recovery of values in bad times and will attract attention of investors. Earlier attempts to rejuvenate this market had failed because of the absence of a broad approach to deal simultaneously with aspects of liquidity, transparency, information disclosures and bankruptcy reforms.

A large number of studies show that debt and equity market are complementary and together they help adding financial depth and contribute to economic growth. In addition, development of this market will also help investors to diversify and will fill up the gap between markets with extreme risk profiles.