It is not that the debt market in India is moribund. Data from independent agencies and the central bank suggest that there were 1,303 issuances that raised around Rs 1,26,790 crore in FY07, around six times the sum raised by equity IPOs. These, however, were from the private placement of debt. Public debt issuances were estimated at around Rs 4,000 crore. In this sense, the market for publicly listed corporate debt is in dire need of resurrection. Apart from the equity market and bank borrowings, Indian corporates must have access to a good public debt market as well. Debt funding allows companies to leverage equity and maximise shareholder returns without dilution of the equity base. Also, the East Asian crisis of 1997 has turned corporates wary of over-dependence on the banking sector for loans. Some experts see raising market debt as a source of stability. Yet, while debentures accounted for a tenth of all corporate funding in the late 1990s, today they?re nearly extinct. Structurally, there is no reason for this. There exist strong trading platforms, reliable credit rating agencies and clearing houses. But the corporate debt market remains extremely illiquid, with a daily turnover of only Rs 150 crore. This slows price discovery down, which in turn deters debt issuers from entering the market.
Sebi?s recent proposals on new listing norms for corporate debt instruments are designed to make it much easier for corporates that are listed for equity trading to list their debt as well. These firms will have far fewer disclosure requirements, and this will speed up issuances. The enhanced role of merchant bankers in conducting due diligence will also help the market along. Space is also being granted for e-listing. However, do not expect the market to take off immediately. It took the US several years to develop what is easily the world?s largest corporate debt market today. Large corporates that have all their documentation in order tend to dominate the pure corporate debt market, even as smaller firms take the structured debt route, and this is likely to be the pattern here as well. The point is to create a vibrant market for corporate debt. Once that happens, mid-sized companies will also start entering it. Sebi?s new measures to ease the way debt listings can be made will set the ball rolling. The rest will depend on market appetite.
