Dedicated trading platform for bonds will help

For over a decade now the country?s financial fraternity has been convinced of the need for a robust and vibrant corporate bond market. Despite the best intentions of the government and regulators, attempts to develop the market have been half-hearted; how stunted the growth has been can be seen from the fact that the share of corporate bonds to total debt was just 4% in 2010-11, compared with 17% for China. Bloomberg data shows outstanding corporate bonds in the Indian market at roughly $245 billion compared with Brazil?s $520 billion and China?s $1.5 trillion. While that in itself is small, and cannot support an economy that?s aiming to grow at 7% or 8%, what?s worse is that almost all of this paper is held by the original buyers with very little of it actually changing hands in the secondary market.

The National Stock Exchange?s (NSE) dedicated platform for debt, to be launched soon, could be a starting point for volumes to become meaningful; much like trading in equities has benefited from a sophisticated trading system, it?s possible the bond markets too will take off. However, if the market is to become large and liquid, attracting investors of all hues, including individuals?as is the case in the stock market?the corpus of bonds itself needs to be much bigger. The fact that bonds below a certain grade don?t find takers?much in contrast to equities where even bankrupt companies are traded?inhibits the growth of the market. Data suggests that three-fourths of the issuances today command a triple-A rating, with most of it coming from the public sector; offerings from the private sector are few and far between?Hindalco, for instance, recently mopped up some R6,000 crore. This is partly because insurers can?t buy paper rated below AA. However, insurers are big buyers of debt, given their capacity to absorb long-term assets, and should be allowed to subscribe lower grade paper. The availability of enough credit enhancement products that will help lower the risk on lower grade paper would protect buyers from defaults. More paper being issued by companies, across maturities, would help create a yield curve in the process facilitating better price discovery. Again, banks today are reluctant to buy bonds or debentures since they would need to mark-them-to-market; a more liquid market would give them an exit avenue and might make them less circumspect where these products are concerned.

The entry of FIIs into the debt markets?they are collectively allowed to invest $76 billion across gilts and corporate bonds?has resulted in higher trading volumes, especially in the gilts space. FIIs, clearly chasing the higher yields available on Indian paper, could become bigger players in the corporate segment too if the currently cumbersome trading rules are eased and the withholding tax is withdrawn. In general, trading needs to be simplified, much like it has been for gilts where trades are netted off before being settled. NSE can help create the infrastructure but, at the end of the day, it is the regulators who need to get more serious.