Repos may be allowed in corporate bond market

Written by Sunny Verma | New Delhi, Jul 30 | Updated: Jul 31 2007, 05:13am hrs
The corporate bond market could soon witness heightened activity as the government plans to put in place a mechanism to allow repo transactions in this segment. A repoor, repurchase agreementis a transaction that allows a holder to sell a bond for a short period to another investor with an agreement to buy it back at a higher price at a later date.

Allowing repo transactions is expected to deepen the corporate debt market while providing companies an avenue to raise cheap finance domestically. The Reserve Bank of India is finalising norms in this regard, a finance ministry official said.

Corporate bonds are issued in India through private placements and public issues, although the former route is used more often. According to data compiled by Prime Database, Indian companies, both private and state-owned, mobilised Rs 92,355 crore through private placement of corporate bonds in 2006-07, compared with Rs 81,847 crore the previous fiscal. Of this, private sector mobilisation stood at Rs 14,540 crore in 2006-07, up from Rs 7,944 crore the previous year.

Presently, limited repo transactions are allowed in government securities. But once the guidelines are in place, similar transactions would be possible in the corporate debt market, too. According to Sanjay Aggarwal, national industry director (financial advisory services) at KPMG, The size of the corporate bond market in India is very small.

But it has a huge potential. Allowing repos could be one way to develop this market. It will also help channel a part of domestic savings into the corporate bond market, thereby enabling companies to raise cheaper finance, he added.

The move will help companies improve their liquidity, as they will be able to raise short-term loans without actually selling bonds. It will also make the instrument more tradable. It will certainly deepen the corporate debt market, but its success depends on putting in place an effective clearing and settlement mechanism, said Arun Kaul, GM (treasury & finance), Punjab National Bank.

Various government committees have advocated the idea of allowing repo transactions to develop a vibrant corporate bond market. The RH Patil Committee on corporate bonds & securitisation also suggested it as a way forward to develop the secondary market in corporate bonds.

The report on making Mumbai an international financial centre had pointed out the need to develop a bond-currency-derivative (BCD) nexus, including developing an active corporate bond market.