Bhavik Nair & Vinayak Aggarwal
Among the measures announced by finance minister Nirmala Sitharaman on Friday to boost the economy, the government has paid attention to the matter of deepening the bond markets — a topic that has attracted considerable interest in the past from market participants, regulators and governments alike.
One of the measures discussed was the government would take further action on development of credit default swap (CDS) markets soon in consultation with the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi).
One of the prominent issues with the CDS market seems to be the inability of counter-parties to net their positions. Without the availability of netting, CDS trades are capital-intensive.
Gopikrishnan MS, independent market expert, explains how the issue of netting in the swap market is acting as a big bottleneck. “Right now in the swap market, both the counterparties in a transaction are required to provide for capital on a gross basis, i.e. they are not allowed to net out their obligations. As a result, capital is stuck on both sides. Therefore, netting between counterparties is required on an urgent basis if over-the-counter (OTC) swap market has to be developed,” he said.
Another issue is that the investing community can buy either protection or CDS, as of now. “The investing community is not allowed to write protection. As a result, the market tends to become one-sided. The investors should be allowed to do both if this market has to be developed,” Gopikrishnan said. There is also a lack of liquidity in the swap market with hardly any trades taking place.
The finance ministry also stated that in order to improve access to long-term finance, it is proposing to establish an organisation to provide credit enhancement for infrastructure and housing projects. This would enhance debt flow towards such projects, the ministry stated.
The ministry also indicated it will work with the RBI to make it more conducive for investors and bond issuers, as well as facilitate increased trading for price discovery in order to improve domestic market in bonds.
According to market experts, not more than 5% of the outstanding corporate bonds are traded on an active basis. As a result, liquidity and subsequent price discovery in the secondary market remains an issue.
The government has also amended the Companies (Share capital and Debentures) rules 2014 to remove the requirement for creation of a debenture redemption reserve (DRR) of outstanding debentures in respect of listed companies, NBFCs and for HFCs.
Ritesh Bhusari, assistant vice-president, treasury at Federal Bank, pointed out that so far, entitites had to create a DRR whenever they issued bonds and the removal of the DRR, it would be beneficial for the market. “Now that the government is going to remove the DRR, liquidity conditions of NBFCs will improve. This is a good step that will help them curb their liquidity issues. As a result, we can see an increase in the corporate bond issuances,” he said.