Aiming to deepen corporate bond market, SEBI chief advises policy makers make this a top priority

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Updated: Jul 23, 2020 8:48 AM

The Securities and Exchange Board of India (Sebi) chairman, Ajay Tyagi, on Wednesday called for the need to deepen the corporate bond market, stressing that it ought to be one of the topmost agenda of the policy makers today.

On use of blockchain technology in settlement of shares, Tyagi said in the past two decades market had come from the T+45 days to T+2 days for settlement of trades.On use of blockchain technology in settlement of shares, Tyagi said in the past two decades market had come from the T+45 days to T+2 days for settlement of trades.

The Securities and Exchange Board of India (Sebi) chairman, Ajay Tyagi, on Wednesday called for the need to deepen the corporate bond market, stressing that it ought to be one of the topmost agenda of the policy makers today.

Addressing the capital markets summit of FICCI, he said the time had come for “unification of financial markets” and the market infrastructure for gilts and corporate bonds should be merged. He said, “Having two separate ecosystems results in artificial segmentation of investors and divergent governance and regulatory norms for institutions in the two markets performing similar functions. The market infrastructure institutions dealing with these two types of securities should follow the same rules and regulations. The economies of scope and scale also dictate such a unification.”

In the context of the credit markets facing a severe liquidity crunch in the aftermath of the pandemic, Tyagi said the corporate bond markets were being restricted to only top-rated bonds in India. About 97% of the issuance and trading in corporate bond market happens in just the top three categories of AAA, AA+ and AA. In contrast, this segment is only 5% of corporate bond market in the US and trading happens in the top rating buckets of AAA and AA. Nearly 75% of the trading happens in the next three rating buckets of A, BBB and BB.

“There is a dire need to move down the rating curve. There are issues on both the demand and supply sides of the equation,” said the chairman in his speech on Wednesday.

The regulator also highlighted the need for more institutional players in the corporate bond market. In the secondary bond market, mutual funds have been the only major active players and around 40% of the trading volumes (average buy & sell) came from them. “Naturally, the illiquidity in the bond market hits them the most. We clearly saw this unfolding in the recent times. The need for having more players, including institutional investors, in the market is apparent,” added Tyagi.

While the corporate bond market has seen higher growth rate over the last five-six years as compared to outstanding bank credit, in absolute terms, it is still around one-third of the bank credit. The amount of outstanding corporate bonds in India has grown from Rs 15 lakh crore in 2013-14 to Rs 33 lakh crore in 2019-20, reflecting a compound annual growth rate (CAGR) of about 14%. Correspondingly, outstanding bank credit has grown at a CAGR of about 9% with the figures rising from Rs 61 lakh crore to Rs 104 lakh crore during the same period.

Despite the challenges thrown by the pandemic, the situation has not been bad as there has been fund raising in the first quarter of the current financial year. Total fund raised during the June quarter of fiscal year 2020-21 was Rs 2.77 lakh crore, compared to Rs 2.94 lakh crore during Q1 of FY2019-20. For equity raising, the comparison between the two periods is Rs 67,000 crore versus Rs 1.28 lakh crore. For debt, it is Rs 2.1 lakh crore versus Rs 1.67 lakh crore. According to Tyagi, there is no cause for despair.

On use of blockchain technology in settlement of shares, Tyagi said in the past two decades market had come from the T+45 days to T+2 days for settlement of trades. “To have a real-time settlement, we have requested exchanges to on a trial basis as it has lot of opportunities. I think it is something which should be tried more seriously by the exchanges and they should, at least, go for it on pilot project,” said Tyagi.

Since the Covid-19-induced lockdown in March, there has been a surge in participation of retail investors in the equity markets. In June more than 10 lakh dematerialised (demat) accounts were opened compared to an average of 5 lakh per month in the pre-Covid times.

Without doubting the wisdom of individuals participating in the markets, the Sebi chairman said to facilitate a smooth entry of the newcomers to the capital markets, it would be ideal for them to begin their journey by first investing in risk-free G-Secs. “I would suggest that, to achieve this, the G-Secs may be issued in demat form. After gaining experience of investing in G-Secs, these new demat account holders could gradually add other securities to their demat accounts,” Tyagi said.

The government has announced an additional borrowing of Rs 4 lakh crore this year on account of Covid-19, over and above the budgeted amount of Rs 8 lakh crore. The issuance of G-Secs in demat form, besides easing the process of making investments by non-institutional participants in these securities, may also facilitate easier raising of the borrowings. Sebi is also looking at allowing the brokers to work and trade from home, given its success in the last few months.

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