At a time when most corporates, especially stressed companies, are facing issues in raising funds, Sebi Chairman Ajay Tyagi acknowledged the need to develop the corporate bond market across the rating curve and interlinking it with the government-security (g-sec) market.
The corporate bond market in India is largely restricted to top rated bonds in India. Tyagi says 97 per cent of the bond trading happens in top rated corporate bonds -- AAA, AA-plus and AA. By comparison, in the US, 75 per cent of the corporate bond trading happens in the next three trading buckets -- A, BBB and BB. "There is a dire need to move down on the rating curve," says Tyagi, speaking at FICCI's two-day 17th Annual Capital Market Conference that started today.
Low liquidity in the secondary bond market is another challenge, to which Tyagi says that participation from institutional investors is key. "There are issues in both demand and supply. In the secondary bond market, only MFs are the active players. They constantly churn portfolio for their operational requirement. Naturally illiquidity in the bond market hits them the most. The need for having more players including institutional investors is apparent."
How to develop corporate bond market
The pricing of corporate bonds is benchmarked typically to g-sec of the corresponding maturity. However, in India, trading in g-sec is concentrated to 7-10 years maturity buckets, which affects the pricing of corporate bonds. "We have a long way to go to facilitate a continued yield curve for g-secs."
Besides, when corporate bonds and g-secs are interlinked, there is no need to have separate ecosystems for both. "Unification of corporate bond and g-sec market is an idea whose time has come," he points out.
"The market infrastructure for corporate bonds and g-sec should be integrated. Having two separate ecosystems results in artificial segmentation of investors and divergent governance. Regulatory norms for institutions in both the markets perform in similar fashion. Hence, market infrastructure dealing in two types of securities should follow the same rules and regulations."
Debt fund expert and former CEO of Essel Mutual Fund Rajiv Shastri, speaking to BusinessToday.In, concurs that multiple trading and reporting platforms for different debt instruments are a hindrance to efficient markets and pose an entry barrier as well. "But in addition to providing a platform that trades all debt instruments, it is essential that this platform be used by all institutional participants as well. This is, by far, the more significant challenge."
G-sec in demat form
The Sebi Chief further acknowledged there has been a deluge of first time investors in the capital market, and if they are provided g-sec in the demat form, they will have an alternate risk-free investment option. "We have seen huge surge in retail participation in equities in last few months. Many of these are first time investors who are here due to lack of investment opportunities. With a view to facilitating smooth and welcome entry to new comers in the capital market, it is ideal that they start their journey by first investing in risk free g-sec. I would suggest that to achieve this objective we need to issue g-sec in demat form. These new demat account holders after gaining experience of investing in g-sec can gradually add other securities in their demat accounts."