By Ibu Sanjeeb Garg
Beating the Rhetoric
The International Capital Market Association (ICMA) published a paper sometime in 2013 delineating the “Economic Importance of Corporate Bond Market’s”. It looked at the basic premises of how corporate bonds serve the need alongwith equity share capital, bank financing and other means to incur business expenses and finance future expansion. Globally, corporate bonds have particularly been a stable and reliable source of term finance for non financial companies. As bank lending has begun to thin the importance of corporate bond market cannot be emphasized more.
In India with the cloud of huge NPA looming large over major public sector banks, corporate bonds become an important source of funding even further. According to latest reports between March 2013 and March 2016 stressed assets in banking sector rose from 9.2% to 11% . During the same period gross NPA rose from 3.4% to 7.6%. This is the highest in 12 years and is expected to cross 8.5% by March 2017. The stress in the banking sector undoubtedly mirrors the stress in the corporate sector. In such circumstances when funds from the banking sector are even harder to come by while banks clean their books, corporate have to look towards corporate bond market.
With these issues in mind recently the government announced a slew of measures in order to kick-start the corporate bond market in India. It includes setting up an electronic platform for private issuances, a platform for corporate bond repurchase agreement, setting up a consolidated reporting platform. It also encourages foreign investment in certain securities categories. The budget also asks the RBI to encourage large financers to indulge in corporate bond financing while advising LIC to set up a special fund towards catering to the infrastructural needs.
However before analysing these measures we must understand the exact position of corporate bond market in India. According to a RBI report, corporate bond accounted for 3.5% of total corporate financing in corporate sector in 2000-01. This climbed to 3.9% of total financing in 2010-11 thus growing by a mere 0.4% in a decade. Between 2005 and 2010 the share of corporate bonds as a share of GDP rose from 0.5% to 1.6%. During the same period in China it rose from 1.6% to 8.9% almost growing 9 times in a period of five years. Malaysia and South Korea too saw an increase from 19.6% to 27% and 26.7% to 37% respectively. This makes it amply clear that compared to other major Asian markets the Indian bond market lags far behind.
When we look at the demand side of corporate bonds i.e. who invests in these corporate bonds it presents a skewed picture. Banks, trading members (FII etc) and others are the major investors in the market with banks ruling the roost. Absence of a repo market essentially keeps the smaller investors out of the bond market. At the same time most of these bonds are placed privately which increases the skewed behaviour.
In essence the corporate bond market suffers from a number of issues. The first is the issue of multiple and overlapping supervisory bodies with no clear legal framework as to how these bonds will operate. Another major problem is the lack of clear legal framework whether in terms of disputes arising out of contracts or insolvency norms. Lack of regulations in these aspects acts as a deterrent towards investing in the bond market. A third problem arises out of the lack of a yield curve. Bond markets are dominated by government securities which generally have a maturity period of 10 years an above. This results in the lack of reliable yield curve for maturities which hampers the price discovery mechanism of relatively shorter duration corporate bonds in turn. Due to the closed nature of the market and non availability of a thriving secondary market secondary investors keep away from the market. This means that the set of investors remain the same while the size of the market size does not increase.
In conclusion to kickstart the bond market the government has to go beyond the market reforms introduced in the budget. As India looks towards a new economic push in the manufacturing sector financing via corporate bond market becomes imperative. The need of the hour is structural reforms. As an important measure the newly announced Bankruptcy Bill is a step in the right direction further reforms are needed towards resolving contract and insolvency disputes in a time bound manner. This bill clearly separates the insolvency resolution process from liquidation. The Bill seeks to resolve the bankruptcy issues in a time bound manner.
Another important step that must be taken in order to propel the bond market in India is to ensure that corporate bonds yield a higher market rate. The government must also clear regulatory hurdles while setting up a robust secondary market for these bonds. It is only with these steps that corporate bond market in India will thrive in India.
( Views expressed by the author are personal)