The Hindu Business Line : Debt slow

Four days into live trading in corporate debt instruments, the statistics put out by the two premier stock exchanges — the NSE and the BSE — bear ample testimony to the fact that India is quite a long way from claiming an active market in them. The retail trade in these instruments is virtually non-existent and the wholesale interest is confined to a handful of deals and that too in some of the better-known public sector undertakings. This is rather surprising as India has a vibrant financial sector that mediates the flow of a large pool of savings by corporates and households to various borrowers, including the government. It also has a wide variety of participants, such as banks, mutual funds, insurance companies, private individuals and so on, with not only a varied perspective on the future course of interest rates but also differing liquidity and risk preferences. All this ought to have translated into an active market for debt instruments. But that is not the case.

The problem is not confined to corporate paper but extends to the gamut of debt instruments. Clearly there is a marked preference among institutional players for the informal ‘Over-the-Counter’ deals rather than a trading platform where the actions of the market participants are transparent to all. In the absence of vigorous participation by institutional players, retail investors can be hardly be expected to make the market on their own. The Government’s policy of allowing the market to evolve naturally to the point where it migrates to an on-line trading platform has failed. The time has come for the Government to mandate the transition that has not happened by consensus. The ban on a trade in equities other than through recognised stock exchanges did much to help these institutions become efficient markets. A similar initiative might well see on-line platforms evolve as effective venues for trade in debt securities.

Initially, the Government should waive the disclosure requirement for outstanding debt instruments of all listed corporates. There already exists adequate information about their financial situation and hence informed trading can happen. As a large pool of securities is thus available for trading in the secondary market, a seamless migration to an on-line platform is easily possible. Data on secondary market trades in debt instruments need to be disseminated quickly so that investors get a ready idea of asset prices and participants’ views on risk and interest rate movements underlying these trades. There cannot be a healthy and functioning financial sector if fixed-income securities continue to be traded over the archaic and opaque medium that the telephone is.

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