The Hindu Business Line : Debt market — Striking the right notes

THE most active market for fund mobilisation in the last five years has also been the most opaque one — that is, the private placement market for debt. But this opacity may soon be a thing of the past. The second desirable note in the debt market was opening up for trading by retail investors.

Private placement: In 2001-2002, close to 74 per cent of fresh fund mobilisation (total: Rs 47,761 crore) was through the private placement market. In 2002-03, to date, the dominance of this market became even more pronounced with 85 per cent of fund mobilisation taking place via this route.

This market has remained beyond the pale of the fairly comprehensive disclosures norms that emerged over the years for a public offering of security.

In this backdrop, the recommendations of the Secondary Market Advisory Committee, headed by Dr R. H. Patil (former Managing Director of the NSE), strikes the right note. Listed and unlisted companies (which want to list the debt paper being issued) would have to comply with the exhaustive disclosures norms prescribed by SEBI for public offers.

This will give investors a good idea of how the companies propose to use these funds and also gauge the risk/returns involved. It may also become useful to evaluate mutual fund debt and investment portfolios of banks and financial institutions.

The very basic issue of imparting (the hitherto absent) transparency into such a vast segment of the capital market is reason enough for SEBI to puts its weight behind these recommendations sooner than later.

A broad-based effort: The committee's recommendations (available on SEBI's Web site: www.sebi.gov.in) also cover other key issues that would make the `disclosures' process more comprehensive. A few notable ones are:

The required information would have to be put up on the Web site of the company, stock exchanges and SEBI.

The companies tapping funds through the private placement market must also comply with disclosure requirements on a continuing basis (disclosure of material events and earnings) that have been mandated for equity. This would ensure that the disclosure effort is not a one-off exercise at the time of issuance. Bringing unlisted companies into the orbit is also important as they are pretty much active in the private placement market. To bring more such securities under the listing umbrella with attendant requirements of more disclosures, the committee has recommended that SEBI-registered intermediaries should not associate themselves with issuance and trading of unlisted securities. As much as the requirements of disclosures, this aspect also could open up the private placement market more into the public domain.

Eventually, it may be in the interest of issuers and investors (now almost entirely institutional) to have vibrant trading in debt instruments. At present, much of the trading activity on the wholesale debt market segment on the NSE is confined to Government of India securities. Only a few corporate debt papers find place in some regular trading.

With better disclosures and listing of all securities issued through private placement likely, trading levels could improve over a period. Effectively, the committee's recommendations will remove the distinction between public offers and private placement — the only difference would be that in the latter, the securities are placed with smaller number of investors. Dematerialisation of all such issuance would also be a useful trigger for improving trading activity in a broader range of debt papers.

The retail thrust: Trading levels on the wholesale debt market segment of the NSE (where largely institutional players participate) have risen manifold in the last five years. From a modest Rs 385 crore a day five years ago, the WDM trades amount to around Rs 5,800 crore a day now. But this market is virtually off-bounds for retail investors due to the trading requirements that suit institutional players.

The RBI's move to allow retail trading with terms that would suit small investors opens up a vibrant market to such investors. With interest rates declining steadily across-the-board, the opening up of the G-Sec markets may also improve investment avenues for retail investors.

Coming close on the heels of such investors being allowed to participate in primary issuance of government securities, the opening up of the secondary markets could strengthen the debt markets, apart from benefiting investors.

But this is a market where prices may take their cue form activity in the wholesale segment. So, one may have to be cautious when using the retail window for trading in debt instruments. Using it to lock-in on specific yields for various tenures may be an option that can be exercised without much risk.

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