Soft-touch regulation could draw global funds into the corporate debt market.

The need for development of the corporate debt market in the country is so important that not a single report of the various committees — set up by the Finance Ministry or the Reserve Bank of India or industry forums — is complete without a detailed reference to it.

The recent meeting of the Financial Stability and Development Council (FSDC), chaired by the Finance Minister, also reiterated the need for a liquid and deep corporate debt market to meet the huge investment needs of the infrastructure sector.

There is, therefore, no doubt that the investment needs can be met only if we manage to create a liquid corporate debt market, wherein issuers with different scale of credit rating (at least investment grade!) are able to meet a chunk of their funding needs through the debt market, instead of relying purely on the bank/institutional loan market.

Even in the global context, post-2009, with stricter banking regulations and introduction of Basel 3, there is a clear trend towards banks de-leveraging their balance-sheets and issuers moving towards bond market for their funding requirement.

This year (CY 2012) has been a record one in terms of the volume of issuance in the global bond market.

To facilitate the development of a deep and liquid corporate debt market, there needs to be a paradigm shift in the way enabling mechanisms are created, especially if we need to attract international capital into the markets.

Investment climate

This is also true at a time when India, as an investment destination, is not as hot as it used to be, with a threat of sovereign credit rating downgrade to non-investment grade and more emerging economies positioning themselves to attract the pool of international savings.

For instance, in the past, whenever the FII debt limits increased, there used to be a major buying of bonds by FIIs — with these entities scrambling to get the debt limits and willing to pay a high premium for the same. The situation is very different today with limits almost freely available for a long period of time with no investment interest.

Development of corporate debt market involves understanding the needs of a multitude of players, regulated by different regulators.

While the issuance process is regulated by the SEBI and is applicable for all issuers (both through public issue and private placement), the issuers, investors and market intermediaries are also regulated by other agencies — the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA) and the Government — both Centre and State.

Poor co-ordination

Historically, there seem to be an apparent lack of coordination among the regulatory agencies and they seem to have issued guidelines concerning the debt market without reference or consultation with other regulators. The much-awaited repo on corporate debt market is a case in point.

The SEBI and the IRDA issued guidelines allowing mutual funds and insurance companies (natural lenders in the repo market) to participate in the repo market almost ayear after the RBI allowed repo facility for the corporate debt instruments --- resulting in just one deal reported on corporate repo till now.

There are still discussions among the market participants on the way forward. There is, therefore, need for coordination among the regulators while issuing various guidelines concerning the debt market.

This is expected to provide much better results and would also send a strong signal to the market participants on the seriousness of the initiatives. In that context, the commitment of FSDC, wherein all regulators are represented, is a welcome step.

Secondly, any activity at a nascent stage needs to be handled with care till it gains momentum, during which time some discipline can be instilled. Similarly, the corporate debt market would need some benevolent regulation from all the regulators for it to revive from its deep slumber.

Broader controls

It is well understood that arbitrageurs and speculators provide the necessary liquidity to any growing market and, therefore, there is a role for these players in any market.

Nevertheless, initiatives that were taken in the past were perceived by markets as very restrictive and hence failed to take off — interest rate futures/CDSs, FII infra limit, and so on). Regulations should, therefore, have broader controls to attract more players.

Thirdly, regulatory feedback mechanism needs to be robust with timely remedial action must be taken in case of any market reform initiative not achieving its intended result.

The measure of any reform initiative would be the impact of such initiative on the market, which should be monitored closely and reviewed periodically.

(The author is Senior Director — Treasury, IDFC.)

(This article was published on January 14, 2013)
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