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SEBI may make another attempt at building a vibrant market for trading in corporate bonds.
On Wednesday, SEBI Chairman Ajay Tyagi said the regulator would soon issue a consultation paper on making it mandatory for large corporates to meet a fourth of their financing needs through the bond market.
This was first proposed in the Union Budget this year.
Tyagi believes the current NPA crisis, which has hit the lending activity of banks, could provide an opportunity for fund-raising from the bond market.
“Given the relatively nascent stage of development of the bond market, such a framework has to have a relatively soft-touch approach. It will be finalised in consultation with stakeholders,” Tyagi said, after inaugurating an ASSOCHAM national conference on the Corporate Bond Market.
A history of attempts
Tyagi’s predecessor UK Sinha made several attempts during his five years in office to develop the corporate bond market in India; he spoke of a unified platform, and sought a re-look at tax on income from bond trading. He had made available a complete information repository for corporate bonds and nudged BRIC nations to come together for a common bond market. But an exchange-traded bond market in India still lies moribund.
Noting that much needs to be done to increase liquidity in the secondary market, Tyagi said SEBI would move in that direction in consultation with the RBI and the government.
According to him, while the private placement of corporate bonds has shown a significant uptake, especially from FY2017, there are concerns about liquidity in the secondary market.
Secondary market products such as interest rate futures, credit-default swaps, repo and others have to be made more attractive to participants, Tyagi noted.
“The efforts made in the development of private placement of bonds have to be necessarily complemented with [an] increase in liquidity in [the] secondary market... The tightening of bond yields remain a concern. The RBI allowing banks a large exposure to the bond markets was a step in the right direction, but its effectiveness is yet to be measured.”
Tyagi holds that banks should be allowed to classify and re-classify bond and loan assets into “held-to-maturity or available-for-sale buckets” based on their declared intention rather than automatic legal documentation.
“In the medium term, this would facilitate deepening of the bond market...researchers should keenly watch how it plays out in the next 3-5 years,...the implementation of the IBC (Insolvency and Bankruptcy Code), how the bond market, as a percentage of GDP grows, which as of now is about 17 per cent,” said the SEBI chief.
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