To further develop corporate bond markets, stakeholders’ should make concerted efforts on improving complementary — repo and derivative — markets, diversify the investor base, both domestic and global, and improve access of borrowers at the lower end of the credit spectrum, according to Reserve Bank of India Deputy Governor T Rabi Sankar.

Sankar emphasised that the corporate bond market largely meets the needs of highly rated corporates. Lower rated corporates have limited access to the corporate bond market for mobilising resources.

Referring to SEBI data, the Deputy Governor said in FY 2021-22, ratings were assigned to 1,235 corporate debt securities amounting to ₹22.55-lakh crore. Of these, 278 or 22.5 per cent were rated “AAA” and 358 or 29 per cent were rated “AA”. Only 66 issuances or 5.3 per cent of issuances were non-investment grade.

“While these numbers themselves are skewed in favour of highly rated issuances, the skew is much more pronounced when looked at in value terms – 80 per cent of issuances in value terms were rated “AAA” and another 1.5 per cent were rated AA,” he said. in his keynote address at the Bombay Chamber of Commerce & Industry

Public vs private issuances

The Deputy Governor said the large bulk of corporate bond issuances every year is through the private placement route rather than through public issuances.

In FY 2021-22, the amount of money raised through public issuances of corporate bonds was ₹11,589 crore – just about 2 per cent of the amount of money raised through private placement at ₹5.88 lakh crore.

Rabi Sankar

Rabi Sankar

In this regard, he observed that the advantages of a public issuance in terms of transparency and efficiency of price discovery are well understood.

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“SEBI has been making efforts to make the private placement process more transparent and efficient, for example, through the introduction of the electronic bidding process on stock exchanges.

“Nevertheless, there is an overwhelming preference for private placement. A hard look at the underlying issues including the reasons for issuers preferring to eschew the public issuance process is perhaps called for,” Sankar said.

Investor profile

The Deputy Governor underscored that the investor base for corporate bonds is, as can be expected given the market microstructure, largely dominated by domestic institutions – insurance companies, banks and mutual funds

“Retail participation in corporate bonds remains low – this in fact is a global trend. What is somewhat unique in India is that investors in debt-oriented mutual funds – which is the avenue through which globally the retail investor participates in debt markets – are also largely institutional.

“Foreign participation in corporate debt has also not been favorable to secondary market activity,” he said.

Sankar said the economic profile, mandate and / or regulatory environment of the investor base in the market, which is closely regulated, often incentivises “buy and hold” kind of participation in corporate bond market.

“With a large investor base with this profile, the challenges of developing liquidity in the secondary market or of developing liquid repo and derivative markets are compounded.

“To take an example, insurance and pension funds are one of the most active participants of credit derivative markets globally – both as buyers and sellers of protection. Without participation of these entities, it may be difficult for the credit derivatives market to develop in the country,” he said.

Widening investor base

Sankar said the question that arises is what measures may be considered to widen the investor base to enhance accessibility of lower rated issuers and liquidity in the corporate bond market.

“Given the rise in retail investments in the domestic equity market, can this category, which is conspicuous by its absence in the corporate bond market, be offered incentives to broaden the investor base in the market?

“What can be done to attract foreign investment in our markets? What can be done by way of incentives for regulated entities to participate more actively in risk markets, without compromising on prudential considerations?” the Deputy Governor said.

These are questions which need deliberations by all stakeholders – Government, regulators and the participants of the corporate bond markets themselves.