TOWARDS DEVELOPMENT OF CORPORATE DEBT MARKET IN INDIA*

1. Perhaps, importance of debt market could rather be better gauged from a statement made by Mr.Greenspan, earlier Chairman of Federal Reserve. He thought that the Asian crisis would have been less severe if East Asia had a functional capital market in general and a bond market, in particular. He thought that existence of a deep and liquid corporate debt market could make emerging economies less vulnerable; especially to volatile capital flows.

2. For, a reasonably well developed bond market could supplement the banking system in meeting the requirements of the corporate sector for long term capital investment and asset creation. It could provide a stable source of finance; especially when the equity market is volatile and resource requirements of the corporate entities are large. In the case of India, development of a corporate bond market has become even more crucial especially, in view of the decline and disappearance of development financial institutions and the need for raising large amount of resources for infrastructure development in the country during the next couple of years.

3. During the recent years, the expansion of corporate bond market in the Asian region has been receiving much more attention than before. The progress made, however varies widely across countries. Both, Malaysia and South Korea have made reasonable progress in this respect followed by Thailand in regard to the developing Asia. Yet going by the US or European standards the progress has been tardy; rather insignificant considering the actual requirements of the region, as of now. Both China and India have surprisingly lagged behind in developing corporate bond markets.

4. There is a plethora of factors responsible for the slow growth of corporate bond market in the Asian region. These are:

· There are only a few corporate entities in the region which are capable of meeting investor requirements in terms of transparency and governance standards. This has resulted in a yawning gap between demand for and supply of corporate bonds in Asia causing outflow of capital in search of greener pastures for safety and higher returns.

· Public offering of bonds being expensive, time consuming and procedure oriented, corporates have been finding it easier to either borrow from banks or make a private placement of their bonds.

· Corporate bond market has been an institutional market. It involves over the counter bulk trading thus making trading activity r less transparent.

· Non availability of bankruptcy laws to ensure investor protection in the Asian markets has also contributed towards slow development of the corporate bond market.

· Corporate governance and disclosure standards available in these countries do not provide enough confidence to investors to go in for investments in bonds, as unlike banks, bond investors will be widely dispersed and therefore will have less bargaining power.

· Building the infrastructure required for a well developed bond market is subject to significant time and resource costs. In fact, most developing Asian economies neither have the resources, nor the skills and the required technology to embark on an infrastructure development programme with a view to revamping their bond markets.

5.In India, development of corporate debt market has been one area which is most deliberated upon and discussed about. And yet it remains the least developed of all segments of the market for reasons known to the market participants. It has also been the least regulated till recently and to some extent even today. Reforms of the financial markets seem to have bypassed this segment of the market, altogether.

6. Yet, India, has been an exception in regard to many of the shortcomings observed in respect of most Asian countries. India has a legal framework in place to provide for regulatory oversight and investor protection. It has a fairly developed financial sector segment of the market which is reasonably free of controls. It also has quite a few corporate entities who could take advantage of the bond markets for its requirement of financial resources. It has the required infrastructure in place and has two world class stock exchanges for trading, clearing and settlement systems. The country also can boast of reasonably well functioning depositories and a credible system of experienced credit rating agencies. Over and above, It has the required skilled manpower coupled with availability of the best technology.

7. Against this background, a fresh attempt is now being made by the Government to create a vibrant dynamic and deep corporate debt market in this country. A beginning towards such an attempt has already been made with the High Level Committee on Corporate Bonds and Securitization, set up by the Government of India, which has spelt out measures needed to realize the dream of developing such a market in this country.

8.Subsequent to the announcement of the Finance Minister accepting the recommendations of the Committee SEBI’s internal group worked out a road map for implementation of a plan for the development of a corporate bond market in India. An internal Group of RBI has also recently come out with its views on the subject. I understand that In June last, the World Bank too organized a seminar wherein the relevant issues were discussed by the market participants, threadbare.

9. SEBI’s internal committee has given some thought to an envisaged set up to make a beginning in the corporate debt market. As an integral part of its efforts to promote an efficient, orderly and fair financial market it has suggested setting up of a trade reporting platform for corporate debt to start with and an exchange for bond trading, clearing and settlement. Globalization being the watch word for success, perhaps we need to think ahead and forge ahead in this area providing even a hub for trading, clearing and settlement of Asian bonds . Let us for a while think of ourselves as the rock stars of an Asian bond market of tomorrow. Since we need not reinvent the wheel, the fact that India is yet to develop a domestic corporate bond market should not deter us from achieving this goal.

10.Some steps towards achieving this objective could be:

· Setting up a corporate bond trade reporting system to ensure real time dissemination of information on bond trading;

· Setting up an exchange exclusively for bond trading with appropriate arrangements for clearing and settlement as soon as the trade reporting system stabilizes and generates the required information on bond trading for dissemination;

· Taking appropriate measures to widen and deepen the bond market. This could include enhancing the investor base, introducing a class of market makers, sorting out of taxation issues etc.

· Evolving a self regulatory organization on the lines of the National Association of Securities Dealers in the US to help ease the burden of SEBI in regulating the bond market could be an integral part of the plan.

· Establishing optional platforms to provide facilities for online public offerings in different ways to investors and setting up a scheme of repurchase agreements in corporate bonds to enhance liquidity of bonds could be added features of the project.

11. Once the domestic segment of the exchange fully stabilizes, an international segment of the exchange could be opened for listing of Asian bonds to facilitate Asian issuers of corporate bonds to undertake their trading activities. This will be in tune with the decision to explore the idea of setting up an international financial centre in Mumbai, on the one hand and the move towards capital account convertibility on the other. Such a move would enable Asian countries which have amassed about $2.73 trillion of foreign exchange reserves have avenues for investment within the region.

*Text of Inaugural Address delivered by Dr.T.C.Nair at Thought Leadership Series of Lectures on “Creating a Vibrant Corporate Debt Market in India “ organized by Dun and Bradstreet at Hilton Towers, Mumbai on August 4, 2006. The views expressed here are those of the speaker.

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TOWARDS DEVELOPMENT OF CORPORATE DEBT MARKET IN INDIA* 1. Perhaps, importance of debt market could rather be better gauged from a statement made by Mr.Greenspan, earlier Chairman of Federal Reserve. He thought that the Asian crisis would have been less severe if East Asia had a functional capital market in general and a bond market, in particular. He thought that existence of a deep and liquid corporate debt market could make emerging economies less vulnerable; especially to volatile capital flows. 2. For, a reasonably well developed bond market could supplement the banking system in meeting the requirements of the corporate sector for long term capital investment and asset creation. It could provide a stable source of finance; especially when the equity market is volatile and resource requirements of the corporate entities are large. In the case of India, development of a corporate bond market has become even more crucial especially, in view of the decline and disappearance of development financial institutions and the need for raising large amount of resources for infrastructure development in the country during the next couple of years. 3. During the recent years, the expansion of corporate bond market in the Asian region has been receiving much more attention than before. The progress made, however varies widely across countries. Both, Malaysia and South Korea have made reasonable progress in this respect followed by Thailand in regard to the developing Asia. Yet going by the US or European standards the progress has been tardy; rather insignificant considering the actual requirements of the region, as of now. Both China and India have surprisingly lagged behind in developing corporate bond markets. 4. There is a plethora of factors responsible for the slow growth of corporate bond market in the Asian region. These are: · There are only a few corporate entities in the region which are capable of meeting investor requirements in terms of transparency and governance standards. This has resulted in a yawning gap between demand for and supply of corporate bonds in Asia causing outflow of capital in search of greener pastures for safety and higher returns. · Public offering of bonds being expensive, time consuming and procedure oriented, corporates have been finding it easier to either borrow from banks or make a private placement of their bonds. · Corporate bond market has been an institutional market. It involves over the counter bulk trading thus making trading activity r less transparent. · Non availability of bankruptcy laws to ensure investor protection in the Asian markets has also contributed towards slow development of the corporate bond market. · Corporate governance and disclosure standards available in these countries do not provide enough confidence to investors to go in for investments in bonds, as unlike banks, bond investors will be widely dispersed and therefore will have less bargaining power. · Building the infrastructure required for a well developed bond market is subject to significant time and resource costs. In fact, most developing Asian economies neither have the resources, nor the skills and the required technology to embark on an infrastructure development programme with a view to revamping their bond markets. 5.In India, development of corporate debt market has been one area which is most deliberated upon and discussed about. And yet it remains the least developed of all segments of the market for reasons known to the market participants. It has also been the least regulated till recently and to some extent even today. Reforms of the financial markets seem to have bypassed this segment of the market, altogether. 6. Yet, India, has been an exception in regard to many of the shortcomings observed in respect of most Asian countries. India has a legal framework in place to provide for regulatory oversight and investor protection. It has a fairly developed financial sector segment of the market which is reasonably free of controls. It also has quite a few corporate entities who could take advantage of the bond markets for its requirement of financial resources. It has the required infrastructure in place and has two world class stock exchanges for trading, clearing and settlement systems. The country also can boast of reasonably well functioning depositories and a credible system of experienced credit rating agencies. Over and above, It has the required skilled manpower coupled with availability of the best technology. 7. Against this background, a fresh attempt is now being made by the Government to create a vibrant dynamic and deep corporate debt market in this country. A beginning towards such an attempt has already been made with the High Level Committee on Corporate Bonds and Securitization, set up by the Government of India, which has spelt out measures needed to realize the dream of developing such a market in this country. 8.Subsequent to the announcement of the Finance Minister accepting the recommendations of the Committee SEBI’s internal group worked out a road map for implementation of a plan for the development of a corporate bond market in India. An internal Group of RBI has also recently come out with its views on the subject. I understand that In June last, the World Bank too organized a seminar wherein the relevant issues were discussed by the market participants, threadbare. 9. SEBI’s internal committee has given some thought to an envisaged set up to make a beginning in the corporate debt market. As an integral part of its efforts to promote an efficient, orderly and fair financial market it has suggested setting up of a trade reporting platform for corporate debt to start with and an exchange for bond trading, clearing and settlement. Globalization being the watch word for success, perhaps we need to think ahead and forge ahead in this area providing even a hub for trading, clearing and settlement of Asian bonds . Let us for a while think of ourselves as the rock stars of an Asian bond market of tomorrow. Since we need not reinvent the wheel, the fact that India is yet to develop a domestic corporate bond market should not deter us from achieving this goal. 10.Some steps towards achieving this objective could be: · Setting up a corporate bond trade reporting system to ensure real time dissemination of information on bond trading; · Setting up an exchange exclusively for bond trading with appropriate arrangements for clearing and settlement as soon as the trade reporting system stabilizes and generates the required information on bond trading for dissemination; · Taking appropriate measures to widen and deepen the bond market. This could include enhancing the investor base, introducing a class of market makers, sorting out of taxation issues etc. · Evolving a self regulatory organization on the lines of the National Association of Securities Dealers in the US to help ease the burden of SEBI in regulating the bond market could be an integral part of the plan. · Establishing optional platforms to provide facilities for online public offerings in different ways to investors and setting up a scheme of repurchase agreements in corporate bonds to enhance liquidity of bonds could be added features of the project. 11. Once the domestic segment of the exchange fully stabilizes, an international segment of the exchange could be opened for listing of Asian bonds to facilitate Asian issuers of corporate bonds to undertake their trading activities. This will be in tune with the decision to explore the idea of setting up an international financial centre in Mumbai, on the one hand and the move towards capital account convertibility on the other. Such a move would enable Asian countries which have amassed about $2.73 trillion of foreign exchange reserves have avenues for investment within the region. *Text of Inaugural Address delivered by Dr.T.C.Nair at Thought Leadership Series of Lectures on “Creating a Vibrant Corporate Debt Market in India “ organized by Dun and Bradstreet at Hilton Towers, Mumbai on August 4, 2006. The views expressed here are those of the speaker.