Developing Indian Debt Markets

Indian Government securities market is one of biggest market but corporate debt market is still an insignificant player. But Why?

Let us start from the very beginning. The debt market comprises broadly two segments, viz., Government Securities Market and Corporate Debt Market. The latter is further classified as Market for PSU Bonds and Private Sector Bonds.

Some of the Structural Weaknesses in the Indian Primary Corporate Debt Market are:
• Lack of large and diverse investors
• Lack of dedicated intermediaries (Bond Manager)
• Heavy tilt towards private placement

Some of the Structural Weaknesses in Indian Secondary Corporate Debt Market are:
• Absence of Clearing Corporation and CCPS.
• Dedicated trading platform.
• Exclusive, well capitalized and professional intermediaries
• Lack of reliable and up to date information

Few of the issues & concerns for Indian debt market:
• Poor Quality Paper
• Inadequate Liquidity in the market
• The investor base in India is very small
• Incomplete access to information - There is no one place in India where one can have all the data pertaining to corporate debt issues. No one knows exactly how much debt is outstanding on any given date and different agencies have incoherent estimates for the same
• There is a perception in India that listed companies seek delisting owing to perceived regulatory arbitrage (additional cost on companies)
• Debt Versus equity: Cost and risks debt paper is offered and reoffered quite frequently by companies. In falling interest rate scenario, Corporate tend to borrow for shortest possible period thus restoring to repeated issue costs and interest rate risks

But all is not bad. The following are few recommendations for developing debt market:

• Widen Investors’ Base – Retail investors can be involved indirectly with the help of placing Bank (as done in Hong Kong). Clearing house should be linked to other countries to expand investor base.
• Transparency - There is need to create reliable and up to date Bond market information and Central Database
• There are no takers for repo transactions where corporate bonds are used as collaterals.
• Private placement of Corporate Debt should be regulated
• A Sound, Robust and Safe Market Infrastructure should be set up by shortening settlement lags and establishing a clearing corporation.
• Need for Regulatory Framework and effectiveness
• Securitization and structured instruments through use of derivatives - It can contribute to the development of corporate bond markets by overcoming the problems of the small size & low credit quality of most emerging market issuers. It can also be useful in identifying gaps and deficiencies in cash market infrastructures and foundations.
• There should be multiple trading platforms with central collection and dissemination of prices. This will ensure competition amongst players as well as liquidity. It should be ensured that no operational arbitrage arises