Indian corporate bonds nowhere near perfection

The government, market regulator and the central bank are pushing companies to take to corporate bonds. 

The results are out -- in 2014 - 15, corporate bond issuance was up 236% from 1.74 lakh crore seen in the 2008-09 recession year to Rs 4.14 lakh crore.  

The Reserve Bank of India, in a recent working group paper on corporate bonds said that the bond market "complements a sound banking system as an alternate source of finance to the real sector for its long term needs. These bonds support in diversification of risks in the financial system."

In the same paper, the RBI put forth issuses that still persist with corporate bonds.  

 The RBI, Securities and Exchange Board of India (Sebi) and the government have identified areas in the corporate bond market that needs tweaking. These issues are keeping the corporate bond market from deepening. 

There are ten issues put forth by the RBI working paper that current persist in the corporate bonds market. 

1. The corporate bond issuance is dominated by private placements as these account for more than 95% of the total issuance of corporate debt (2014-15);

2. A majority of the issuances are concentrated in the 2-5 year tenor;

3. The investor base is limited/narrow as the investment mandates of institutional investors such as insurance companies, pension funds and provident funds, despite review of the minimum credit rating from time to time, provide      limited space for going down the credit curve as the investments are made in fiduciary capacity to protect the interests of subscribers;

4. Small outstanding stock of individual issuances is one of the key factors impacting secondary market trading as reissuances have not picked up inspite of the enabling provisions by Sebi;

5. Functional trading platform with Central Counter Party (CCP) facility like NDS-OM in G-Sec is not available; the existing DvP-III settlement introduced by stock exchanges has found no takers;

6. There is total lack of liquidity in credit risk protection instruments like Credit Default Swaps (CDS);

7. Stamp duties on corporate bonds across various states have not been standardised; tax regime for financial instruments remains one of the key drivers of investor interest;

8. There are inherent structural incentives for borrowers to prefer bank financing, e.g., cash credit system and no disincentive for enjoying unutilised working capital limits;

9. As the corporate debt market cannot be looked as totally detached from the sovereign bond market, this market may get a fillip as the interest rates come down with the inflation and fiscal consolidation targets being achieved;     and

10. In the current context, many large non-financial corporates who should normally be the preferred issuers of bonds are leveraged and hence cannot access either loan from banks or bond financing through market mechanism.