Tuesday, May 26, 2009

Development of the Indian Debt Market

India's corporate bond market remains underdeveloped despite strong economic growth and significant financial system reforms, the Asian Development Bank said in a report last April. The report found that corporate borrowers continue to depend on bank loans, equity markets and private placement to meet their requirement of funds. http://aric.adb.org/pdf/workingpaper/WP22_India.

The secondary market activities in corporate bonds have started to pick up; efforts of Securities Exchange Board of India (SEBI) and the stock exchanges to bring the trading to electronic stock exchange platforms have started to yield desired results:

--- No. of Trades*

Amount(Rs. Cr.)*

No. of Trades*Amount (Rs. Cr.)*No. of Trades*Amount (Rs. Cr.)*No. of Trades*

Amount (Rs.Cr.)*

2007-0827697 41186.73 3787 31453.14408923479.0135573 96118.88
2008-0941737638057.92 4902 49505.39 9585 61535.15429642 148751.96

Indian financial markets regulator SEBI has recently issued simplified rules governing corporate debt paper, thereby making it possible to raise debt funds quicker on domestic capital markets. Companies that have already floated one debt or equity issue can now cut through several layers of paperwork when issuing another tranche. The long-winded vetting process that accompanied each issue made companies reluctant to use this route and they prefer private placement, often arranged by bankers Rs 2 lakh crore in corporate debt raised in fiscal 2008-09 has been through private placement, though this is, incidentally, a huge jump over the Rs 1.28 lakh crore raised in the previous year through the same route, it is not yet an indication of a healthy debt market which needs public issues and liquidity in the secondary market for efficient price discovery to take place. The new listing agreement, though, stipulates that an issuer must maintain 100% security cover for listed secured debt securities at all times and ensure that charges on the assets are registered. Disclosure norms have also been made more stringent to draw in investors; the issuer is required to separately mention the debt service coverage ratio and interest service coverage ratio after the item earnings per share while submitting half-yearly or annual results. Currently, institutions that invest in corporate bonds mostly prefer short-term maturity paper rather than long-term ones, high liquidity and long-term players like pension funds and insurance companies are crucial to the development of the corporate bond market in India. http://ssrn.com/abstract=421440

A long standing proposal to improve liquidity in buying and selling of government bonds .through introduction of Separate Trading for Registered Interest and Principal of Securities (STRIPS) is likely to be introduced in the current fiscal year. While initially only select identified G-Secs will be converted into STRIPS, it is expected to provide institutional investors an additional instrument for asset-liability management. A detailed explanation of STRIPS and its benefits may be found in the following article: The Strips Programme and its Implications for the Indian Gilts Market-A Note

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