[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

Pramod K.Yadav Ritesh Agarwal
Doctoral Students, Indian Institute of Management (IIM)-Ahmedabad
Indian Corporate Bond Market:
The Road Ahead
"In the age of globalization, where vast amounts
of capital can be moved across the world with
a mere computer keystroke, functioning bond
markets are more important than ever. So is
having a group of infl uential, globally known
bond buyers who can alert the government if its
policies are roiling markets, either by dumping
its debt or speaking out. It's incredibly important
that India's government and central bank continue
to nurture the market's growth. India needs
to take advantage of the favorable economic
climate to strengthen regulation, improve transparency
and bolster liquidity. It also needs to act
faster to increase foreign investors' ability to move
funds here. were put to productive use here.
investor and business confi dence...India is
stepping up efforts to do just that. For all China's
advantages, bonds are one important area where
India is ahead. It means markets here in Mumbai
are likely to have their own Bill Gross before
Shanghai does."
William Pesek Jr.,
International Herald Tribune,(IHT),
October 11, 2004
The Corporate Debt Market in
India is underdeveloped, both in
terms of the market participation
and efficient price discovery; and the
volume of fixed income securities is very
small as compared to equity market.
Most of the big Indian Corporate still
seek bank finance and retained earnings
to fulfill their funding requirements. Primary
corporate debt market is dominated
by non-banking finance companies and
the total corporate debt market is a minuscule
2 percent of the total debt market.
Over the years, Indian firms have
relied more on the equity market, retained
earnings and bank loans to fulfill
the funding requirements. To make the
matter worse, the secondary market in
corporate bonds has also not picked up
as desired. Securities Exchange Board of
India (SEBI) and the stock exchanges did
realize the need of corporate bond and
introduced various regulations to provide
an impetus to the bond market; however
none of the regulations or norm could
yield the desired results. The debt market
in India is broadly classified as government
securities market and corporate
securities market. The Indian debt market
is highly skewed towards government
securities market. Total outstanding debt
of India has increased over the years and
was around 36 percent of the GDP in
2004-way below the mature financial
markets (IMF,2004). The current government
bond segment resulting from
persistently high fiscal deficits and regulatory
requirement in India is about 40
percent of the GDP –at par with the well
functioning financial markets. Nearly 90
percent of the bonds issued in India are
government bonds. The enormous size of
the government bond market is not surprising
considering the persistent high
fiscal deficit and consequentially high
public sector borrowings. Mandatory requirement
on the part of banks to invest
through statutory liquidity reserve
(SLR,currently at 25 percent) compounds
the problem. Perceived risk free nature
132 THE IIPM THINK TANK