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

REIMAGINING INDIA
External Commercial Borrowings
Year
ate financing approach. However current
shallow status of Indian bond market
does not seem to be geared to meet the
target capital requirement. The inability
to meet the financing requirement of infrastructure
leads to a lower output and
hence a shortfall in the welfare and GDP
and other various dominos effects.
The demand for corporate debt can be
gauged by the fact that Indian corporate
papers are in huge demand in overseas
market in the form of external commercial
borrowings (ECBs). In 2007 itself,
the net ECB inflow in the country was
about $16 billion and RBI had to tighten
the norms on ECB borrowing in order to
keep inflation and rupee-dollar exchange
rate in check.
ECB Gross
inflow
The experience of US and other developed
countries clearly indicates that the
corporate bond market played an important
role in the development of the economy
as a whole. During the last few years,
DFI’s access to long-term funds has dwindled
and they cannot meet the demand
for term funds of industry and infrastructure
sectors when investment activity is
all set to pick up from the present low
levels. Moreover, as the demand term
debt increases significantly to finance
ECB outflow
(imputed)
Net ECB
inflow
high level of investments, excessive dependence
on banks will hit the creditworthy
borrowers, as they would end up
paying up more than what they would
have to pay if they decide to raise funds
from the market directly.
DEMAND SIDE
The corporate bond market in India is
underdeveloped owing to the limitations/
reluctance of the various market
participants:-
Corporate – The cash credit system of
banks operates in effect like a loan in
perpetuity, many corporates prefer it to
bond financing where the amount has to
be returned on a specific date. Moreover,
they are either riding on the current equity
boom in the economy or relying
more on retained earnings.
Foreign Institutional Investors are
major players in the equities market.
However, there exists a ceiling on their
investment in the debt market (currently
there is a ceiling of $1.5 billion on investment
in corporate debt), they are present
only in a limited way in the bond
market.
Pension Funds And The Insurance
Sector could spurt the market activities
but the absence of pension funds and low
insurance penetration has meant limited
demand for long-term bonds.
Gross inflow
on ECB
2002 2687 4272 -1585
2003 3514 5206 -1692 827
2004 5228 8153 -2925 1714
2005 9084 3890 5194 3856
2006 14547 11824 2723 5463
2007 21291 5207 16084 6744
SOURCE - RBI
Households too are almost completely
absent from the market, due to the lack
of an efficient legal system, and unhappy
experience with debenture trustees.
SUPPLY SIDE
• Public Placement – There are a lot
many regulations related to disclosure
and filing of the norms which adds to
the overall costs of issuing the bonds.
Corporate prefer private placements
owing to less hassles and almost non
existent disclosure norms. Though the
government has limited the private
placement partners to 50 in case of
private placement, corporate has
sought a way out because the partners
can issue the debt issued to them to
new partners.
• Illiquidity – A large part of the market
does not mark-to-market the corporate
bond portfolio. As a result, once any
bond goes into the books, it does not
come out. This takes away liquidity
from the market.
• Trading is concentrated in AAA – rated
bonds, as they are the safest and
most liquid. A large part of the market,
including insurance companies, provident
funds and banks, has restrictions
on private sector paper. Thus the
bonds of public sector units are much
more liquid than private sector
bonds.
Benefits Of Efficient Market For
Market Participants
Corporate
• Availability of long term funds – An
efficient bond market gives the freedom
to issue long term debt. This is
particularly important for India where
there is a large requirement of infra-
134 THE IIPM THINK TANK