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

REIMAGINING INDIA
bringing in changes in the prudential
regulatory mechanism which treats loans
portfolio on par with investment portfolio.
Moreover, Co-operative banks are
permitted to invest only a small part of
their deposits in bonds issued by PSUs
and only scheduled co-operative banks
are allowed to invest in private sector
bonds. Allowing all co-operatives banks
to invest in high quality corporate bonds
would be helpful as cooperative banks
have large deposits.
FIIs – The investment limits of FII in
corporate bonds should be increased
because FIIs are a major investor class
and can bring volumes to the corporate
bond markets. Though the limit was
hiked recently to USD 1.5 billion, still
this is too small for big players taking any
active interest in this market
meaningfully.
Provident Funds And Pension
Funds – These should be allowed to
invest on the basis of rating rather than
in terms of category of issuers. This may
encourage these funds to invest in high
quality corporate bonds. Currently, these
funds are allowed to invest only up to 10
percent of the accruals in a year in private
corporate bonds and 40 percent of the
corpus can be invested in bonds issued by
public sector undertakings. As the Risk
profile of a large number of the PSUs
established by the state governments is
not materially different from that of several
private corporate sector companies.
ECB in India has increased during the last fi ve years.
This is an indication that Indian corporate want to raise
debt... which is not easily available in the market owing to
regulatory issues and high cost of borrowing
Hence, investment that rating quality as
indicated by the recognized rating companies
should become the main criteria
for investment in corporate bonds and
not category of bonds in terms of issuers.
Thus the guidelines issued to PFs and
EPFs need not discriminate between
State Govt. PSUs and private corporate
sector entities. To encourage small investors,
the bond market structure should
emulate the equity market structure and
retail investors should be able to buy and
sell bonds without any restriction on the
minimum market lot. Currently an investor
can buy even one share in the equity
market.
Increasing Market Participation
By Widening The Issuer Base
The Issuer base can be increased primarily
by reviewing the current guidelines
for issuance, disclosure and listing of corporate
bonds. The current regulations
and guidelines should be made less stringent
so that it would become easier for
the companies to issue bonds. On the flip
side, regulations are needed to promote
the volume and liquidity in the primary
market apart from increased issuance.
Currently banks are allowed to issue
bonds of maturities over five years only
for financing infrastructure sector. Since
banks are one of the leading issuers of
bonds, they should be allowed to issue
bonds of maturities over five years subject
to their asset liability matching norms.
The development of an interest rate derivatives
markets is a major prerequisite
to facilitate this.
Banks are one of the major issuers of
bonds to augment their tier-II capital and
these bonds are in turn subscribed to by
other banks (cross holdings). This reduces
the overall volume and liquidity in the
market. Regulatory caps should be fixed
for such cross investments so that other
participants are given an opportunity to
subscribe to these bonds.
Market Makers
Market makers provide exit options to
investors to buy or sell bonds whenever
desired by the investors. The market
making in corporate bonds is necessary
as the market is in a nascent stage and it
would require the psychological comfort
in the beginning. Investment banks that
help corporate to raise money from the
market can possibly be roped in to market
making in the bonds which they have
helped in issuance.
Listing Norms To Be Eased And
Enhancing Liquidity
As mentioned earlier, External Commercial
Borrowing in India has increased
during the last five years which is an indication
that Indian corporate want to
raise debt which is not easily available in
the market owing to regulatory issues
and high cost of borrowing. There is less
issuance of corporate debt in the first
place and secondly disclosure and documentation
norms deter the corporate to
issue debt publicly. Thus, the corporate
debt market is dominated by private
placements. For listed entities, norms
can be made simpler; they should be allowed
an abridged version of disclosure;
whereas unlisted companies issuing
136 THE IIPM THINK TANK