[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
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REIMAGINING INDIA<br />
bringing in changes in the prudential<br />
regulatory mechanism which treats loans<br />
portfolio on par with investment portfolio.<br />
Moreover, Co-operative banks are<br />
permitted to invest only a small part of<br />
their deposits in bonds issued by PSUs<br />
and only scheduled co-operative banks<br />
are allowed to invest in private sector<br />
bonds. Allowing all co-operatives banks<br />
to invest in high quality corporate bonds<br />
would be helpful as cooperative banks<br />
have large deposits.<br />
FIIs – <strong>The</strong> investment limits of FII in<br />
corporate bonds should be increased<br />
because FIIs are a major investor class<br />
and can bring volumes to the corporate<br />
bond markets. Though the limit was<br />
hiked recently to USD 1.5 billion, still<br />
this is too small for big players taking any<br />
active interest in this market<br />
meaningfully.<br />
Provident Funds And Pension<br />
Funds – <strong>The</strong>se should be allowed to<br />
invest on the basis of rating rather than<br />
in terms of category of issuers. This may<br />
encourage these funds to invest in high<br />
quality corporate bonds. Currently, these<br />
funds are allowed to invest only up to 10<br />
percent of the accruals in a year in private<br />
corporate bonds and 40 percent of the<br />
corpus can be invested in bonds issued by<br />
public sector undertakings. As the Risk<br />
profile of a large number of the PSUs<br />
established by the state governments is<br />
not materially different from that of several<br />
private corporate sector companies.<br />
ECB in India has increased during the last fi ve years.<br />
This is an indication that Indian corporate want to raise<br />
debt... which is not easily available in the market owing to<br />
regulatory issues and high cost of borrowing<br />
Hence, investment that rating quality as<br />
indicated by the recognized rating companies<br />
should become the main criteria<br />
for investment in corporate bonds and<br />
not category of bonds in terms of issuers.<br />
Thus the guidelines issued to PFs and<br />
EPFs need not discriminate between<br />
State Govt. PSUs and private corporate<br />
sector entities. To encourage small investors,<br />
the bond market structure should<br />
emulate the equity market structure and<br />
retail investors should be able to buy and<br />
sell bonds without any restriction on the<br />
minimum market lot. Currently an investor<br />
can buy even one share in the equity<br />
market.<br />
Increasing Market Participation<br />
By Widening <strong>The</strong> <strong>Issue</strong>r Base<br />
<strong>The</strong> <strong>Issue</strong>r base can be increased primarily<br />
by reviewing the current guidelines<br />
for issuance, disclosure and listing of corporate<br />
bonds. <strong>The</strong> current regulations<br />
and guidelines should be made less stringent<br />
so that it would become easier for<br />
the companies to issue bonds. On the flip<br />
side, regulations are needed to promote<br />
the volume and liquidity in the primary<br />
market apart from increased issuance.<br />
Currently banks are allowed to issue<br />
bonds of maturities over five years only<br />
for financing infrastructure sector. Since<br />
banks are one of the leading issuers of<br />
bonds, they should be allowed to issue<br />
bonds of maturities over five years subject<br />
to their asset liability matching norms.<br />
<strong>The</strong> development of an interest rate derivatives<br />
markets is a major prerequisite<br />
to facilitate this.<br />
Banks are one of the major issuers of<br />
bonds to augment their tier-II capital and<br />
these bonds are in turn subscribed to by<br />
other banks (cross holdings). This reduces<br />
the overall volume and liquidity in the<br />
market. Regulatory caps should be fixed<br />
for such cross investments so that other<br />
participants are given an opportunity to<br />
subscribe to these bonds.<br />
Market Makers<br />
Market makers provide exit options to<br />
investors to buy or sell bonds whenever<br />
desired by the investors. <strong>The</strong> market<br />
making in corporate bonds is necessary<br />
as the market is in a nascent stage and it<br />
would require the psychological comfort<br />
in the beginning. Investment banks that<br />
help corporate to raise money from the<br />
market can possibly be roped in to market<br />
making in the bonds which they have<br />
helped in issuance.<br />
Listing Norms To Be Eased And<br />
Enhancing Liquidity<br />
As mentioned earlier, External Commercial<br />
Borrowing in India has increased<br />
during the last five years which is an indication<br />
that Indian corporate want to<br />
raise debt which is not easily available in<br />
the market owing to regulatory issues<br />
and high cost of borrowing. <strong>The</strong>re is less<br />
issuance of corporate debt in the first<br />
place and secondly disclosure and documentation<br />
norms deter the corporate to<br />
issue debt publicly. Thus, the corporate<br />
debt market is dominated by private<br />
placements. For listed entities, norms<br />
can be made simpler; they should be allowed<br />
an abridged version of disclosure;<br />
whereas unlisted companies issuing<br />
136 THE <strong>IIPM</strong> THINK TANK