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

MORE MARKETS, LESS GOVERNMENT
bonds to institutional investors and
QIBs, rating should form the basis for
placement. However, companies which
are not listed and which are opting for
the private placement mode should be
subjected to stringent disclosure norms.
Privately placed bonds should be mandatorily
listed within seven days from the
date of allotment, as is the case with public
issues. The practice of suspension of
trading/delisting of securities in case of
non compliance with listing norms by an
issuer needs to be replaced by heavy penalties
on the promoters and directors of
the erring company. Debenture trusties
should be made more responsible and
accountable. They also should ensure
that important information such as rating
downgrades should be disseminated
to the investors.
Trade Reporting System
There should be a mechanism to capture
all the information relating to trades in
corporate bonds, disseminate the same
and maintaining a database of trade history.
Regulators should direct the market
participants to report all the transactions
done by them to the trade
reporting system.
Trading, Clearing And Settling
Mechanism
Anonymous screen based order matching
trading systems should be adopted in
order to improve the transparency and
efficiency in the corporate bond transactions.
However, multiple trading platforms
may also impact the liquidity adversely.
Moreover, novation and
multilateral netting should form the
backbone for risk mitigation and enhancement
of liquidity.
Development Of Derivative
Market
Derivative market is essential for hedging
interest rate risk. Though interest
rate swaps and forward rate agreements
exist in India, there is a need for advanced
derivative instruments for better
price discovery and hedging. RBI has
already initiated certain steps and
formed committees to formulate
a framework for some advanced
derivative instruments.
Price Distorting Issues
Stamp duty is a levied by the State
Governments and RBI should reduce the
stamp duty and rationalize it
between different states. Tax Deducted
at Source (TDS) also distorts the pricing
of bonds. TDS on interest income from
corporate bonds is not uniformly
applicable to all the investors. While insurance
companies and mutual funds are
exempt from the provisions of TDS, all
other market players are subject to it in
respect of interest paid on corporate
bonds. An automated computerized
trading system and a meaningful price
discovery process cannot be introduced
because of the differing TDS treatment
for different market player. Therefore it
is desirable to have a uniformTDS rule
for all the market players.
The shut period (for reckoning the registered
owner of the bond for payment of
coupons) is very long and may be brought
on par with that for the government securities,
which is one day. It is also necessary
to standardize the day count conventions.
Currently the day count
conventions in the market differ depending
upon the nature of the
instruments and the nature of
the transaction.
References
• Sharma, V. K. and Sinha, Chandan.
The Corporate Debt Market in India
(2006). Bank for International Settlements,
Paper No. 26
• Stone, M. Corporate Debt Restructuring
in East Asia: Some Lessons from
International Experience (1998). International
Monetary Fund
PPAA/98/13
• Mohan, R. 'Recent Trends in the Indian
Debt Market and Current Initiatives'
(2006)
• Bose, S and Coondoo, D. A Study of the
Indian Corporate Bond Market (2003).
Social Science Research Network.
• Kar , S and Khasnobis, B.G. The Corporate
Debt Market-A Firm-Level
Panel Study for India. Research Paper
No. 2006/50, UNU-WIDER World
Institute for Development Economics
Research
• Reddy, Y.V. 'Issues and challenges in
the development of the debt market in
India' (2003). BIS Paper No.11, Bank
for International Settlements
• 'The Indian Bond Market, Current
Situations and Developments' (2006),
Keio University.
• India’s Capital Market (2007), Deutsche
Bank
• "Bonding the BRICs: A big chance for
India’s Debt Capital Market"(2007),
Goldman Sachs
• IMF Global Financial Stability Report,
September 2007
• IMF Global Financial Stability Report,
April 2007
• NSE Debt RoundUp, October 2007
• "India on fire", The Economist; February
1st 2007
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