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Arecipeforthecorporatebondmarket
Sixgrowthtriggersareinplace,butsixmorestepswouldbenecessarytoheraldadeepfundingalternative

TworecentdevelopmentshavespicedupIndiascorporatebond
market.

Firstistheissueof`3,000croreoffshorerupeedenominatedmasala
bondsbymortgagepioneerHDFC.Andsecondisthemandate,in
earlyJuly,bytheSecuritiesandExchangeBoardofIndia(Sebi)to
useelectronicbookbuildingforallbondissuesover`500crore.The
firstsuchflotation,byLICHousingFinance,sailedthroughonthe
NationalStockExchange.

Whilemasalabondsdiversifytheinvestorbaseofrupeebondsand
mitigatecurrencyrisk,theebiddingplatformmarksaquantumleap
intransparency,especiallyinpricediscovery.

Thetidehasbeenturningforawhile
Photo:iStockphoto
Thesedevelopmentsreflectaseriesofongoingstepsbyregulators
andpolicymakerstowardsbuildingarobustcorporatebondmarket.

Inthepastdecade,corporatebondissuanceshavegrownatacompoundannualgrowthrateof20%toreach`4.8trillioninfiscal2016.
Commercialpaper(CP)issuanceshavegrownevenfaster,treblinginthepastfiveyears.Intermsofoutstandingcredittothecorporate
sector,corporatebondsincludingCPsaccountforafifthtoday.AndtheshareofbondsandCPsinincrementalfundinghasdoubledin
thepastfiveyears,risingparticularlyfastinthepasttwo.

Today,therearesixgrowthtriggersinplace,butsixmorefacilitationswouldbenecessarytoheraldadeepfundingalternativefor
corporates.

Thetriggers

FirstisthatIndiasmacroeconomicmilieuisbecomingconduciveinmultipleways.Stablemacros,especiallydurableinflationgains,are
crucialhereandIndiaisgettingtherethroughtheflexibleinflationtargetingandMonetaryPolicyCommitteeframework.Andanimproving
fiscwillreducethecrowdingoutofcorporateborrowingssoendemicinthepast.Also,alongstandingstructuralconstrainttomonetary
policytransmissionhasgonewithinterestratesonsmallsavingsschemesnowlinkedtomarketbenchmarks.Forforeigninvestors,thereis
alsocurrencystabilityandgoodyieldsintimesofnegativetobarrelbottomratesinthedevelopedworld.

Second,CrisilestimatesIndiasinfrastructurebuildoutrequires`43trillionoverfiveyearsto2020.Nearlyaquarterofitorabout`10trillion
willhavetocomefromthecorporatebondmarket.

Thirdisthatpublicsectorbanks(PSBs),weigheddownbybadloanproblems,willfinditdifficulttooffercompetitiverates,orgrow.Toboot,
theyneed~`1.7trillionofequitybyMarch2019.

Fourth,someregulationshavebeenfavourablesuchastheReserveBankofIndias(RBI)draftframeworktoenhancecreditsupplytolarge
borrowersthroughthebondmarket,theBaselIIIliquidityguidelines,andSebisguidelinesformunicipalandgreenbonds.

Fifthistheongoinginnovationwherenewstructures(securitizationofpowertransmissionutilityreceivables),newvehicles(infrastructure
developmentfunds),andnewinstruments(hybridsfortheinsurancesector)wouldattractmoreissuersandinvestors.

Sixth,acrediblebankruptcyresolutionmechanismisonthehorizonwiththeInsolvencyandBankruptcyCodebecominglaw.This
strengthenscreditorrightslikeneverbeforebecauseitaffordsgreaterpredictabilitytorecovery,which,inturn,increasesinvestorconfidence
inbonds.A2006InternationalMonetaryFundstudy(LocalCurrencyBondMarketsbyJohnD.BurgerandFrancisE.Warnock)showsthat
countrieswithbetterenforcedcreditorrightshavelargerdomesticcurrencythanforeigncurrencybondmarkets.

Needsomecrucialfacilitations

Butevenasthingsimprove,halfadozenregulatoryfacilitationshavebecomecriticaltocreatethedeepsourceoffundssonecessaryto
buildoutinfrastructureandraiseIndiaspotential,ortrend,growthrate.

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8/3/2016 ArecipeforthecorporatebondmarketPrintViewLivemint
Firstisthatthesecondarymarketneedstobemoreliquid,andonewaytofacilitateitisbyenablingmarketmaking,andencouragingrepos
inAAcorporatebonds,likeinAAAbonds.

Secondistopromotecreditdefaultswapprotection,whichcanweaninvestorsawayfromGSecstocorporatebonds.Here,quickand
relentlessimplementationofthebankruptcycodewillbehelpful.

Third,toreduceconcentrationriskinbanking,largecorporatesneedtobepersuadedtoraiseaportionoftheirfundingneedsthrough
corporatebondsandCPs.TheRBIsmovetomakeitcostlierforbankstolendtospecifiedlargeborrowersbeyondadefinedlimitis
encouraging.

Fourth,itisimperativethattheinstitutionalandmarketframeworksarestrengthened.Weneedanationalbondguaranteefundforcredit
enhancement,areliablebenchmarkyieldcurveforbetterpricediscovery,acrediteventreportingmechanismtoinstillmoredisciplineand
transparency.

Fifth,itsnecessarytoexpandaccesstoalargeinvestorclassinsurancecompanies.Today,thereisalimittowhatinsurerscaninvestin
infrastructurespecialpurposevehicles(SPVs)basedontheirnetworth,whichreducestheirappetite,andforbondissuers,shrinksthe
investorfield.Additionally,forabondtobeconsideredapprovedinvestmentbyinsurers,theparenthastoguaranteeevenifitisrated
lowerthantheSPV.

Sixthandlast,wecanlearnfromtheglobalexperienceandintroducenewinstrumentssuchascoveredbonds,anddeterminedlybuilda
deepoffshorerupeebondmarket.

Itwouldbeappositetosumupwithacondimentalmetaphor:thebrothofcorporatebondmarketgrowthiscookingslowly.Itnowneedsthe
masalaofgreaterregulatoryandpolicyfacilitationtoturnintoadelectabledebtdish.Else,corporateswillsoonbefamishedforfunds.

PawanAgrawalischiefanalyticalofficer,Crisilratings.

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