Corporate Bond Market in India

K.Sindhuri 1226113126 Summary Despite the remarkable progress made in Indian financial markets over the years and with the country holding a place of prominence globally in the equity markets space, India's corporate bond markets have been by and large stagnant. They have not managed to build investor interest over the years and account for less than 5%of India's debt market Inspite of all these, there has been a significant growth over the recent years . In 2011, outstanding issue size of corporate bonds was close to Rs. 9 lakh crores (USD 200 billion). and there is a great potential to attain a size equal to 15 per cent of GDP by the end of the 12th Plan, Introduction The 2008 Global Financial Crisis (GFC) highlighted the need to reduce the dominance of the banking system in financing corporate sector by developing a good corporate bond market. Indias infrastructure funding requirements (estimated at around 10 per cent of GDP annually) need a robust corporate bond market for diversifying risk, enhancing financial stability, and for better matching of risk-return preferences of the borrowers. A well-developed corporate bond market is critical for Indian economy as it (i) enables efficient allocation of funds, (ii) facilitates infrastructure financing, (iii) improves the health of the corporate balance sheets, (iv) promotes financial inclusion for the Small and Medium Enterprises (SMEs) and the retail investors, (v) safeguards financial stability and (vi) enables development of the municipal bond market . (RBI
,2012)

The presence of corporate bond market in India is barely perceptible as compared to other economies. Despite of multiple endeavours by the government in the recent past, to revive the market, neither investors nor issuers showed any tangible interest. As a result, at least 80% of corporate bonds comprise of privately placed debt by public financial institutions. The following graph confirms inadequate growth of the bond market in India relative to the countries like US, Japan and China. (Golaka C.nadh ,2012)

Why slow growth Unlike the Indian equities market which has made significant progress in terms of market infrastructure, regulatory structures, trading and liquidity, the corporate bond market has seen very little action Many blame RBI for this stunted growth. India's government securities market may have developed compared to a decade ago and it could very well be one of the biggest in Asia. But liquidity is restricted to a handful of securities and is not broad-based. In such a scenario, it is futile to expect the corporate bond markets to be liquid. With the 10-year interest rate, the only benchmark product, there is virtually no futures market. Repurchases (repos) in corporate bonds could help but those in the bond market say that structure is an issue with the central bank which has to worry about liquidity management. In short, they claim the way interest rate or the fixed income market has evolved is one of the major reasons why the Indian corporate bond market is in a stunted state - although, technically, SEBI is the regulator for the corporate bond market. There are other reasons, too. As long as there is an opportunity for arbitrage between loans and bonds, which is the case in India, the market is unlikely to take off. Indian lenders prefer providing loans to corporates rather than investing in bonds. According to ADB Working Paper (2008), corporate debt market accounts for 3.9% of GDP in India, while the same accounts for 61% in Korea and 37.5% in Malaysia. The outstanding corporate debt composition is also skewed towards private placement (92%). The ratio of equity

market capitalization to GDP increased from 32.1% in 1996 to 108% in March 2008. Over the same period, the bond market grew to 40 % of GDP from 21.3%. Out of that Government bond market represented 36.1% of GDP while the corporate bond accounted for a meagre 3.9%. According to SEBI figures, India's corporate bond turnover ratio was 70 % in 2007. Initiatives taken : With a view to developing the Corporate Bond Market in India, several initiatives have been taken. These include measures to impart liquidity by permitting repo transactions in corporate bonds, increase transparency by capturing information related to trading in corporate bonds including repo transactions through the authorized reporting platforms and mandatory settlement of all trades in corporate bonds through the clearing corporations and facilitating risk transfers by introduction of Credit Default Swaps (CDS). In order to further enhance transparency, it has been decided to permit Scheduled Commercial Banks (SCBs) to become members of SEBI approved stock exchanges for the purpose of undertaking proprietary transactions in the corporate bond market. While doing so, SCBs should satisfy the membership criteria of the stock exchanges and also comply with the regulatory norms laid down by SEBI and the respective stock exchanges.

The spread indicates the risk appetite of investors in the bond markets.Corporate Bond Spread is the difference between the yield of a corporate bond and a government bond.In October 2008, there was so much panic in the market, yields of corporate bonds were rising (bond prices were falling)and yields of GoI bonds were falling (bond prices were rising), hence spread was more. In 2005, this spread was as low as 30-40 bps due to positive sentiments of market. The credit spread between 10-year AAA-rated credit and 10-year GoI bond went up from 200 basis points to almost 400 in October 2008 and has comeback to 200 at the end of April 2009. Cap on FII investment in corporate debt is $500 million.Corporate bonds are not considered for REPO transactions . Later Cap on FII revised from $500 mn to $15 bn Corporate bonds of credit rating AA and above are permitted for REPO transactions In the recent years a number of corporate bond issues have hit the market. Among them, one from State Bank of India in February and another from Shriram Transport Finance Co. Ltd,

targeted the retail investor with a minimum investment requirement of Rs10,000 and interest rates of 9.75% and 11.60%, respectively. In the last six months, there have been a few other privately placed bond issues with interest rates in the excess of 11%. A 10-11% return on investment per annum is meaningful for investors and one should be on the lookout for other such issues through the rest of this year. There are, however, some risks attached to bonds that one needs to understand before investing or trading. (Sanjay Benarji , 2012) Comparison with other countries In India, the proportion of bank loans to GDP is approximately 36%, while that of corporate debt to GDP is only 4% or so. In contrast, corporate bond outstanding is 70% of GDP in USA, 147% in Germany, 41% in Japan, & 49% in South Korea. The size of the Indian corporate debt market is very small in comparison to both developed markets, as well as some of the major emerging market economies. For a sample of eight Indian corporates that featured in Forbes 2000, corporate bonds account for only 21% of total long term financing. In contrast, corporate bonds account for nearly 80% of total long term debt financing by corporates in the four developed economies of USA, Germany, Japan and South Korea1. In these countries, the share of corporate bonds is close to 87% for corporates graded above BBB and 66% for the rest. Corresponding figures in major emerging economies such as South Africa, Brazil, China and Singapore, are 57% and 33% for corporates rated above BBB and those rated at BBB or below respectively.

Comparison with the G-Sec Market and Equity Market In India the long-term debt market largely consists of government securities. The market for corporate debt papers in India primarily trades in short term instruments such as commercial papers and certificate of deposits issued by Banks and long term instruments such as debentures, bonds, zero coupon bonds, step up bonds etc. In 2011, the outstanding issue size of Government securities (Central and State) was close to Rs. 29 lakh crores (USD 644.31 billion) with a secondary market turnover of around Rs. 53 lakh crores (USD 1.18 trillion). In contrast, the outstanding issue size of corporate bonds was close to Rs. 9 lakh crores (USD 200 billion). Moreover, the turnover in corporate debt in 2011 was roughly Rs. 6 lakh crores (USD 133

billion) whereas in 2011, the Indian equity market turnover was roughly Rs. 47 lakh crores (USD 1.04 trillion.) Recent Growth After around 20 years of dither, of late, there are signs of stirring in India's corporate bond market, after policymakers removed some impediments. We have seen two successive years of strong growth in issuance. While 2011-12 saw a 31% increase in issuance to Rs 2.51 trillion ($50.2 billion) compared to 2010-11, growth accelerated further by 39% in 2012-13 with issuance volumes reaching Rs3.5 trillion ($70 billion). L& T came out with the first inflation-indexed debentures by a corporate (rated Crisil AAA). State-owned United Bank of India issued India's first Basel-III bond (rated Crisil AA+) in June. This was followed by Mahindra & Mahindra's 50-year bond issue (rated Crisil AA+). The Rs5billion ($100 million) debenture issue by India's first infrastructure debt fund, India Infradebt, has just been rated. Soon, Indian mutual funds, which hold Rs1.87 trillion ($37.4 billion) of corporate bonds, will start using individual security-level valuations by independent agencies to value their corporate bond portfolios. The investor base is widening. Foreign investment in India's bond market increased five times, from Rs18.95 billion in 2008-09 to Rs283.34 billion in 2012-13. Mutual funds' investment in corporate bonds has almost doubled from Rs1.09 trillion ($21.8 billion) in March 2009 to Rs1.87 trillion ($37.4 billion) in May 2013, constituting 22% of their investment portfolio. The limit for foreign investment in corporate bonds has been increased from $40 billion in August 2011 to $51.5 billion in June 2013. (FICCI,2013) Potential of a corporate bond market The corporate bond market is estimated to attain a size equal to 15 per cent of GDP by the end of the 12th Plan, a survey conducted by the Confederation of Indian Industry (CII) has said. Currently, it is below 5 per cent of GDP. (Business line , The Hindu , Dec 2013))

References 1. RBI (2012) , Corporate Debt Market: Developments, Issues & Challenges. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?id=742 2. Shaji Vikaraman ( 2012) , Indian corporate bond market still remains a mirage. http://articles.economictimes.indiatimes.com/2012-11-28/news/35409041_1_corporate-bondmarket-loan-market-rh-patil 3.Sanjay Banerji(2011) , New thinking on corporate bond market in India http://finmin.nic.in/WorkingPaper/CorpBond_Market_India.pdf 4. Golaka C.Nath (2012) , Indian Corporate Bonds Market An Analytical Prospective. https://www.ccilindia.com/Documents/Rakshitra/2012/June/Article.pdf 5.CS Nidhi Ladha (2013) , Corporate Bond Market - Removing the Bottlenecks http://india-financing.com/Corporate_Bond_Market-Removing_the_Bottlenecks.pdf 6..FICCI ( 2013) , Financial Foresights http://www.ficci.com/sector/3/Add_docs/Financial-Foresights-April2013.pdf