Dollar inflows good for corporate bond mkt

NEW DELHI: Large dollar inflows as external commercial borrowings (ECBs) are promising to be a blessing in disguise for India’s moribund corporate bond market. Government sources told ET that a clutch of long-pending reforms pertaining to the corporate bond market, including the introduction of repos in corporate bonds, could turn out to be a reality sooner than expected.

This is because RBI, which is concerned about the large dollar inflows, would now want to ease the pressure on ECBs by bolstering the bond market. The sources said that RBI would also be paving the way for approved exchange-traded interest and credit derivatives products.

The central bank has already sent signals to the finance ministry with regard to its intent to speed up the necessary amendments to its circulars, these sources reveal. RBI feels that existence of a bond market, less riskier than now, would drive down the current ECB fancy of Indian companies. It is perceived that companies prefer the ECB route to raise capital, more due to the absence of a real alternative in the effete bond market, than the interest rate differential which is marginal.

Currently, most buyers of corporate bonds in India are wholesale operators who buy these bonds in the over-the-counter market. There are only a few participants in this market. As a result, the buyers are saddled with bond instruments without even the facility to transfer the holding risk. This has been identified as one of the reasons behind the lackadaisical nature of the Indian corporate bond market by many analysts and also the expert committee headed by RH Patil, which had made a number of proposals aimed at invigorating the market.

Allowing repos would provide the much-needed liquidity management mechanism for corporate debt subscribers. The repo facility would be akin to CBLO for government papers. The interest rate and credit derivatives, according to some analysts, have more utility in the ECB and government securities market, but are relevant, although to a lesser extent, in the corporate bond market also.

The finance ministry has been pushing hard for reforms in the corporate bond market ever since it received the Patil Committee recommendations. It stated more than once that creating a single, unified exchange-traded market for corporate bonds is one of its priorities. While moves are afoot to provide such a trading platform (Sebi has already asked BSE to create it), more decisive changes like providing the safety of derivatives instruments for bond market players are yet to be implemented.

RBI, which oversees the policies in this regard, remained non-committal even as the ministry and the market regulator Sebi moved ahead on many aspects of the bond market reform with apparent mutual agreement. The underlying principle of the concerted efforts is that clarity of regulation is essential for establishing a credible corporate debt market.

Sebi had rationalised the disclosure requirements for corporate debt issuers who are already listed. Sources said the market regulator would be coming out with the primary issuance guidelines for corporate bonds soon. Chronicling the action taken by it on Patil Committee proposals, Sebi had underscored the need to have a mechanism for dissemination of trades and prices.

“Steps may be taken to introduce reporting system in the market and ensure real-time dissemination of information. Simultaneously, steps may be taken to immediately introduce the revised and approved exchange-traded derivative products, which have been pending for a long time,” it says in a statement posted on its website.

The Patil Committee’s proposal for uniform stamp duty on corporate papers would be implemented soon, with the Centre and states agreeing on it. The revenue department would notify necessary amendments to the Stamp Act soon, the sources said. Currently, the stamp duties vary widely among the states, besides being too high in most states.