For market making in corporate bonds

Sebi has put out a consultation paper on market making in corporate bonds (CBs). Issuance, of late, has increased substantially, but the bulk of CBs continue to be privately placed and held to maturity, which stultifies transparency and market efficiency. A thriving secondary market in CBs would shore up liquidity, lead to better price discovery, and consequently, lower the cost of debt.

The paper calls for Sebi-registered stock brokers and merchant bankers to function as market makers in CBs, and provide two-way quotes. It suggests that stock markets offer incentives, such as reduced transaction charges, to boost secondary market activity in CBs. But in tandem, we surely need to policy induce an active repo market for CBs, to enable routine sale and buyback. Note that the Union budget of 2019-20 did suggest a tri-party repo market in corporate debt securities by allowing AA-rated bonds as collateral. Note also that there are inherent structural incentives for borrowers to prefer bank financing in the cash-credit system, for instance no disincentive for unutilised working capital limits. But we do need to eschew inbuilt opacity in bank borrowing, and instead opt for arm's length finance and extensive credit appraisal that a vibrant CBs market does provide. Yet there remain glaring rigidities in the market for CBs.

Notice the non-signing of any Global Master Repo Agreement, and non-availability of guaranteed settlement in CBs, very unlike that for government securities. Hence the need for a liquid market for insurance products for CBs, read credit default swaps. Also, the Reserve Bank of India (RBI) surely needs to allow usage of CBs in its liquidity management operations, in the short end of the market to begin with.