Corporate bonds in India: issues & challenges – Notes for UPSC

Corporate Bonds in India-

• There are 3 ways of raising funds – banks, equity markets and bond markets.

• Since banks are incapable now, corporate bonds are a good source as they provide long term fund which banks are not able to give due to their stressed assets.

• This can help especially the small and medium enterprises and infra companies.

• Moreover, long term investors like pension and provident fund companies will find it easier to invest in these bonds

• Budget has announced an electronic platform for issuance, trading, settlement and reporting for corporate bonds based on RH Patil committee.

• Budget 2019 announced credit default swaps, corporate bond repos to deepen bond market. It allowed FPI to invest in infra debt bonds as also a trading platform for social orgs.

• RBI planning to restrict amount of loans corporates could take from banks and develop a corporate bond market to raise money. Sarfaesi act to be amended so that not just banks but bond trustees can also sue the company.

Problem with Corporate bonds –

• Underdeveloped bond market- barely 16% of GDP

• Low liquidity as buying and sharing is ljmited

• Limited investors like mutual funds, pension funds, FPI.

• Lack of reliable trading platforms

• Lack of confidence in settlement- In absence of a robust bankruptcy code, settlement of repayment of bonds of a bust company can create problems.

• No coordination among regulatory agencies like RBI SEBI

• Govt penchant of making financial institutions buy government bonds crowds out private bond market.

Video lecture on corporate bonds