Nishikant Dubey
The central government has set itself an ambitious task of achieving a nominal GDP of $5 trillion (Rs 350 trillion) by 2024. Debt markets have played a major role in developing the global economy by providing sustainable long-term capital to fuel growth in infrastructure and social development. With a current GDP of $2.76 trillion, India has an outstanding government debt of Rs 91 trillion (47% of GDP) and outstanding corporate debt of Rs 31 trillion (16% of GDP).
Going forward, the bond market will play a crucial role while meeting our growth aspirations. For this, a higher share of corporate bonds to GDP would be an imperative, moving closer to markets such as China with 19%, Malaysia 44%, South Korea 74% and US 123% of GDP.
India has made significant progress in developing its corporate bond markets. The outstanding corporate bonds have grown from Rs15 trillion (13% of GDP) in FY 2014 to Rs 31 trillion (16% of GDP). An estimate published by CRISIL in its 2018 yearbook on the Indian debt market pins the total projected bond supply by FY23 to be Rs55 to Rs 60 trillion –ie, 16 to 17% of a Rs 350 trillion economy. Multiple market reforms such as Insolvency and Bankruptcy Code, regulatory intervention by RBI, SEBI etc among others symbolize the committed efforts in this direction. The mutual funds (MF) industry has played an important role in the development of corporate bond market in India by catalysing innovation, price discovery, liquidity and transparent bond valuation.
Despite these developments, India needs to set a roadmap in order to deepen its corporate bond markets which encompasses and promotes enhanced participation of all stakeholders while addressing the imperative issues pertaining to the same.
Under an institutionalized and regulatory framework, liquidity across the product category, tenure and investor class is crucial for strong and efficient financial markets. Private placements continue to dominate corporate bond issuances and accounted for 99 per cent of the total debt issuances in FY18. The demand for corporate bond as an investment is mostly confined to institutional investors such as Provident Funds, Insurance Funds, Mutual Funds, Pension Funds among others with retail investors accounting for only 3 per cent of the outstanding issuances.
Trading appetite of the various investors needs to be developed through a simplified exchange trading mechanism to enhance liquidity. There is a need to channel the savings of individuals and corporate entities guided through an improved role of entities such as merchant banks, private wealth and product distributors to educate and diversify the investor base. Reducing the face value for private issuances from the current Rs 10 lakh and allowing participation by the HNI category can widen the investor base as well.
Also, due to lack of market making and trading capabilities, most investors are in the ‘buy and hold’ category which results in low liquidity and volumes. QIBs, brokers, merchant bankers and investment banks could be appointed to undertake market making, thereby providing liquidity across all tenors and instruments. Market-makers should be allowed access to call money as well as ready forwards, as only to Banks and PDs can now access them. This will reduce their cost of funds, thereby allowing market participants to hold corporate bonds and provide two-way quotes.
On the supply side, finance and infrastructure companies together accounted for 90-92 per cent of the total cumulative value outstanding during 2017-19 while the share of manufacturing was less than 1 per cent.
SEBI’s circular mandating bond issuance by large corporates for meeting 25 per cent of their capital requirements is a welcome move. However, without a large investor-base and liquidity, the efforts might fall short of meeting the objective. Needless to say, a coherent effort by the government, regulators and market players is critical for its overall success.
NSE launched the tri-party corporate bond repo platform in 2018 under which the NSCCL provides settlement and collateral management. However, the approved list of securities allowed consists majorly of PSUs and a handful of corporates such as HDFC Bank, LIC HF, ICICI Bank, and HDFC Ltd. A similar platform by BSE is also under progress. Expanding the list for issuers with a highly credible debt-servicing history should be promoted through this platform to provide liquidity. Consequently, their borrowing costs would reduce over time. The government’s efforts to provide for partial credit enhancement for NBFCs and the SEBI’s relaxation on minimum investment for REITs and InvITs is a step in the right direction
Alternate investments such as REITs, InVits and securitization have aided the capital flow to the infrastructure sector, NBFCs, in the backdrop of the credit crisis originating from the IL&FS collapse followed by stress in behemoths such as DHFL, Reliance ADAG, Essel, among others. By promoting the participation of institutions such as insurance funds, MFs, these bankruptcy remote structures with underlying operational and revenue-generating assets reduce the credit risk for the investor. Market Linked Debentures owing to its hybrid nature and taxation similar to equity instruments provide a tax effective mode of investment which has gained acceptance among the HNI investors.
Market participants cannot hedge appropriately without certain products, including derivatives, bond exchange traded funds, asset-backed securities and real estate investment trusts. While some of these products are in place, they have not grown and are considered unsuccessful. Credit default swaps, for instance, which are prevalent in every developed market, is yet to take off in India. A government-backed institution insuring investors against any potential loss can develop the market for CDS and provide a new stream of financial business.
Demand for a government-backed Debt ETF to address the capital needs of PSUs through bond issues, providing an exit to the government, and sound capital management for the underlying investors, has been raised by the industry as well.
Prime Minister Narendra Modi’s announcement to set up a Rs 100 lakh crore modern infrastructure will help boost economic growth, create jobs and help India achieve the $5 trillion economy goal. However, government intervention is necessary to remove major roadblocks in infrastructure development, including contract enforcement, speedy dispute resolution and regulatory uncertainty.
Achieving this level of infrastructure investment will need bringing back private capital in a big way. The 2016-17 Union Budget announcement of setting up a Credit Enhancement Fund could enable infrastructure companies, which represent large pools of funding demand, access the corporate bond market, complemented by the large exposure framework laid down by RBI.
The writer is BJP Member of Parliament from Jharkhand.