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Panel suggests corporate bond index, easier norms for FPIs

With an aim to develop corporate bond market in India, an expert panel today suggested easing of norms for foreign investors, a corporate bond index on the lines of Sensex or Nifty, and making it mandatory for large corporates to tap this market for funds beyond a threshold.

The panel, comprising nominees from Reserve Bank, Finance Ministry, markets watchdog SEBI as also insurance and pension regulators IRDAI and PFRDA, also wanted tightening of norms for credit rating agencies by mandating them to strictly adhere to timely public disclosure of defaults.

The ‘Report of the Working Group on Development of Corporate Bond Market in India’ has been submitted to RBI Governor Raghuram Rajan in his capacity as Chairman of the FSDC (Financial Stability and Development Council) Sub Committee, which comprises members from various regulators .

The report was released today by SEBI, whose Chairman U.K. Sinha is a member of the FSDC Sub Committee.

September deadline

The group was constituted in September 2015 under chairmanship of the then RBI Deputy Governor H.R. Khan and has now submitted its report after taking into account various structural issues impinging on the development of a deep corporate bond market in India.

The panel has said, “Large corporates with borrowings from the banking system above a cut-off level may be required to tap the market for a portion of their working capital and term loan needs. Necessary guidelines may be issued by RBI taking into account market conditions by September 2016.”

It has recommended amendments in FEMA regulations to allow investments by FPIs (Foreign Portfolio Investors) in unlisted debt securities and pass through securities issued by securitisations.

In a rare case of suggesting specific timelines for its various suggestions, the Working Group has sought necessary notification with regard to allowing FPI investments in these segments by August-end 2016.

It also wanted amendments in both FEMA notification and SEBI guidelines to facilitate direct trading in corporate bonds by FPIs in the OTC segment and on an electronic platform of a recognised stock exchange.Banks may be encouraged to submit loan overdue information to credit information companies (CICs) on a weekly basis to start with.

“RBI may consider whether CRAs (credit rating agencies) may be allowed access to Central Repository of Information on Large Credits database based on legal feasibility and other relevant factors,” it said.

Some of the preliminary recommendations of the Working Group were earlier made to the government and they were included in the Union Budget 2016-17.

Private placement

Corporate bond issuance in India is dominated by private placements as bonds account for more than 95 per cent of the total issuance of corporate debt.

Besides, a majority of the issuances are concentrated in the 2-5 year tenor, while the investor base is limited as the investment mandates of large investors such as insurers, pension funds and provident funds provide limited space for going down the credit curve as the investments are made in fiduciary capacity to protect the interests of subscribers.

The panel observed there is a total lack of liquidity in credit risk protection instruments like Credit Default Swaps (CDS), while stamp duties on corporate bonds across various states have not been standardised.

Investor interest

The tax regime for financial instruments remains one of the key drivers of investor interest, while there are inherent structural incentives for borrowers to prefer bank financing, such as cash credit system and absence of any disincentive for enjoying unutilised working capital limits.

“As the corporate debt market cannot be looked as totally detached from the sovereign bond market, this market may get a fillip as the interest rates come down with the inflation and fiscal consolidation targets being achieved,” the panel said.

Many large non-financial corporates who should normally be the preferred issuers of bonds are leveraged and hence cannot access either loan from banks or bond financing through market mechanism.

Among its various recommendations, it said the issuers coming out with frequent debt issues with the same tenor during a quarter may club them under the same umbrella ISIN (a unique code to identify a specific securities issue) to increase the float in the market.

The group has recommended that SEBI and stock exchanges operationalise market making in corporate bonds.
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