For a Vibrant Market for Corporate Bonds–economic times–10.02.2018

The Budget 2018 speech has several welcome suggestions to deepen and widen the corporate bond market, although setting a target for resources to be raised via the bond market by large corporates at “about one-fourth of their financing needs” makes no sense. The finance minister’s suggestion to include single ‘A’-rated bonds as investment grade is movement in the right direction, as is the call to rationalise stamp duty rates on corporate bonds.
We do need a thriving market for corporate bonds and an active secondary market, for arm’s-length finance and transparency. But corporate bond issuance is overwhelmingly dominated by private placements, with a rather narrow investor base, and mostly held to maturity. Further, there is almost total lack of liquidity in credit-risk protection products like credit default swaps. It is a fact that the interest rate options market here is barely a year old and quite a fledgling, which, in turn, precludes and prevents liquidity in the credit derivatives market. The point is to let a market for credit and interest rate derivatives evolve to help investors decide how much to invest in what-rated paper, rather than to classify a particular rating as the minimum for investment eligibility. A so-called junk bond market is a necessary complement to a market for higher-grade bonds.
We need to standardise stamp duty on corporate bonds and have an active platform with central counterparty facility as in the market for gilts. Efficient insolvency resolution is a precondition for a functional bond market. There remain inherent structural incentives for borrowers to access bank funding and no real disincentives for enjoying unutilised working capital limits. Proactive policy on multiple fronts is the only way to get the bond market going.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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