The marked dichotomy in the regulatory regimes for government securities and corporate bonds seems to have stultified an active market for the latter. RBI’s July 2018 guidelines for repurchase transactions (repo) in corporate debt securities, which mandate quite arbitrary haircuts and margining requirements, appear to have further widened the disparity. Little wonder that 98% corporate debt on average is privately placed, and held to maturity, thus precluding modern arm’s-length finance in India, still reliant on opaque bank funding even for long-gestation infrastructure projects. Such a state of affairs clearly calls for proactive reforms.
Now that big-ticket infrastructural investments are in the offing, the way forward is to incentivise public issuance and listing of corporate bonds and overhaul their market design. A vibrant corporate bond market would boost resource allocation for multi-year projects. We need regulatory cohesion — the frequency of disclosure requirements for listed debt should align with that for equity. The norms, meanwhile, warrant that funds borrowed via repo in government securities would be exempt from cash reserve ratio (CRR) or statutory liquidity ratio (SLR) computation.
No such luck for repo borrowings in corporate bonds, which are reckoned as liabilities to meet CRR/SLR requirements. Further, there are mandatory minimum haircuts stipulated for repo in corporate bonds, plus provision for additional haircuts based on tenor and liquidity of the security. Besides, there is no central counterparty for corporate bonds as for government securities, and bond insurance products like credit default swaps remain dormant thanks to regulatory rigidities.
There is also added inflexibility, say, on simultaneous issuances, on the electronic bidding platform for bonds, very unlike that for government securities. To address credit risk in bonds, debt market participants surely need improved access to data repositories rather than rigidities in regulation. Cheaper infrastructure and stronger banks depend on a vibrant debt market.