28 March 2014

The Indian Corporate Bond Market

The Indian Corporate Bond Market


1. The corporate bond market in India has not kept pace with the developments in the equity market, which has matured and grown to global standards. It has suffered from chronic neglect, both in terms of policy and infrastructure, and has been almost entirely restricted to a set of domestic institutional investors. For an active secondary market, there is a need for a wider range of issuers and of investors, and with different perceptions for investment and trading in the secondary markets.

2. With continued pace of economic reforms and growing business confidence together with increasing global recognition of India’s technical capabilities and economic potential, entrepreneurs are willing to invest in large, global scaleprojects to enhance infrastructure as well as to promote exports. As capacity utilizations in a wide range of industries have been in excess of 80-90percent, entrepreneurs are now willing to invest capital to grow capacities. This is expected to result in increased competition for financial resources as companies look to expand.

3. India has aggressive targets for GDP growth rate at 8percent-10percent p.a. The investment in infrastructure by both the government and the private sector has been relatively low in the past. Achieving financial closure for large infrastructure projects has often been difficult and time consuming given the quantum of funds required and long gestation periods. Banks continue to be exposed to problems of asset / liability mismatches when they lend long tenor as such long term assets are inevitably funded through significantly shorter tenor liabilities.

4. In future, infrastructure development will be a significant growth driver. Broadening and deepening of the bond market is required to provide long tenor project finance. India’s financial system is still largely dominated by the banking  system with a deposit base largely of less than 3 year tenors. A borrower who requires long-term funds (10-15 years) is still dependant on a few providers of   such long maturity loans. Infrastructure projects like power, telecom, ports, airports, urban infrastructure, roads etc require long-term funds. Consequently, we need a significant growth in the insurance, pension and provident fund sectors since they are the logical providers of long-term money. Simultaneously, small  investors need to be brought into the long-term debt capital market. In the absence of such growth, Indian corporates with large expansion plans would expose  themselves to significant refinancing risks.

5. The recent past has witnessed many Indian corporates effecting overseas acquisitions as part of their vision of global growth. The overseas subsidiaries of these companies have accessed foreign currency loan/bond market to fund these acquisitions. The ECB guidelines have been liberalized in 2004 enabling corporates to access the foreign currency loan market to fund overseas acquisitions. This is imparting greater flexibility in funding cross border acquisitions.
6. As demand for funds from the corporate sector grows rapidly, large government borrowings may create a crowding-out situation for the corporate sector.

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