Report on Corporate Bond Market Submitted

The ‘Report of the Working Group on Development of Corporate Bond Market in India’ has been submitted to RBI Governor Raghuram Rajan. 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.

Main Recommendations:

-Among its various suggestions, 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 also wants necessary amendments in FEMA regulations to allow investment by FPIs in unlisted debt securities and pass through securities issued by securitizations.

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

-It also wants 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 recognized stock exchange, subject to certain safeguards, without involving brokers.

-With regard to credit rating agencies, the report wants them to publish the credit rating transition matrix more frequently. Besides, the rating agencies have been asked to take up membership of credit information companies to access relevant credit information. Necessary action would be required to be taken by Sebi in this regard.

-Besides, banks may be encouraged to submit loan overdue information to CICs on a weekly basis to start with.

-RBI may consider whether CRAs may be allowed access to Central Repository of Information on Large Credits database based on legal feasibility and other relevant factors.

-The corporate bond issuance in India is dominated by private placements as these 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 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.

-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.

-Also, 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 and enhance the liquidity.

-Re-issuances may not be treated as fresh issuances for the purpose of Stamp Duty. The corporate governance norms applicable to companies which have listed only debt securities and not equity may be reviewed to make them less onerous.

-A uniform valuation methodology available on a daily basis may be followed by all regulated entities for valuation of their holdings of corporate bonds. Regulators may explore an acceptable mechanism for valuation including engaging the Financial Benchmarks India Pvt Ltd (FBIL) or credit rating agencies for the same with necessary safeguards and oversight.

-The penalty structure in place for default in delivery of debt securities/funds for trades subject to CCP clearing by the clearing houses of the stock exchanges may be reviewed in consultation with all the stakeholders with a view to prescribing a penalty which is prudent yet reasonable.

-The panel has also suggested steps towards new products like CDS (Credit Default Swap) and Repo in Corporate Bonds, besides Basel III compliant Perpetual Bonds.

-It has also asked the government to allow insurance companies and EPFO to invest in AT-1 bonds of banks subject to prudential limits with credit rating upto investment grade.

-The maximum investment ceiling of 2 per cent of the total portfolio of the funds in AT-1 instruments stipulated for non-Government PFs may be reviewed for relaxation.