Top rated, large companies make up for most bond issuances, says CEA
mid-sized companies should be enabled to raise bonds, making it accessible for them
Liquidity in bond markets needs to improve
Chief Economic Advisor V Anantha Nageswaran, on November 28, said there was a concentration of large and top-rated companies in the bond market for raising funds, the Press Trust of India (PTI) reported. There was a need for enabling mid-sized companies to be able to access funds in the market “systematically and affordably,” he said.
"The challenge today is not the absence of a debt market but its concentration. Large and highly rated firms raise capital with ease. The task ahead is to enable mid-sized corporates, infrastructure SPVs, supply chain firms... to access markets systematically and affordably," PTI quoted Nageswaran as saying at a Trust group event in Mumbai.
Bond markets and bank funding can act as a “double engine” to help provide effective financial support to boost the growth Indian economy, he said.
Nagewaran said that domestic money should “anchor” funding in India’s debt securities, while foreign inflows should “complement” it.
India has nearly Rs. 3 lakh crore of debt market, which Nageswaran said needs a recalibration over the next few years in a manner where the load for funding is shared between banks and the debt markets.
The dual engine model could work where banks provide working capital, relationship-driven lending, and project finance at early stages. Meanwhile, debt markets must lead in long-term financing, transition finance, and both large and mid-market companies, Nageswaran said.
Liquidity in the bond markets needs to be increased, and investors’ tendency to hold bonds till maturity needs to be reduced in order to do that, Nageswaran said. Liquidity coupled with innovation could be the next frontier in the Indian economy, and smarter regulations could help build India’s debt market, he said.
Earlier this month, Tuhin Kanta Pandey, chairman of the Securities and Exchange Board of India (Sebi), also called for the need for increased liquidity in India’s bond market. While the Sebi has reduced the minimum investment amount in bond markets to Rs. 10,000 to boost retail participation in bond markets, most investors continue to hold bonds till maturity, which affects market liquidity, which could limit effective price determination of bonds in the secondary market.
Earlier this month, the Indian Railway Finance Corporation raised nearly Rs 2,981 crore through its 10-year bond issuance at a zero coupon for the first time, where it received overwhelming bids. Other AAA-rated companies have also tapped the market in recent times, with several financial companies also raising bonds through fresh issuances, in which demand was seen as firm.
Though Nageswaran’s comments seek to provide higher access to mid-sized companies to raise funds by raising bonds, it is important to note that top-rated companies are a safer asset compared to companies whose bonds are rated lower. While lower-rated bonds could have chances of a higher return due to the risks associated with investing in these asset classes compared to higher-rated bonds, liquidity in lower-rated bonds remains poor, which could result in investors getting stuck with the asset and leaving them unable to trade in the market, market participants said.
