Summary of this article
Penetration in India's corporate bond market remain poor, says NITI Aayog
Current scale, structure of bond market could become bottleneck to India’s Viksit Bharat goals
In order to mobilise low-cost, long-term capital and sustain India’s growth, a coordinated and harmonised reform strategy is needed to deepen the country’s corporate bond market, said a report by NITI Aayog. The report cautioned that the current scale and structure of the bond market could become a bottleneck to India’s growth.
The report said that only one-sixth of India’s corporate debt is raised through bonds, which was completely reversed compared to global peers, where bond market size often surpasses that of equity markets. “In India, the equity markets are seven times the size of our corporate bond market. That tells you the gap in financing,” NITI Aayog chief executive officer and former commerce secretary B V R Subrahmanyam said. The country’s reliance on bank loans for corporate funding needs increases systemic risks and limits access for underserved sectors, such as MSMEs, Subrahmanyam added.
The think tank said that India’s corporate bond market remained largely untapped in mobilising long-term capital, with the current size of the bond market nearly 16 per cent of gross domestic product (GDP), modest compared to developed economies.
The report pointed out several structural challenges which hindered the growth of the corporate bond market. Regulatory overlaps, extensive disclosure requirements which limit lower-rated companies from tapping into the bond market, limited participation from retail and foreign investors, and lower liquidity were major reasons holding back the growth of India’s corporate bond market, the official government think tank said.
NITI Aayog proposed a three-phase reform strategy to deepen the corporate bond market. These reforms lay out a six-year horizon to implement the strategy by strengthening infrastructure, expanding market participation through innovative instruments, and creating a fully integrated and mature ecosystem, which is aligned with global standards.
“Efforts will be made to strengthen market infrastructure through digital access, reliable credit ratings and robust trading platforms,” the report said. In this, the report suggested that developing corporate bond indices which measure market performance, guide investments and serve as benchmarks for evaluating portfolios could help increase depth in the corporate bond market.
Additionally, more innovative products and instruments could also cater to different investor needs and bring more investment into the fray. Perpetual bonds or green bond issuances, which often require higher regulatory disclosures, should be simplified and made uniform. Providing incentives to companies as well as investors to raise funds through green bonds could be the next step to developing a sustainable ecosystem.
“Fiscal incentives aimed at stimulating demand, such as tax exemptions or credits for retail investors, can allow issuers to reduce coupon rates, further enhancing the appeal of green bonds. Credit enhancement mechanisms like guarantees or partial credit funds are crucial to improving credit ratings and reducing issuer risk,” the report said.
The report also suggested creating a special window or giving benefits to investors under 80C through income tax exemptions to corporate bonds. Additionally, lowering the withholding tax for foreign investors and equalising long-term capital gains taxes across asset classes will also simplify processes and bring more investments into the corporate bond segment. This could increase the depth of the corporate bond market and turn it into a Rs. 100-120 lakh crore market in the next five years, the report said.
