Weekly Current Affairs

Panel suggests corporate bond index, easier norms for FPIs [Economy]

  • With an aim to develop corporate bond market in India, an expert panel has suggested easing of norms for foreign investors, a corporate bond index on the lines of Sensex or Nifty, and making it mandatory for large corporates to tap this market for funds beyond a threshold.
  • The panel, comprising nominees from Reserve Bank, Finance Ministry, markets watchdog SEBI as also insurance and pension regulators IRDAI and PFRDA, also wanted tightening of norms for credit rating agencies by mandating them to strictly adhere to timely public disclosure of defaults.
  • The ‘ Report of the Working Group on Development of Corporate Bond Market in India ’ has been submitted to RBI Governor Raghuram Rajan in his capacity as Chairman of the FSDC (Financial Stability and Development Council) Sub Committee, which comprises members from various regulators .
  • 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.
  • It has recommended amendments in FEMA regulations to allow investments by FPIs (Foreign Portfolio Investors) in unlisted debt securities and pass through securities issued by securitisations.
  • Corporate bond issuance in India is dominated by private placements as bonds account for more than 95 per cent of the total issuance of corporate debt.
  • 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.
  • 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.