While the Indian corporate bond market has become more active in the private placement segment in the past few years, the market’s overall development has been ad hoc. This situation seems set for a much needed change, with the Reserve Bank of India (RBI) under its current governor, Raghuram Rajan, actively promoting the migration of long-term infrastructure debt and structured debt from the loan markets to the bond market.
The reason for this is two-fold: (1) the significant asset-liability mismatch makes bank funding of infrastructure projects unviable for most banks; (2) bond financing deepens debt markets by enabling capital markets participants (such as pension funds and insurance companies) to lend directly to borrowers. Such participants are generally considered to be better placed to evaluate and to assume longer term risk. Additionally, bonds have the perceived advantage of being more liquid than loans, in that trading of bonds is generally less complicated than syndication or down-selling of loans.
The growth of the Indian corporate bond market has coincided with the downturn in credit growth (i.e. bank lending), and bond-based financing as well as commercial paper-based financing through institutional investors has replaced bank lending to a substantial extent. While the RBI and the Securities and Exchange Board of India (SEBI) have introduced measures such as enabling infrastructure debt funds and rationalizing the entry route for foreign portfolio investors to invest in debt securities, in the absence of government-backed measures so far, these regulatory steps haven’t been as successful as intended. The government’s 2016-17 budget seeks to remedy this by recognizing the need for deepening the bond market and by introducing specific measures for this purpose.
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Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.
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