How can the corporate bond market be broadened? A question haunting since the last 20 years. In almost every other budget there is a reference to the deepening of the corporate bond markets. The two major reasons for the inactive market is-lack of enough bonds on supply side and the absence of retail level investor awareness on the demand side.
In most developed nations, the bond market is often several multiples larger than the equity market. There is a high degree of secondary market liquidity for debentures. By law, debentures are secured debt and in theory, a bondholder has strong legal recourse in case of default.
Once large companies are mandated to raise a sizeable portion of their financing needs from the bond market, the pressure on banks which are reeling from NPA’s will also reduce. This move will broaden the corporate bond markets in terms of more corporates selling bonds to raise funds.
This will provide insurance companies, provident and pension funds an opportunity to invest in high yielding instruments and open up a new funding source for lower-rated companies.
The government can announce movement from ‘AA’ to ‘A’ grade ratings. Pension and provident funds as presently invested in ‘AAA’ rated securities only. It would also make it possible to raise capital for private sector infra-projects, which are currently starved of funding. Retail investors will also get a chance to invest in such projects via debt funds. There would be big risks and commensurately huge rewards too.
Many sectoral regulators can relax investment rules in their respective industries; for example, the insurance regulator might henceforth allow insurance companies to invest in ‘A’ rated bonds when the current rules draw the line at ‘AA’ rating. One of the reasons for this is lack of takers for lower-rated and longer papers. Regulators such as PFRDA and IRDA need to liberalize investment norms for the entities they regulate, who have appetite for lower rated bonds.