International Journal of Advanced Research and Development

ISSN: 2455-4030
Impact Factor: RJIF 5.24
www.advancedjournal.com
Volume 2; Issue 5; September 2017; Page No. 353-356

Disputes around corporate bond market in India

Balaji C
th
Student, BBA. LLB, Hons, IV Year, Saveetha School of Law, Saveetha University, Chennai, Tamil Nadu, India

Abstract
Vibrant, deep and robust corporate bond markets are essential to enhance stability of financial system of a country, mitigate
financial crises and support the credit needs of corporate sector, which is vital for the growth of an economy. The previous review
of research and policy papers on the corporate debt markets in India reveals a persistent absence of efficient legal machinery in the
present arena. Our paper seeks to flag this issue and help to fast track the development of the corporate bond markets in India.
Recent trends reinforce the need for strong policy measures to develop the corporate debt markets in India. A study of corporate
bond market experiences across developed and emerging markets further underscores the importance of strong institutional and
regulatory framework, along with support from policymakers for building robust corporate debt markets. A review of literature and
an analysis of key trends in corporate debt market help us identify the issues with the three pillars of corporate debt markets –
institution and regulators, market participants, and instruments. We find that this lack of depth and efficiency in the corporate debt
market is mainly explained by inadequate infrastructure, illiquidity, regulatory gaps, limited investor and issuer base, and absence
of benchmark yield curve across maturities. Finally, we apply the insights from literature review, the trend analysis and cross-
country study to make recommendations to revive the Indian corporate debt markets. The recommendations span areas such as
taxation, legal and regulatory, public policy, market micro structures, corporate laws, and banking regulations.

Keywords: corporate sector, corporate bond market, instruments, regulations

Introduction In India, while the banks still command a sizable presence in

A well developed corporate bond market supports economic the economy, corporate sector is taking recourse to the
development. It provides an alternative source of finance and overseas markets for raising equity, debt and loans. An
supplements the banking system to meet the requirements of underdeveloped corporate bond market can abet this trend,
the corporate sector to raise funds for long-term investment. It thereby increasing the external sector vulnerability.
is believed that this segment acts as a stable source of finance Fortunately, the presence of a big private sector, deregulated
when the equity market is volatile, and also enables firms to interest rates, well developed government securities market,
tailor their asset and liability profiles to reduce the risk of highly developed clearing and settlement system, credible
maturity. It also helps in the diversification of risks in the rating agencies, and supporting regulatory structure body well
system. In view of huge investment requirement for for the development of the corporate bond market in India.
infrastructure sector, the presence of a well developed Corporate bond enhances the risk pooling and risk sharing
corporate bond market assumes significance in India. With the opportunities for investors and borrowers. Reddy (2002)
declining role of development finance institutions (DFIs), a highlights the argument of Allan Greenspan that ‘co-existence
developed and robust corporate bond market becomes all the of domestic bond market and banking system help each to act
more important. as a backstop for the other’, and alludes to that ‘in a relatively
Corporate bond market is likely to be more beneficial for open economy since non-bank intermediation may get located
business having longer term cash flows, where investors may outside the country… the domestic bond market helps in
be wary of risks associated with equity and long-term avoiding double mismatches of currency and maturity’. Khan
financing from banks may not be easily available [Report on (2012) reckons
High level committee on corporate bond and securitisation “The capital flows to the country through External
(2005), Singh (2011), Khanna and Varottil (2012)]. Experts Commercial Borrowings (ECBs), while helping the country
argue that India’s high growth can be sustained by improving funds the current account deficits and corporate raise
infrastructure and expanding the manufacturing base, and a resources at a lower cost could also become a source of
developed corporate bond market can make both the tasks transmission of severe external shocks to the domestic
easier. Furthermore, India is in need of US$1 trillion or Rs. economy”. In fact, he also highlighted Greenspan’s view that
6430 Crore in the current five year plan for financing its bond market act as a ‘spare tyre’, and it can provide corporate
infrastructure. The Bank dominated financial system is funding at times when banks ration credit in the face of weak
unlikely to finance such a huge amount; in this context, balance sheet.
recourse to the corporate bond market can be helpful The development of corporate bond market has been a priority
(Mukherjee 2013). in the policy hierarchy for the last few years. The existing

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literature largely focuses either on developing this segment of viz., Government securities market and corporate debt market.
market by reducing the transaction/trading costs involved or Corporate debt issued by a firm is either in the form of
identifying an appropriate legal framework. commercial paper (CP) or corporate debentures/bonds (CB).
While CP has maturities between one week and a year,
Corporate Bond Market in India corporate bonds have longer maturities. Corporate bonds have
India has been historically witnessing the underdevelopment some distinct features. They do not necessarily have semi
scenario of bond market. There has been lots of buzz going annual coupons nor have their cash flows fixed values. They
around the Indian corporate bond market. In the earlier write- may have some embedded options. Both public and private
up we discussed the changes brought to streamline the companies issue corporate bonds. At present, any company
regulatory regime surrounding the Indian bond market. In incorporated in India, even when part of a multinational
India, the equity market is more vibrant and matured as group, can issue corporate bonds. However, a company
compared to bond market; however, the same is in contrary to incorporated outside India cannot issue corporate bonds in
the other economies of the world, where bond market is more India [5].
vibrant.
In order to boost the Indian market, a High-level Expert Issues Prevailing
Committee on Corporate Bonds and Securitization was The underdevelopment of India’s corporate bond market has
formulated under the chairmanship of Dr. R.H. Patil with a some historical perspective. The big companies, at the time of
mandate to identify the factors inhibiting the development of opening up of the economy, saw more benefits from the stock
an active corporate debt market in India and recommend market liberalisation than from the bond market liberalisation
policy actions necessary to develop bond insurance in the (Armour and Lele 2009, Singh 2011, Khanna and Varottil
country. In early 2013, RBI advised banks to issue 2012) [1]. The built up of debt in the 1970s and the 1980s was
subordinated debt for raising Tier-II capital to public investors in the consciousness of the policy makers. Thus, the
through public issuance, to deepen the corporate debt market. development of the bond market did not attract the attention of
On similar lines the government official released a statement the policy makers. With the opening of the economy, there
saying, “We are examining if banks can be mandated to raise was high inflow of FIIs and GDRs, and it strengthened the
part of their requirements through public issue to retail primacy of equity market (Virmani 2001, Virmani 2006,
investors” [1]. Khanna and Varottil 2012, Ahluwalia 1999) [6].
Further, in the Union Budget 2016-17, the Finance Minister Furthermore, the equity market liberalisation measures were
announced various measures to facilitate deepening of in the hands of the regulators but the measures required for
corporate bond market. He further added that, “the enactment development of corporate bond market were in the hands of
of Insolvency and Bankruptcy Code would provide a major legislatures (Armour and Lele 2009, Khanna and Varottil
boost to the development of the corporate bond market” [2]. 2012) [1, 7].
The Indian bond market has witnessed its highest peak of At present, there is miniscule participation of retail investors
public issuance in the year 2013-14 amounting to INR in corporate bond market, though they are coming gradually.
42382.97 Crores and private placement in the year 2015-16 FIIs can buy corporate bonds, but only up to a limit. Though
amounting to INR 458073.5 Crores [3]. there are instances of bonds selling like hot cakes in public
Indian economy has always been dependent on banks for issuances, they are few in number. Infrastructure bonds
financing. Only in the 1980s, some activity was witnessed in generated lot of interest with the allowance of Rs.20,000 tax
the primary market of corporate bonds, where issuances were deductions. Similarly, corporate bonds of some financial
undertaken by PSUs, and investment was done by banks and entities with high standing and robust distribution channel also
FIs. Earlier, corporate were mostly dependent on DFIs saw huge subscription in public issuances [8].
(Development Finance Institutions), like ICICI, IDBI and These positive experiences indicate that rightly priced bonds
IFCI for financing of their long-term investment. along with an incentivised distribution channel can generate
With the conversion of these DFIs into banks, getting the the interest of the retail investors. Recently, the Reserve Bank
finance for the long-term projects has become a challenge. of India has advised banks that at the time of issuing
Banks have managed to perform this role, but their capacity is subordinated debt for raising Tier-II capital, to consider the
limited as there are asset-liability mismatch issues in option of raising such funds through public issue to retail
providing long-term credit. Furthermore, over the years, the investors [9].
bank credit as a proportion of GDP (Gross Domestic Product) The major investors in the bond market are viz., banks,
is also rising, indicating that banks are getting stretched to financial institutions, insurance companies, mutual funds,
finance the growth of the economy. With the cheap pension funds and foreign institutional investors. However, for
availability of funds in the overseas market, the access to each of the aforementioned categories there seems to be
ECBs and ADR/GDR route has also become more frequent [4]. restrictive conditions with respect to participation in the bond
The debt market in India comprises broadly two segments,
5
Eichengreen, B. and Luengnaruemitchai P. 2004. “Why does not Asia have
1
http://www.business-standard.com/article/finance/rbi-asks-banks-to-issue- bigger bond markets?” NBER working paper series,No.10576.
tier-ii-bonds-to-retail-investors-113012500006_1.html 6
Khanna, Vikramaditya and Varottil Umakanth 2012. “Developing the
2
http://www.unionbudget.nic.in/ub2016-17/bs/bs.pdf Market for Corporate Bonds in India”; NSE Working Paper; WP/ 6/2012.
3 7
Ibid ibid
4
Goswami, M. and Sharma S. 2011. “The Development of Local Debt 8
ibid
Markets in Asia, An Assessment”, ADBI working paper series /326. 9
ibid

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market. insolvency, the World Bank has placed India at 136 out of 189
Further, if the investment is on account of investment in countries. Delay in resolving the dispute is a key hindrance for
Securitisation papers issued for infrastructure projects, and the financial entities looking to invest in the corporate bonds.
bonds/debentures issued by Securitisation Companies and Various trial and error with respect to regulations were
Reconstruction Companies set up under the Securitisation and ensured by the regulators; however, the success of the same
Reconstruction of Financial Assets and Enforcement of was either limited or there was a mix success. There is a need
Security Interest Act, 2002 (SARFAESI Act) and registered for strong and faster process of deciding insolvency, winding
with the Reserve Bank then an additional cap of 10 per cent is up and liquidation [13].
permitted on such investment [10]. The Sick Industrial Companies Act led to establishment of
A simplified and low stamp duty structure is an ingredient for Board of Industrial and Financial Reconstruction for revival
building up of a vibrant corporate bond market. In India, now- and rehabilitation of sick undertaking; however, the success
a-days the secondary market transactions in corporate bonds was limited. The Corporate Debt Restructuring scheme
through demat transfers do not require stamp duties. introduced by RBI for safety of money given by banks and
Nevertheless, stamp duty is still applicable in case of issuance, financial institutions, this scheme had a mix success [14].
re-issuance and transfer (if held in physical form) of corporate The Recovery of Debts Due to Banks and Financial
bonds, and it is higher in comparison with international Institutions Act led to establishment of Debt Recovery
standards. It is also not uniform across the states. Tribunals were established to avoid delays with courts in the
However, as per the news piece dated March 18, 2016, the enforcement for debt but unfortunately the success was very
finance minister had approved the proposal mooted by the limited. In the year 2002 the SARFAESI Act was introduced
labour minister for holding back investments in corporate for enforcement of security interest without courts
bonds up to 15 per cent in view of volatility of the stock intervention and the success was high [15].
market and invests the same in G-Secs, “amid a surge in the However, the need for a uniform code led to enactment of the
number of loan defaults by corporate, retirement fund body Insolvency and Bankruptcy Code, 2016 - In case of
EPFO will cut exposure in corporate bonds and park more Insolvency Resolution and Liquidation for Corporate Persons
funds in the secure government securities [11].” - National Company Law Tribunal shall be the adjudicating
authority and for individuals and partnership firms - Debt
Legal Framework Recovery Tribunal shall be the adjudicating authority. The
Several missing and inadequate legal structures are observed success of both the authorities will be determined in the years
in the context of corporate bond markets, the most prominent to come.
being those relating to enforcement contracts and corporate
insolvency. A corporate bond is essentially a debt and the Conclusion
expeditious enforcement of debt contracts is a natural concern The government is in the process of incorporating various
for lenders. In India enforcement contract litigation is often measures to intensify the corporate debt market and to curtail
embroiled in delays and deficiencies of India’s overburdened the issues and challenges faced by the industry. The enactment
legal system, not the least of which are prohibitive costs. This of the Insolvency and Bankruptcy Code, 2016 might bring
lack of remedial opportunities increases the risk of corporate reforms with respect to delay in resolving the matter. If the
bond lending. Code succeeds in achieving its objective, one may expect the
Similar inefficiencies have been observed in cases of end of never ending issues and challenges and boost in the
corporate insolvency. Analogous to enforcement contracts, the corporate bond market. This study has found that the
process of liquidation and winding up of companies is corporate bond market of India is not deep.
important because it determines the distribution of assets to In Indian context, a combination of factors such as procedural
the lenders. In India, the RDBF Act and the SARFAESI Act hassles, legal issues, and preference of the corporate for
form the pillars of insolvency laws. However, these are not private placement in issuance is not helping the cause of the
sufficient since they address only debts due to banks and corporate bond market. Keeping in view lack of availability of
financial institutions and not ordinary creditors. As far as research and due to the time constraint, this study is an
ordinary creditors are concerned, the only recourse available is attempt to open further areas of research on this market. It
ordinary civil court litigation [12]. may be added that any work taking the yield of individual
India is considered to be more “regulators-friendly” than to be corporate bond, would be highly helpful in taking the research
“business-friendly”. World Bank, in its Doing Business on this area to higher level.
Report 201619, has placed India at 130 out of the 189
countries for ease of doing business. From recovery References
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11
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