Corporate Bond Market in India, which stands below 5% of GDP at present, has the potential to reach to a level of 15% of GDP during the 12th Five Year Plan (2012-17) on back of policy and regulatory reforms, according to a survey conducted by the Confederation of Indian Industry (CII).
As per findings of the CII Survey on Reforming Corporate Bond Market (CBM) of industry stakeholders including issuers, investors, market makers, credit rating agencies and technical experts, majority (57 per cent) of the respondents believe that the actual potential of CBM in terms of outstanding Corporate Bond as a percentage of GDP is 12.5 - 15 per cent which could be realized with the help of policy and regulatory reforms aimed atutilizing the CBM to finance infrastructure development during the 12th Plan.
Among other surveyed industry stakeholders, 29 per cent of the respondents estimated the actual potential of CBM to be 10 -12.5 per cent of GDP while 14 per cent of the respondents believe the potential level of CBM to be 7.5 -10 per cent of GDP for the Indian economy.
“A robust Corporate Bond Market is imperative to meet the funding needs of the emerging Indian economy. Concerted policy and regulatory reforms in CBM holds the key for the private sector to meet its target share of47 per cent in the total infrastructure investment duringthe 12th Plan, said Mr Chandrajit Banerjee, Director General, CII.
The Survey noted that India is heavily reliant on budgetary support and bank credit for funding its infrastructure needs while in many countries across the world, long term debt in form of corporate/ sovereign or municipal bonds forms a major share of infrastructure finance. Respondents feel that limitations or inflexibility of the banking sector to meet with increasing capital requirements of infrastructure companies would be the key driver for development of CBM.
In the 12th Plan, the Government is expecting the private sector to play a key role with an overall investment growth of 131 per cent from the 11th Plan. Corporate Bond Market offers a promising avenue for the private sector to achieve this by way of mobilising long-term resources for meeting the infrastructure needs.
On the impediments of CBM in realizing its full growth potential, respondent industry stakeholders ranked lack of conducive regulatory framework, inexistence of incentives and support mechanisms for willing market makers and inadequate credit enhancement facility as the biggest challenges in deepening of the CorporateBond Market in India.
To address these issues, industry stakeholders expect a slew of measures to be undertaken by Ministry of Finance and regulators (RBI and SEBI) which would encourage the private sector to mobilise long term resources from the debt market.
Among the key policy and regulatory measures,surveyed industry stakeholders believe conducive regulatory framework and incentivizing willing market makers would have the biggest (positive) impact on the development of CBM. Also, increased availability of credit enhancements by different institutions including banks would allow less than investment grade bonds to be eligible for investment by insurance companies, Provident Fund and Pension funds.
Further industry stakeholders believe that top priority needs to be given in formulating strong bankruptcy laws by amendments to SARFAESI Act to enable recovery of bond holder dues by Debenture trustees through Debt Recovery Tribunals, standardizing documentation, and mandating use of unified market conventions for standardization, concluded the Survey.