Mumbai: In an effort to boost the fledgling corporate bond market in India, the capital market regulator has allowed six entities to set up trade facilitating platforms or online platforms that would offer information on trading volume and end-of-day prices of corporate bonds.
On average, the turn of the debt market is four to five times that of the equity market turnover. However, with a Rs4,000-5,000 crore turnover, daily trade volumes in the Indian debt market, including government and corporate bonds, is about 20% of the equity market. Corporate bonds account for about 10% of the total bond trading volume.
The Securities and Exchange Board of India (Sebi) has allowed four private brokers and two real-time news and information providers to float their own trade facilitating platform. The facilitating platform, which is not meant for trading, will display real-time quotes and volumes on trading on corporate bonds.
One of the private brokerages to get the Sebi go-ahead is Derivium Capital and Securities Pvt. Ltd, a Mumbai-based brokerage and a leading player in the corporate bond market. Mint could not get the names of the other three private players who were allowed to float such a trade facilitating platform. Derivium is offering its online platform free of cost to its institutional investors.
Emphasizing the need to boost the corporate bond market, Ashish Ghiya, managing director of Derivium, said, “If India is growing at 9% per annum and so much of infrastructure is to be funded, we need a fair amount of debt because equity alone cannot support this growth. We also cannot rely on banks to keep on funding the growth. We need to deepen the corporate debt market.”
India needs more thanRs1.2 trillion of investment in urban infrastructure over the next seven years.
Banks usually do not buy corporate bonds and prefer to offer loans to corporations because they are required to “mark to market” their bond portfolio or value the bonds at the prevailing market price and not at the price at which they are bought. This essentially means that in a rising interest rate scenario, banks end up booking losses as the bond prices fall.
In addition, under the current banking norms, banks are required to set aside the same amount of capital for all bonds, irrespective of their ratings. But when Basel II norms come into effect next year, the capital requirement for bonds will vary, in accordance with their ratings. Also, under the new international regulations, banks will have to take into account the market risk for loans too. This would make higher rated bonds attractive for banks. The spread or the yield differential between corporate and government bonds are currently veering around 160 basis points at the longer end. Currently, the yield on an AAA-rated, 10-year corporate bonds is 9.32%, compared with the 7.62% yield of 10-year benchmark government bond.
Unlike an established equity and government bond market, where the infrastructure is in place to trade and disseminate information, there is no mechanism in the corporate bond market to know at which price a particular deal is struck and the volume of trade.
“We don’t get reliable quotes (of corporate bonds),” said a bond dealer who did not wish to be named. “If we get that and also the end-of-day pricing, the repo-ability of the corporate bond will increase and many more players will start approaching the bond market in a big way pushing the daily trade volume.”
A repo-ability of a bond is the ability to use it as collateral to get funds.