Photo: Abhijit Bhatlekar/Mint
Photo: Abhijit Bhatlekar/Mint

Sebi works to deepen corporate, municipal bond markets

Moves include allowing greater flexibility in using corporate bonds as collateral to borrow

Mumbai: The capital markets regulator is working on several proposals to strengthen the corporate and municipal bond markets in India, according to three people familiar with the development.

These steps include allowing greater flexibility in using corporate bonds as collateral to borrow and encouraging local bodies to sell bonds to the public by putting in place bankruptcy procedures, they said, requesting anonymity.

The Securities and Exchange Board of India’s (Sebi’s) attempt to deepen the corporate and municipal bond markets will help companies and local bodies raise capital from the public, reducing their reliance on banks, which have become risk-averse because of rising bad loans.

The cost of borrowing in the bond markets has fallen faster than bank lending rates, potentially making it more attractive for companies to raise funds from the markets.

“We have created a pipeline of steps that need to be undertaken to deepen the corporate bond market and promote trading on the exchange platform," said a Sebi official—one of the three people cited above.

An email sent to the regulator on Thursday did not elicit a response.

The regulator, in consultations with the Reserve Bank of India (RBI), is trying to address the lack of adequate liquidity in the corporate bond market through the fresh set of proposals.

As part of the plan, Sebi is once again proposing to introduce Collateralized Borrowing And Lending Obligations (CBLOs) for corporate bonds.

CBLOs allow you to borrow against an underlying security in an exchange-traded market. You can borrow for up to a maximum of one year in this market. Currently, only central government securities are eligible to be used to borrow in this market. Changing the rules to allow corporate bonds as eligible securities will boost liquidity in the market.

The plan was first proposed by Sebi in 2013, but was deferred as RBI was uncomfortable with it. The corporate bond market falls under the jurisdiction of both regulators.

Sebi is now working with RBI to see if concerns related to CBLOs linked to corporate bonds can be addressed. RBI, too, has been looking at ways to deepen the corporate bond market, RBI deputy governor H.R. Khan said at a conference in New Delhi on 5 February.

“An exchange-traded repo market, on the lines of Basket Repos or CBLO like in government bonds for corporate bonds on exchanges, could encourage borrowing and lending activity in corporate bonds as there would a central counter party," said Ajay Manglunia, head of fixed income at Edelweiss Financial Services Ltd. “The introduction of this mechanism would deepen and widen the corporate bond market and will increase refinancing activity."

Sebi’s Corporate Bonds and Securitization Advisory Committee is likely to submit its report on this product shortly, said the second person cited above.

Meanwhile, the regulator is also trying to remove hurdles that are preventing municipal bonds from taking off. Sebi notified regulations for listing and issuance of debt securities by local bodies in July, but there have been no issuances so far.

“Issues such as addressing bankruptcy of municipalities, cap on interest rates offered by municipal bonds and auditing practices of municipalities are understood to have been discussed with the finance ministry," said the third person.

Municipal corporations may not have accounting and auditing standards that meet regulatory stipulations, which may make potential investors uncomfortable. There is also no clear mechanism to deal with the issue of bankruptcy of a municipal body.

As part of its suggestions, Sebi has suggested to the finance ministry that a chapter on bankruptcy of municipalities be introduced in the proposed bankruptcy Bill.

The government is likely to take up the bankruptcy Bill in the budget session.

“The municipal bond market is clouded by state politics. The finances of various municipalities are not as well managed as a corporate. Subscribers of tax-free bonds are very conscious of quality of credit and the quality of credit in municipal bonds is still not up to the mark. These steps will help, but the market may not take-off till the fundamental issues are addressed," said Manglunia.

In addition, Sebi also intends to make provisions for traders in the debt segment to provide market-making services in the corporate bond market.

“Sebi has sought that RBI consider enabling trading members in the debt segment of stock exchanges to borrow funds to provide market making in the corporate bond market," said the second person cited above. “The proposal is under examination."

Market-makers are brokers who take the risk of holding a certain number of shares with themselves to facilitate trading, in return for compensation.

Corporates have already been bypassing the banking sector for their borrowing needs. Indian banks have lost nearly 5 percentage points in market share to the bond market over the past two years, said a 12 January report from research house Ambit Capital.

The shift of borrowings towards the bond markets, which is detrimental to bank earnings, mirrors trends in more advanced markets.

“In developed countries and emerging markets, corporate bond markets have more than ~50% share in credit offtake versus merely 23% share in India," the Ambit report said.

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