Mumbai: Markets watchdog Securities and Exchange Board of India (Sebi) will soon come out with a consultation paper on making it mandatory for large corporates to meet one-fourth of their financing needs from bond markets.

The move follows the Budget 2018 proposal in this regard, and is aimed at part-funding the huge investments needed in the infrastructure space, which is projected at $4 trillion over the next decade, Sebi chairman Ajay Tyagi said.

He also said the regulator has not received any definitive open offer proposal from Life Insurance Corporation (LIC) on its plan to take over the crippled state-owned lender IDBI Bank.

The move on bond issuance assumes importance because the banking sector is faces a spike in bad loans which are hovering around at 12% of the system now. This has made banks, especially state-run lenders, wary of lending to low-rated corporates.

“The bond market has a huge potential to grow, which will need a robust secondary market. We will soon come out with a consultation paper on making it mandatory for large companies to source a quarter of their financing needs from the bond market. Final guidelines will be drafted in consultation with all the stakeholders," said Tyagi, adding that this will go a long way in developing a robust secondary market for the debt segment.

The corporate bond market is valued at around $290 billion, around 17% of the GDP, way lower than the equity market at 80%.

“Given the relatively nascent stage of development of the bond market, such a framework has to be relatively a soft-touch approach, and will be finalised in consultation with stakeholders soon," Tyagi said while addressing a conference on the corporate bond market organised by Assocham. Noting that a lot of things need to be done for increasing liquidity in the secondary market, he said Sebi “in consultation with the Reserve Bank and government will take steps to enhance a secondary market for corporate bonds, so that liquidity improves".

The repo platforms launched by the BSE and NSE for tripartite repurchase of corporate bonds is expected to improve liquidity of and investor appetite for these securities, Crisil said in a report on Wednesday. While private placement of corporate bonds have shown an uptick since 2016-17, there are genuine concerns about liquidity in the secondary market, Tyagi said.

He pointed out secondary market products such as interest rate futures, credit default swaps and repo have to be made more attractive to participants in order to develop a secondary market. “Efforts made in development of private placement of bonds have to be necessarily complemented with increase in liquidity in the secondary market," he said.

Tyagi noted that the stress in the banking sector has helped many corporates raise funds from debt and this is one of the reasons for the increased volume in the bonds market from electronic bidding platform in the recent years.

“Clearly there is an opportunity to deepen the bond market amidst the present NPA crisis. Though the RBI intervention is a step in the right direction, its effectiveness is yet to be measured," said Tyagi. He also said loan bond arbitrage has to be removed by measures such as allowing banks to classify and re-classify bonds and loan assets into held-to-maturity or available-for-sale buckets, based on their declared intention rather than automatically based on legal documentation.

The Sebi chairman also noted that with the Insolvency and Bankruptcy Code (IBC) coming in to force, it has addressed default risk of bonds to a large extent as bondholders are kept on a higher priority. “In the medium term, this would facilitate deepening of bond market. But researchers should keenly watch how this plays out in the next three to five years, how the bond market grows as a percentage of GDP," he added.

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