The debut of electronic trading in India’s corporate bonds seeks to expand volumes now 20 percent of those in South Korea and improve transparency amid global probes into manipulation of interbank markets.
The National Stock Exchange of India Ltd., backed by State Bank of India and Goldman Sachs Group Inc., introduced yesterday the system that allows anonymous matching of orders and reduces transaction costs. Last month, $20 billion of company debt was exchanged in Mumbai’s two decade-old telephone market, compared with $102 billion in Seoul, data from the Securities and Exchange Board of India and Korea Exchange Inc. show.
“The corporate bond market lacks transparency,” Parthasarathi Mukherjee, Mumbai-based president for treasury and international banking at Axis Bank Ltd. (AXSB), the No.1 arranger of rupee bonds, said in a phone interview on May 9. “The platform should boost liquidity in trading and improve price discovery.”
Expanding India’s company debt market is crucial to the success of Prime Minister Manmohan Singh’s plan to attract $1 trillion by 2017 to build roads, ports and electricity networks and steer Asia’s third-largest economy out of the worst slowdown in a decade. Average weekly volume in government securities has surged more than 13-fold since August 2005, when the Reserve Bank of India started screen-based transactions on an order-matching platform.
Trading that allows anonymous matching of orders will allow a more level-playing field, helping “develop a market that will benefit all participants,” Aneesh Srivastava, who manages about $546 million as chief investment officer at IDBI Federal Life Insurance Co., said in a telephone interview yesterday.
The nation is upgrading trading infrastructure as China probes rule violations in its over-the-counter market and authorities elsewhere investigate more than a dozen banks for their role in the alleged rigging of benchmarks including the London interbank offered rate, or Libor. Barclays Plc, Royal Bank of Scotland Group Plc and UBS AG have been fined a total of around $2.5 billion by U.S. prosecutors.
India, yet to implement many of the steps policy makers agreed on as early as in 2005 to develop the bond market, is now seeking to catch up with regional markets that have grown faster. Outstanding corporate debt are the equivalent of 13 percent of gross domestic product in the country, compared with 60 percent in the U.S. and 40 percent in China, according to the Mumbai-based Securities and Exchange Board, or SEBI.
A tripling of bond sales by local companies in five years to 2.5 trillion rupees ($46 billion) in 2012 was dwarfed by an almost sevenfold surge in issuance in China to 4.2 trillion yuan ($683 billion), data compiled by Bloomberg show. Singapore, with its AAA rating and transparent rules, is attracting record bond listings from the region. New fixed-income offers on Singapore Exchange Ltd. surged 54 percent in 2012 to $166 billion, data compiled by Bloomberg show.
In South Korea, investors can electronically trade bonds that are listed on Korea Exchange, which was incorporated in 2005, according to its website. Exchange-based trading in the country’s government bonds started as early as in 1999, and 10-year debt futures were first offered in 2008.
In India, the Reserve Bank introduced the so-called Negotiated Dealing System for rupee-denominated government notes eight years ago, with transactions cleared and settled by the Clearing Corp. of India. Average weekly volume on that platform increased to 4 trillion rupees from 296 billion rupees in the month it was opened, central bank data show.
India’s “corporate bond market is taking baby steps and there’s a lot of ground to be covered,” Chitra Ramkrishna, chief executive officer at Mumbai-based National Stock Exchange, said at a conference yesterday. “We want to make it the place for issuers to come for capital. What we would like to provide is what works for the markets in terms of adding to liquidity.”
Bonds worth 66.3 billion rupees were exchanged in 54 transactions on the first day of electronic trading, according to the National Stock Exchange’s website.
Singh’s administration is stepping up efforts to attract more buyers and sellers of debt. The government plans to cut the so-called withholding tax on rupee debt, charged on interest income earned by foreigners, to 5 percent from 20 percent, Finance Minister Palaniappan Chidambaram said in parliament on April 30. The proposed cut in the withholding tax will be in effect for two years starting June.
Last month, India simplified rules on global investment in rupee securities, removing restrictions including those on the types and maturities of notes that can be bought.
International ownership of local sovereign and corporate notes jumped $4.8 billion since Dec. 31 to a record $37.8 billion on May 9, according to official data. Ten-year (GIND10YR) federal securities yield 7.55 percent in India, compared with 3.41 percent in China and 2.88 percent in South Korea.
The yield on the benchmark 8.15 percent note due June 2022 fell four basis points today, while the rupee advanced 0.2 percent to 54.6050 per dollar in Mumbai, as official data showed inflation declined to a 41-month low of 4.89 percent in April.
Bond risk for Indian companies has slid this year. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers declined 48 basis points to 222, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
India’s economic slowdown and the failures of previous steps aimed at developing the debt market may damp investor response to electronic trading, according to Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda.
“Some investors may not welcome new products at this stage because the pace of economic growth and financial market vibrancy are far from convincing,” said Mumbai-based Nitsure. “The fate of products that are languishing” also may rein in enthusiasm toward new steps to expand the market, she said.
India’s attempts to expand the fixed-income market by introducing securitized debt, municipal notes, credit-default swaps and bond futures have failed. Sales of asset-backed securities slid 43 percent in five years to 366 billion rupees in the 12 months through March 2012, according to ICRA Ltd., the local unit of Moody’s Investors Service. India hasn’t seen a municipal bond sale since 2008, data compiled by Bloomberg show.
There has been little trading in rupee-denominated credit-default swaps since they were allowed in 2011. Government debt futures also have had almost no activity since an attempt in 2009 by regulators to revive the market.
Screen-based trading “will help rationalize costs for borrowers from the corporate bond market, a thing that had been due long,” Rajeev Agarwal, whole-time director at the SEBI, the capital-market regulator, said in an interview yesterday.
Exchange-based electronic trading may encourage individual investors to purchase more corporate bonds in India, according to National Stock Exchange’s Ramkrishna.
“Retail is a potential that has to be tapped because India’s savings are high,” she said.
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