There are two onshore corporate bond markets in India. The one that's seen in charts shows steady growth of issuance and rising prominence. A picture of health. The other, which issuers, investors and traders face everyday, is a zombie. And perhaps jinxed to remain one.
To see just what is wrong with the market, consider this laundry list:
- More than 90 percent of bonds get sold privately. They aren't publicly issued.
- There's no uniform standard for even simple things like what to do if the coupon payment date happens to be a holiday.
- Regular issuers offer a bewildering array of securities that should all be clubbed as one bond, but aren't. For instance, so far this year, Housing Development Finance has sold a dozen different rupee-denominated notes that will all mature in 2019.
- Liquidity is so fragmented that virtually no trading takes place. The daily secondary-market turnover is just $300 million.
- Repurchase, or repo, transactions are infrequent because the electronic trading system that makes it easy to repo Indian government bonds isn't available for corporate securities.
- Credit default swaps exist on paper to help investors manage risk. But there are no deals. Banks, which can buy and sell protection against corporate nonpayments, have no interest in making a market because they aren't allowed to net their positions against the same counter-party, meaning they need to lock up capital unnecessarily.
- Even the low-hanging fruit is hard to pluck. For instance, to meet minimum capital requirements under Basel III norms, India's state-run banks need to raise $13 billion of additional Tier 1 capital by selling perpetual securities. Only one lender sold such bonds during the last financial year, raising $22 million. The 11.95 percent coupon it paid was so exorbitant that other issuers stayed away.
The sorry state of the market has led to much finger-pointing. The finance ministry believes that the Reserve Bank of India is too obsessed with bank lending, which it regulates, and too paranoid about hot money, to want a vibrant market in corporate debt with full access to foreign investors.
RBI officials shift the blame to the government, whose ability to finance large budget deficits cheaply would erode if it had to compete with companies for funds.
The blame game could have gone on indefinitely. But there's some sign of a compromise. A working group set up last year by the government but headed by a then-central bank deputy governor suggested on Thursday that the RBI should "explore the possibility" of accepting corporate bonds as collateral when it injects liquidity into banks. At present, the monetary authority accepts only government securities.
If banks could finance their inventory in an efficient repo market, they would be more eager buyers of corporate debt. The RBI's participation might also set a benchmark for haircuts on collateral. Since the central bank is unlikely to accept lower-rated securities, a true junk-bond market will have to await implementation of India's bankruptcy law. For more creditworthy corporate borrowers, though, improving liquidity could mean better prices in proper public issues.
Don't bet just yet on the zombie's return to the land of the living. But there's hope that the bond jinx is about to be broken.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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