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What's Roiling India's Stock Market? Bonds

Mumbai needs a more robust debt market to prevent violent swings in equities trading

India's markets have long enjoyed a reputation for being well run. But after shares in Mumbai fell 10% in the first 57 seconds on Jan. 22 and regulators halted trading, investors started grousing that India's bourses still have a long way to go before they're on par with the world's leaders. "India has made major strides with market reform, but in finance...it's antediluvian," says Percy S. Mistry, chairman of London consultancy Oxford International Group.

The bond market—or lack thereof—is the core of the problem. Although India has long had the regulatory framework for companies to offer debt, the disclosure requirements are so stringent that few bother. Last year, Indian companies issued bonds equivalent to just 1% of the country's gross domestic product, compared with 112% of GDP in the U.S. and 10% in China, according to Britain's University of Reading. Lacking other financial options, Indians funnel almost all their money into stocks. "If there were more debt available," says Alan Rosling, a director of Indian conglomerate Tata Sons, "some institutional investors would buy and hold rather than join the hot money rushing in and out of equities."