Corporate Bond Market: Never ending issues and challenges!

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• India has been historically witnessing the
  underdevelopment scenario of bond market. There
  has been lots of buzz going around the Indian
  corporate bond market. In the earlier write-up we
  discussed the changes brought to streamline the
  regulatory regime surrounding the Indian bond
  market. Recently, the Reserve Bank of India came
  up with a detailed analysis on "Corporate Bond
  Market in India Issues and Challenges".
• In India, the equity market is more vibrant and
  matured as compared to bond market however, the
  same is in contrary to the other economies of the
  world, where bond market is more vibrant. In
  order to boost the Indian market, a High-level
  Expert Committee on Corporate Bonds and
  Securitization was formulated under the
  chairmanship of Dr. R.H. Patil with a mandate to
  identify the factors inhibiting the development
  of an active corporate debt market in India and
  recommend policy actions necessary to develop
  bond insurance in the country. In early 2013, RBI
  advised banks to issue subordinated debt for
  raising Tier-II capital to public investors
  through public issuance, to deepen the corporate
  debt market.

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• On similar lines the government official released
  a statement saying, "We are examining if banks
  can be mandated to raise part of their
  requirements through public issue to retail
  investors". Further, in the Union Budget 2016-17,
  the Finance Minister announced various measures
  to facilitate deepening of corporate bond market.
  He further added that, "the enactment of
  Insolvency and Bankruptcy Code would provide a
  major boost to the development of the corporate
  bond market".
• In this write-up, we intend to discuss the issues
  and challenges still faced by the corporates at
  the time of issuance of bonds in the market.
• Performance of the bond market
• The Indian bond market has witnessed its highest
  peak of public issuance in the year 2013-14
  amounting to INR 42382.97 crores and private
  placement in the year 2015-16 amounting to INR
  458073.5 crores. The table below reflects the
  issuance of bonds and provides a comparison to
  understand the highs and lows of the history of
  the bond market in India.
• Issues and challenges
• The major investors in the bond market are viz.,
  banks, financial institutions, insurance
  companies, mutual funds, pension funds and
  foreign institutional investors. However, for
  each of the aforementioned categories there seems
  to be restrictive conditions with respect to
  participation in the bond market.

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• Banks
• In order to understand the restrictions on the
  investment in the corporate bonds, let us first
  analyse the two important terms used in the
  prudential guidelines, i.e., SLR investments and
  non-SLR investments.
• SLR investment every bank is required to
  maintain certain portion of their deposits in
  liquid assets. These liquid assets can be cash,
  gold or government securities. SLR is maintained
  by the bank to control the expansion of bank
  credit and the ratio is determined by the Reserve
  Bank of India. Currently, the prescribed
  statutory liquidity ratio for banks is 21 per
  cent of their deposits.
• Non-SLR investments Other than granting loans,
  the banks are allowed to invest in capital market
  instruments such as stocks and bonds issued by
  public and private sector companies and
  commercial papers. Further, banks were also
  permitted to invest in mutual fund schemes.
• The prudential norms issued by RBI for
  Classification, Valuation and Operation of
  Investment Portfolio by Banks provides for
  restriction on non-SLR investments. Para 1.2.9 of
  the prudential norms provides for an restriction
  on bank's investment in unlisted non-SLR
  securities which shall not exceed 10 per cent of
  its total investment in non-SLR securities as on
  March 31, of the previous year, and such
  investment should comply with the disclosure
  requirements as prescribed by SEBI for listed
  companies. The aforementioned capped percentage
  shall also include investment by banks in long
  term bonds issued by other banks for financing of
  infrastructure and affordable housing. Even
  though, if banks invest in non-SLR debt
  securities which are not listed, such banks are
  still required to ensure the disclosure standards
  prescribed by SEBI. (Para 1.2.1 (ii)).

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• Further, if the investment is on account of
  investment in Securitisation papers issued for
  infrastructure projects, and bonds/debentures
  issued by Securitisation Companies and
  Reconstruction Companies set up under the
  Securitisation and Reconstruction of Financial
  Assets and Enforcement of Security Interest Act,
  2002 (SARFAESI Act) and registered with the
  Reserve Bank then an additional cap of 10 per
  cent is permitted on such investment. (Para
  1.2.10).
• Insurance Companies
• The Insurance Regulatory and Development
  Authority in consultation with the Insurance
  Advisory Committee amended the Insurance
  Regulatory and Development Authority (Investment)
  Regulations, 2000 (hereinafter referred to as
  "Investment Regulations") by way of an Insurance
  Regulatory and Development Authority (Investment)
  (Fifth Amendment) Regulations, 2013 (hereinafter
  referred to as "Fifth Amendment Regulations")
  dated February 16, 2013. The investment
  restrictions are as follows
• ?Regulation 9 of the Fifth Amendment Regulation
  provides for substitution in the Investment
  Regulations wherein the corporate bonds or
  debentures rated not less than AA or its
  equivalent and P1 or equivalent ratings for short
  term bonds, debentures, certificate of deposits
  and commercial paper, by a credit rating agency,
  registered under SEBI (Credit Rating Agencies)
  Regulations, 1999 would be considered as
  'Approved Investments'.
• ?Such insurance companies shall not invest less
  75 per cent in debt instruments in case of life
  insurers, and not less than 65 per cent in case
  of general insurers, should be in sovereign debt
  having AAA rating for long term and P1 or
  equivalent for short term instruments.

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