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Corporate bonds reforms likely on anvil

Proportion of corporate debt to GDP stands at only 4%in India while bank loans to GDP is at approximately 36%

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The sluggish corporate debt markets may see some soon, including easing of norms for investment by pension and provident funds in these bonds, to give this segment some sort of depth.

The Finance Ministry and financial sector regulators today discussed as to how long term investors could be attracted to these bonds, besides making this debt segment liquid and bringing down cost of the issues. 

A meeting of the Financial Stability and Development Council (FSDC), chaired by Finance Minister P Chidambaram, stressed on a roadmap for structural shift towards a diverse financial system with an adequate emphasis on corporate bonds, an official statement said here. 

"The Council also discussed a number of steps to be taken for rationalizing the framework for regulation of corporate debt with an aim to remove regulatory constraints for issuers and protect investors," the statement added.

The corporate bond markets need to be strengthened to encourage participation of long term investors, reduce cost of public issuance and increase liquidity through improving the market infrastructure, it added.

According to a study, proportion of corporate debt to stands at only four% in India while bank loans to GDP is at approximately 36%.

On the other hand, corporate bond outstanding is 70% of GDP in the USA, 147% in Germany, 41% in Japan and 49% in South Korea.

Yesterday, Economic Affairs Secretary Arvind Mayaram had said the government may soon relax the norms for pension and provident funds to invest in the corporate bond markets to provide long term finance for infrastructure. 

He had said most countries had developed corporate debt market for funding the infrastructure sector and India also could replicate it by relaxing the investment norms for pension and provident funds which would provide long-term funds.

“This is one area we are very actively looking at and we would be coming out with some new guidelines in the near future,” Mayaram had said.

The FSDC meeting was attended by RBI Governor D Subbarao, chairman U K Sinha, PFRDA chairman Yogesh Agarwal, IRDA member R K Nair and finance ministry officials.

As Euro zone crisis continued, the council discussed various policy suggestions on mitigating the vulnerabilities through moderating imports, promoting exports and encouraging capital flows through progressive liberalsation.

Already, the government had announced reforms in the sphere of foreign direct investment by hiking cap to 100% from 51% in single brand retail and allowing up to 51% FDI in multi-brand retail.

Despite contracting exports, India's trade deficit was only marginally down at $89.25 billion  in the first six months of this fiscal against $89.39 billion in the corresponding period of last fiscal.

India's current account deficit (CAD) reached a record level of 4.2% of GDP. For the first quarter of this fiscal, CAD was down in absolute terms to $16.4 billion from $17.4 billion due to movement of the exchange rate it rose to 3.9% of GDP against 3.8% over the period.

High level of CAD requires high level of foreign investment as well to finance it.

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