Corporate bond reforms on the anvil

The corporate bond market should be strengthened to encourage participation of long-term investors and reduce the cost of public issuances, the statement said

The sluggish corporate debt market may see reforms soon. To provide depth to the segment, norms for investment in these bonds by pension and provident funds may be eased. Today, finance ministry officials and regulators from the financial sector discussed ways to attract long-term investors to these bonds. Reducing the cost of issues was also discussed.

Today’s meeting of the Financial Stability and Development Council (FSDC), chaired by Finance Minister P Chidambaram, emphasised on a road map for a structural shift towards a diverse financial system, with adequate focus on corporate bonds, said an official statement. “The council also discussed a number of steps to be taken for rationalising the framework for regulating corporate debt, with an aim to remove regulatory constraints for issuers and protect investors,” the statement added.

Reserve Bank of India Governor D Subbarao, Securities and Exchange Board of India Chairman U K Sinha, Pension Fund Regulatory and Development Authority Chairman Yogesh Agarwal and Insurance Regulatory and Development Authority member R K Nair also attended the meeting.

The corporate bond market should be strengthened to encourage participation of long-term investors, reduce the cost of public issuances and increase liquidity through improving market infrastructure, the statement said.

According to a study, the proportion of corporate debt to gross domestic product (GDP) is only four per cent in India, while bank loans account for about 36 per cent of GDP. In the US, outstanding corporate bonds account for about 70 per cent of GDP. For Germany, Japan and South Korea, the figures stand at 147 per cent, 41 per cent and 49 per cent, respectively.

Yesterday, Economic Affairs Secretary Arvind Mayaram had said soon, the government might relax the norms for pension and provident funds to invest in the corporate bond market. This, he added, was aimed at providing long-term finance for infrastructure.

He said most countries had developed corporate debt markets for funding their infrastructure sectors, adding India, too, could develop the market by relaxing investment norms for pension and provident funds. “This is one area we are very actively looking at. We would come out with some new guidelines in the near future,” he had said.

Against the backdrop of the Euro zone crisis, the FSDC also discussed mitigating vulnerabilities through moderating imports, promoting exports and encouraging capital flows through progressive liberalisation.