Corporate bond market posts record turnover

The corporate bond market has witnessed a sharp surge in trading volumes. Data from the Securities and Exchange Board of India (Sebi) show that April 2009 saw the highest ever trading when bonds of over Rs 31,500 crore were traded.

According to the data, trading activity picked up since December 2008 when the equity markets went out of favour after the collapse of US investment banking giant Lehman Brothers in October. Investors braced for new private debt issuance's on anticipation of cuts in interest rates due to liquidity freeze and already high domestic lending rates.

“Last month, trading volumes were unusually high as there was a sudden dip in credit offtake,” says Vikas Agarwal, executive director of bond arranger A K Capital.

Trading in the corporate bond market has surged by over 55 per cent year-on-year (y-o-y) with bonds worth Rs 1,48,000 crore being traded 2008-09 compared.

Both the Reserve Bank of India (RBI) and Sebi have been making persistent attempts to revive the corporate bond market to enable corporate houses to raise cheap funds in the domestic market itself.

Sebi recently said that it was formulating a road map to bring over-the-counter (OTC) transactions in corporate bonds under clearing entities such as banks, Stock Holding Corporation of India (SHCIL) and Clearing Corporation of India (CCIL). Following this, RBI too allowed clearing houses of the exchanges to have a transitory pooling account facility with the central bank and do settlement on real-time basis.

While, at present, settlements in OTC are done in a manner where pricing and settlement are ruled by the larger party involved in a transaction, counter-party risks will be drastically cut once the clearing entity comes into picture.

However, what makes the corporate bond market more attractive is the falling interest rate scenario and subdued activity in the equity market. “Many corporate houses recently tapped the bond markets as interest rates came down, enabling them to offer attractive rates at maturity. Moreover, banks had become averse to credit risk and preferred to pick up bonds instead,” said Deven Padhyay, director at broking firm Darashaw & Co.

Padhyay said spreads in bonds too were quite high and akin to banks, mutual funds too had become aggressive in the bond market as large corporate houses were putting more money into debt than equity schemes.

Between 2004 and 2008, when interest rates were on the rise, bond prices were falling. Also, the steep rise in the equities market made it more attractive for investors. Even from a company's perspective, raising capital through initial public offerings (IPOs), or external commercial borrowings (ECBs), or the alternative investment market (AIM) route was not difficult.

Since November last year, over 70 companies (including PSUs and banks) have issued bonds worth of over Rs 70,000 crore. The banking sector, which is in the process of raising its Tier-II capital, has also been quite aggressive.

Among the banks that will soon come up with bond issues are State Bank of India (Rs 2,000 crore), Corporation Bank (Rs 1,000 crore) and Punjab National Bank (Rs 1,000 crore). Among the corporates, REC will raise Rs 1,000 crore and SAIL Rs 500 crore.