Dusting off a 4-year-old report, now that the PM wants action

Much of Patil panel’s to-do list on developing a corp bond market remains shelved .

Prime Minister Manmohan Singh’s recent remarks on the need to develop a strong domestic corporate bond market has again brought into focus the tardy pace of reforms to channelise savings of retail investors for funding long-gestation infrastructure projects.

It was over four years earlier (December 2005) that the high-level panel on corporate bond markets and securitisation headed by R H Patil gave its report. Prithvi Haldea, managing director of Praxis Consulting and Information Services, said, “Nothing much has happened between now and then”. He was a member of the Patil panel.

Most of the recommendations by the Patil panel, such as bringing uniformity in the stamp duty levied by state governments on corporate bonds, steps to enlarge the issuer base and making the job of placement easier are yet to be implemented, said Haldea.

The investment need for infrastructure projects were pegged at about $500 billion (Rs 22.6 lakh crore) in 2007-12. Banks, prime providers of funds for projects, are finding it tough to raise long-duration funds and they are also reaching prudential limits for taking further exposures.

The Prime Minister, while addressing the Reserve Bank of India’s platinum jubilee function on April 1, had said rapid growth requires massive investments in infrastructure and much of this will have to be funded through long-term debt.

“Banks are not ideally suited to provide long-term debt and this underscores the need to develop a domestic corporate debt market. This, too, requires a conscious plan of action,” Singh said.

RBI, conscious of the need to speed up the process, has permitted a repurchase facility for corporate bonds. G A Tadas, chief executive officer, IDBI, said: “It will increase the tradability of corporate paper. Banks and other institutional investors would like to use corporate bonds as collateral to raise funds from the market.”

The Patil panel had suggested retail investors be encouraged to participate in the debt market through stock exchanges. They could participate in the corporate bond market through mutual funds.

The Indian retail investor is safety-minded and most investments are in deposits and higher-quality paper. There is huge potential for the public bond market. The amounts (Rs 1,000 crore-Rs 1,500 crore) that companies have raised are quite small, Haldea said.

Also to encourage banks to invest in corporate paper, their investment in corporate bonds should be considered as part of total bank credit while computing their credit deposit ratio, is another suggestion.

A Subba Rao, Group Chief Financial Officer, GMR Infrastructure, said that pension and insurance funds should be allowed to subscribe to bonds to deepen the bond market. But, for these funds to subscribe to bonds, infrastructure companies have to have a good rating. And, that’s a problem.

Most infrastructure companies in India have a rating of BBB or A; getting even an AA rating is very challenging for most of them. To overcome this, banks and institutions should be allowed to credit-enhance the bonds of infrastructure companies, Rao added.

Banks were barred from credit enhancement after a recent case, where State Bank of India had stood guarantee for Tata Motors’ bonds.

“The central bank doesn’t want banks to take additional risks, but in my view, credit enhancement should be allowed,” stressed Rao, “Subject to the banks following certain prudential norms, like those for loans.”