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The Securities and Exchange Board of India (Sebi) is preparing to launch trading in at least four new categories of debt — municipal bonds, Sukuk bonds, covered bonds and bonds issued by cooperative societies — this financial year.
According to sources, the regulator is in the process of studying the framework for such bonds in foreign markets a likely structure for the domestic market. It has also begun consultation with various stakeholders.
For the first time, the regulator has tasted some success in debt-based exchange traded instruments. Earlier this year, it introduced trading in interest rate futures (IRF) for a third time, with an easier framework, based on market feedback. IRFs, derivative products with underlying government security, have had a weekly average turnover of around Rs 1,000 crore.
Trading on municipal bonds and on Sukuk bonds — the latter being the Islamic equivalent; where conventional bonds confer ownership of a debt, Sukuk grants the investor a share of an asset, along with the commensurate cash flows and risk; Islamic principles prohibit the charging or payment of interest — is popular globally but had never been launched in India.
A few municipal corporations, in the past, have raised capital by issuing municipal bonds under guidelines issued by the Union government but trading hasn’t been allowed in these. A municipal bond or ‘muni bond’ is a debt security issued by a state or municipality to finance its capital expenditures such as construction of highways, bridges or schools.
Last November, business chamber Assocham had written to the Reserve Bank of India (RBI) to allow municipal bonds to be traded. Globally, these are popular, as they typically come with the additional advantage of an exemption from state and local taxes. Ajay Manglunia, head of fixed income at Edelweiss Financial Services, said there was a huge market for municipal bonds globally, as these offer a higher coupon rate than government securities.
As for Sukuk bonds, popular in the Islamic world, Indian regulators haven’t approved these instruments as unlike the traditional debt products, these do not provide a fixed return. The so-called covered bonds are mortgage securities, backed by the issuing authority. Last year, National Housing Bank had created a working group to look into these. Headed by a Sebi executive director and with representatives from the Reserve Bank and the Union finance ministry, it has already given its report.
Money market experts say covered bonds, beside widening the resource base for lenders, induce greater discipline in lenders.
Bonds issued by co-operative societies are common in India but there’s no trading in these. Market experts say permitting trading in new debt-based securities is vital for developing the market. “Any new development in the bond market space is a good development, as it will boost growth for debt segment. And, give more choice to investors who might be interested in such products,” said N S Venkatesh, chief general manager & head-treasury, IDBI Bank.
