Deeper debt market needed: WEF

INDIA ECONOMIC SUMMIT 2006

Further measures are needed to create liquidity in the market, including debt instruments, to stave off funding pressures

Given Indian industry's high demand for credit, funding pressures during periods of tight liquidity can be expected to be high.

Further avenues are needed to create liquidity in the market, including debt instruments, according to a new discussion paper by the World Economic Forum on the evolution of the capital markets in India.

It says the need for a corporate bond market is pressing, not least because of India's substantial infrastructure-funding requirements.

Excessive regulations impede potential debt issuers and investors, though the prerequisites for the successful development of an efficient corporate bond market appear to be in place with India's government securities (G-secs) market, which provides a reasonably dependable yield curve, the paper says.

It says reforms have changed India's banking sector for the better in several ways, but further foreign and domestic competition is needed to introduce additional best practices, tailored to Indian needs.

There are too few domestic institutional investors, due to a lack of penetration by mutual funds, insurance and pension funds and overly restrictive regulations.

Indian exchanges are therefore vulnerable to the actions of foreign investors, whose actions are replicated by domestic investors. The equity markets need to attract a broader base of institutional investors, the paper says.

Factors hindering the development of the securitisation markets include limitations on market participation and high stamp duties.

Asset Reconstruction Companies (ARCs) have been set up to recover NPAs, and foreign special situations funds have begun to invest in Indian distressed debt, the paper notes.

The 'alternative investments' sector in India is being spearheaded by large private equity funds seeking opportunities in this market, the paper says.

The popularity of PIPE (private investment in public equity) transactions suggests in the mid-cap sector, it notes. It says infrastructure sector needs new types of debt instruments, and private equity funds are among the innovative sources of financing.

Corporate governance ratings instruments from CRISIL and ICRA encourage better governance, the paper notes, adding that corporate India is investing in good corporate governance as a prerequisite for companies with a global vision.

Credit flows to small and medium enterprises are inadequate, and key issues include weak corporate governance and a lack of MIS. Over 400 million people, mostly rural, remain outside the banking system in India, the paper notes, and suggests 'no-frills' bank accounts and non-branch locations as solutions for 'banking the unbanked'.

In foreign exchange markets, the paper notes that the S S Tarapore committee has advocated a three-stage liberalisation of the capital account over a five-year period ending 2010-11. A nascent FX derivatives market promises 'huge' growth and is important to companies with global ambitions.

It says India ranks third in the world in terms of M&As, and recent liberalisation measures have boosted cross-border transactions, but more needs to be done.