Junk bond trade on hold

The Securities and Exchange Board of India (Sebi) has put the proposal of introducing sub-investment grade bonds in the corporate bond market on the backburner.

According to sources, the proposal was mooted in the report of R H Patil and Sebi was to amend the Disclosure and Investor Protection (DIP) guidelines for introducing the product.

Sub investment grade bonds are floated by companies who do not wish to rate the bonds either due to lack of good fundamentals or are in the process of restructuring the operations.

Sources said that given the turbulence in the global markets following the sub-prime crisis, the timing is inappropriate. The crisis should unfold completely so that it could set a precedence for others on how to tackle such developments, especially the extreme fund crunch in the overseas markets. Later the proposal could be looked into at an appropriate time, said the source.

The objective of the proposal was to allow small- and medium-sized companies to borrow funds from the bond market. Other alternatives available to them were bank finance and funds from the overseas market especially London's Alternative Investment Market (AIM).

At present, only investment grade bonds are allowed to be traded in the Indian bond market. Sebi will also have to amend the guidelines to allow mutual funds to deal in such(sub investment grade) bonds. Only banks are allowed to trade in such bonds up to 10 per cent of their investment portfolio.

Usually, bonds are rated as investment grade so that they can be traded in the market. However, other institutional investors like mutual funds and insurance companies are not allowed to invest in such bonds.

Earlier, the government said there should be no bar on the trading of sub investment grade papers as it depends on the risk appetite of the investors.

Moreover, if a mutual fund discloses that it is investing in below investment grade paper and the investors in these schemes are aware of it, there should be no problem in introducing the product.

Trading in such bonds will deepen the market and increase the size of bonds. Now, only Triple A companies and banks get to access the bond market for raising funds.