'Regulatory changes are needed'

Q&A/ R H Patil, chairman, Clearing Corp

on ways of reviving the corporate bond market and the obstacles that need to be overcome.

Corporate debt transactions are now being reported on the stock exchanges, but the market has still not revived. What is wrong?

In the corporate bond market, virtually nothing is happening. The issues are different and reporting of deals will not serve any purpose. According to the National Securities Depositories (NSDL) data, the outstanding debt comprising government corporations' bonds and bank bonds, is worth Rs 3.70 lakh crore.

So the size of the market is huge. Internationally, the corporate bond market is not a retail market and retail investors participate through mutual funds.

So what is the solution to revive the market?

Some regulatory changes are needed. The listing guidelines should be amended. The bond issues, where investors are less then 49, are currently treated as private issues.

So issuers prefer these instruments to avoid the costs involved in listing and issuing documents. Ratings must be permitted. The ratings given by the agency should be sufficient enough to allow listing. The rating rationale, with some additional disclosures, could be put on the website of the exchanges where the bonds would be listed.

Whatever the outstanding stock, its data base/ information should be made available as investors want access to information before trading. Both the mainline stock exchanges where the corporate bonds would be traded from July should do clearing and settlement for the same. The shut period for such bonds should also be kept shorter.

But aren't there taxation issues?

Yes, like equities, TDS should not be deducted at source for such bonds. The rates and applicability of TDS provisions for various investors are different.

There should not be a stamp duty on such bonds as trading would take place in the secondary market. Investors pay stamp duty as equity appreciates in value, but duty would eat in to the yield as far as the bond market is concerned.

Isn't securitisation virtually non-existent?

A vibrant securitisation market is necessary. The Union government has to boost securitisation through a special purpose vehicle (SPV). The SPVs are pass-through arrangements as they buy small-retail loans and bundle them.

Hence, they should be exempt from stamp duties. Such SPVs should also be non-tax bearing entities. The trading of securitised portfolio should then be allowed.

To make the securitised portfolios tradable, the securities and contract regulation act needs to be amended.

This is pending since the last two years and nothing has been heard about it. These SPVs can make the market of securitised portfolios dynamic.

It can divide the portfolio into AAA, medium type debt and debt which can be put in the category of equity in terms of risk. Such segregated portfolios can be sold separately.