Unifying bond markets will allow use of common infra: Sebi's Ajay Tyagi

Unification of government bond and corporate bond markets will enable the trading of such securities on the same platform, thereby utilising common infrastructure for trading, clearing, settlement and holding of securities, said Sebi chairman Ajay Tyagi.

"Unification of government bond and corporate bond markets is an idea whose time has come," Tyagi said while speaking at CRISIL's 6th bond market seminar.

He further added that this would lead to seamless transmission of pricing information between G-Secs and corporate bonds.

Corporate bonds, which are generally priced on the basis of G-Secs of comparable maturity, would therefore be priced more appropriately.   The proposal would lead to economy of scope and scale, and increased liquidity for both G-Secs as well as corporate bonds and also facilitate greater participation by retail and non-institutional investors.

Tyagi, in his speech, laid out several other steps that are needed for further development of corporate bond market.

Emphasising on credit enhancement mechanism, he said the issuances by infrastructure projects do not typically fall in the category of top-rated corporate bonds.

Thus, a credible credit enhancement mechanism is required to improve the rating category of infrastructure special purpose vehicles (SPVs), which, in turn, would facilitate these SPVs to raise funds from the corporate bond market.

"This would be crucial to meet infrastructure financing targets as per the National Infrastructure Pipeline," he said. He also noted that expanding the investor base with preference for lower rated corporate bonds is required for further deepening of the corporate bond market.

With a conducive ecosystem, mutual funds can be expected to play an even bigger role in the development of relatively lower rated corporate bonds. Ratings given by credit rating agencies should be used for guidance purpose and financial institutions should continue to have the onus for due diligence of their investments.

"They should develop their own expertise in rating evaluation/due diligence of their investments and should not be solely dependent on the ratings given by credit rating agencies," Tyagi said.

Reacting on the measures announced in the budget, he said the announcement for creation of permanent institutional framework to purchase investment grade debt securities both in stressed and normal times would help in the development of the bond market.

Such a facility would surely lift the confidence of the investors in liquidity of corporate bonds which is very much required especially for relatively lower rated bonds.

"SEBI is under discussion with the government and other stakeholders about the possible structure of such a facility so that the same could be operationalised at the earliest," he said.

He added that the announcement to consolidate the provisions under different Acts dealing with securities is a welcome step and the regulator has shared some of the suggestions with the government in this regard and is hopeful that the securities market code would get finalised at the earliest.

Regarding development financial institution (DFI), he said, "it is our view that the mandate of DFI should also include provision for equity financing." As infrastructure projects are long gestating in nature, their debt repayment capacity is constrained in the initial years. SPVs, which manage such projects, would initially prefer financing in the form of equity and subsequently, when cash-flows start accruing, opt for debt financing, as per Tyagi.