With an aim to develop corporate bond market in India, an expert panel today suggested easing of norms for foreign investors, a corporate bond index on lines of Sensex or Nifty, and making it mandatory for large corporates to tap this market for funds beyond a threshold.
The panel, comprising of nominees from Reserve Bank, Finance Ministry, markets watchdog Sebi as also insurance and pension regulators IRDAI and PFRDA, also wants tightening of norms for credit rating agencies by mandating them to strictly adhere to timely public disclosure of defaults.
The 'Report of the Working Group on Development of Corporate Bond Market in India' has been submitted to RBI Governor Raghuram Rajan in his capacity as Chairman of the FSDC (Financial Stability and Development Council) Sub-Committee, which comprises of members from various regulators and had had set up the group.
The report was released today by Sebi, whose Chairman U K Sinha is a member of the FSDC Sub Committee.
The Group was constituted in September 2015 under chairmanship of the then RBI Deputy Governor H R Khan and has now submitted its report after taking into account various structural issues impinging on the development of a deep corporate bond market in India.
Among its various suggestions, the panel has said, "Large corporates with borrowings from the banking system above a cut-off level may be required to tap the market for a portion of their working capital and term loan needs. Necessary guidelines may be issued by RBI taking into account market conditions by September 2016."
It also wants necessary amendments in FEMA regulations to allow investment by FPIs in unlisted debt securities and pass through securities issued by securitizations.
In a rare case of suggesting specific timelines for its various suggestions, the Working Group wants necessary notification with regard to allowing FPI (Foreign Portfolio Investor) investments in these segments by August-end 2016.
It also wants amendments in both FEMA notification and Sebi guidelines to facilitate direct trading in corporate bonds by FPIs in the OTC segment and on an electronic platform of a recognized stock exchange, subject to certain safeguards, without involving brokers.
With regard to credit rating agencies, the report wants them to publish the credit rating transition matrix more frequently. Besides, the rating agencies have been asked to take up membership of credit information companies to access relevant credit information.
Necessary action would be required to be taken by Sebi in this regard.
Besides, banks may be encouraged to submit loan overdue information to CICs on a weekly basis to start with.
"RBI may consider whether CRAs may be allowed access to Central Repository of Information on Large Credits database based on legal feasibility and other relevant factors," it said.
Some of the preliminary recommendations of the Working
Group earlier made by it to the government and they were included in the Union Budget 2016-17, presented in February by Finance Minister Arun Jaitley.
Noting that these Budget announcements are in the process of being implemented, the Panel said, RBI Governor Rajan and three deputy governors had a detailed meeting with Sebi's Chairman Sinha and its whole time members on possible measures for the development of corporate bond market and it was agreed that both RBI and Sebi would work closely on some of the recommendations falling within their remit.
The corporate bond issuance in India is dominated by private placements as these account for more than 95 per cent of the total issuance of corporate debt.
Besides, a majority of the issuances are concentrated in the 2-5 year tenor, while investor base is limited as the investment mandates of large investors such as insurers, pension funds and provident funds, provide limited space for going down the credit curve as the investments are made in fiduciary capacity to protect the interests of subscribers.
The panel observed there is a total lack of liquidity in credit risk protection instruments like Credit Default Swaps (CDS), while stamp duties on corporate bonds across various states have not been standardised.
The tax regime for financial instruments remains one of the key drivers of investor interest, while there are inherent structural incentives for borrowers to prefer bank financing, such as cash credit system and absence of any disincentive for enjoying unutilised working capital limits.
"As the corporate debt market cannot be looked as totally detached from the sovereign bond market, this market may get a fillip as the interest rates come down with the inflation and fiscal consolidation targets being achieved," the panel said.
Also, many large non-financial corporates who should normally be the preferred issuers of bonds are leveraged and hence cannot access either loan from banks or bond financing through market mechanism.
In its report, the Working Group also took note of key recommendations of earlier committees or panels that have not been fully implemented as yet.
Listing out as many as 29 specific recommendations, the new report makes explicit mention of the authority responsible for implementing the suggestions.
Among its various recommendations, it said the issuers coming out with frequent debt issues with the same tenor during a quarter may club them under the same umbrella ISIN (a unique code to identify a specific securities issue) to increase the float in the market and enhance the liquidity.
"Re-issuances may not be treated as fresh issuances for the purpose of Stamp Duty. The corporate governance norms applicable to companies which have listed only debt securities and not equity may be reviewed to make them less onerous," it said.
As suggested by market participants, Sebi has been asked
to standardise the corporate bond issuance by having a re-look at the guidelines issued in October 2013 so as to clarify on day count convention, shut period, basis for yield calculation, calculation of coupon interest and redemption with intervening holidays with illustrations.
In terms of RBI guidelines on credit default swaps, the panel wants the credit exposure of a protection buyer to be on the protection seller.
"In case of need for further clarification of doubts, if any, market participants may seek the confirmation of the respective regulators," it said.
Sebi and stock exchanges have been asked to take steps to operationalize market making scheme in corporate bonds.
Regulated entities like banks, in addition to brokers, can be encouraged by regulators to act as market makers in corporate bond market.
Besides, RBI has asked to examine allowing trading members of debt segment of exchanges to access the repo market in corporate bonds to enable them to undertake market making.
It also wants Sebi to take steps for the Electronic Book Mechanism for private placement of debt securities, currently mandatory for issuances over Rs 500 crore, to be extended to all primary market issuances.
A uniform valuation methodology available on a daily basis may be followed by all regulated entities for valuation of their holdings of corporate bonds. Regulators may explore an acceptable mechanism for valuation including engaging the Financial Benchmarks India Pvt Ltd (FBIL) or credit rating agencies for the same with necessary safeguards and oversight.
The penalty structure in place for default in delivery of debt securities/funds for trades subject to CCP clearing by the clearing houses of the stock exchanges may be reviewed in consultation with all the stakeholders with a view to prescribing a penalty which is prudent yet reasonable.
It has been suggested that alternative mechanisms, such as borrowing through repo in corporate bonds, may also be explored for ensuring settlement.
A centralized database for corporate bonds covering both primary and secondary market segments may be established expeditiously in two phases, for secondary market by August and for both primary and secondary market by October 2016.
The panel has also suggested steps towards new products like CDS (Credit Default Swap) and Repo in Corporate Bonds, besides Basel III compliant Perpetual Bonds.
It has also asked the government to allow insurance companies and EPFO to invest in AT-1 bonds of banks subject to prudential limits with credit rating upto investment grade.
The maximum investment ceiling of 2 per cent of the total portfolio of the funds in AT-1 instruments stipulated for non-Government PFs may be reviewed for relaxation.
"Large corporates with borrowings from the banking system above a cut-off level may be required to tap the market for a portion of their working capital and term loan needs. Necessary guidelines may be issued by RBI taking into account market conditions by September 2016," it said.
"The stamp duty on debentures should be made uniform across states and be linked to the tenor of securities within an overall cap. Re-issuance of the same security should be included for the purpose of the cap, in order to encourage re-issuance. As this issue has been pending for quite some time, this may be resolved expeditiously," it said.
On investor protection, it said, "In order to achieve the objective behind the Bankruptcy Code, issues such as early notification of the rules, development of insolvency professionals, tribunal/court infrastructure and information utilities and quick redressal of the transitional problems may be addressed with priority.
