Inject into the Economy

Context: The growth of the corporate debt market has been disappointing for India.

Importance of Corporate Debt:

• The backbone of any economy: as it does infrastructure growth, which is by nature debt-fuelled.
• Act as an alternative to banks and Non-Banking Financial Companies (NBFCs) as they are reluctant to lend to long-term assets.

Issues with Corporate Debt Market:

• Skewed Growth: The entire growth in the corporate debt market has been only with the safest bonds.
• Raising debt capital without being the safest company is difficult: 95% of all corporate debt is rated either AAA or AA. All other ratings fall in the 5%., while the US markets mirror the image. 
• Creating an equity-like market is difficult since the nature of traders and trades are different since most trades are large, time-sensitive and traders re highly sophisticated.
• Transparency: While traders want more transparency with respect to the underlying company’s health, they want less transparency with respect to their trades.

• India is the world’s only jurisdiction that imposes a ‘non-cooperative rating’ mandate, wherein rating agencies have to necessarily put out ratings based on publicly available data.
• This weakens trust in the system, edging investors to the safest securities.

• A large part of the market is a phone market, where players give two-way quotes through a broker, who does not disclose whether the counterparty is a buyer or a seller till the very end. 

• Flexibility Issues: Unlike equity, a company may have dozens of securities of debt, making the market and pricing highly fragmented. 

Way Ahead: 

• An electronic, anonymous marketplace should coexist with a non-transparent market which requests for quote systems, hit-and-take bilateral platforms and voice broking
• Competition among marketplaces should be encouraged, while the backend can be handled more frequently by the clearing corporations, ensuring guaranteed trades for many, 
• Other reform measures like credit enhancement, repo and Credit Default Swap (CDS) market development, Government Security (G-sec) market reforms, and less risky debt adoption.