oppn parties Bonding with Corporate Bonds Through Much Needed Reforms

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RBI hikes key rates by 50bps, stocks jump and recover 50% of the losses incurred in the last few session
oppn parties
Bonding with Corporate Bonds Through Much Needed Reforms

By Sampriti Sarkar
First publised on 2016-09-06 13:13:10

About the Author

Sunil Garodia Post graduate student of Calcutta University. Aspiring economist. Budding writer.
Even in the last few days of his tenure, Raghuram Rajan was in no mood to slow down regulatory measures to boost the financial market. As a parting gift, Rajan initiated mainly three regulatory changes to penetrate further into India’s corporate bonds market in order to raise its global standards and reduce the risk of exposure. The changes are welcomed by the investors as long awaited and much needed reforms. The reforms include firstly, issue of ‘masala bonds’ to raise money from the overseas market. Secondly, to allow market brokers to trade in corporate bond repo market. Thirdly, banks can borrow from RBI for liquidity needs by pledging corporate bonds. Promoting policies to deepen financial markets and reduction of risks banks face has been in the agenda of the RBI for quite some time. In a new set of guidelines issued by the RBI, the Central Bank has announced that the banks are allowed to issue ‘masala bonds’ to raise money from the overseas market while bond investors hold the currency risk. Previously, only corporate, non-banking lenders and large NBFCs were allowed to issue ‘masala bonds’. Masala bonds are Indian rupee denominated bonds that can be used to get money from overseas market in rupee, and not in any foreign currency. These make funds more easily available for the Indian banks with enhanced liquidity. RBI also mentioned that these overseas bonds can be used to finance housing and infrastructure. The second amendment RBI made is to allow brokers to trade in corporate bonds repo market to meet the funding needs. To promote retail participation in the market by small investors, RBI also removed restrictions on government securities transfer to enhance smooth transfer. The third change allows RBI to accept corporate bonds under liquidity adjusted facility. So, the banks can pledge corporate bonds as collateral while borrowing funds from its overnight repo window. RBI mentioned that "These measures are intended to further market development, enhance participation, facilitate greater market liquidity and improve communication." Apart from these three key measures, other changes introduced are- • Aggregate partial credit enhancement (PCE) will be increased from the present level of 20% to 50% of the size of bond issue. • Direct trading of corporate bonds by Foreign Portfolio Investors without involving a broker. This has been decided jointly by SEBI and RBI. This measure will widen the investor base. • To remove the 7-day restriction, under which listed companies can lend money through market repo mechanism to banks for seven days. To improve communication and transparency, the auction results of government securities auctions will be published by RBI at a stipulated time. These reforms are all critical in short run as well as in long run. The investors believe that the reforms will help the financial market to mature further. It has been argued that Indian markets are more bank dependent because of shallow corporate bonds market. Rajan made attempts to resolve this issue by introducing these new regulatory measures. Corporate bonds issuance has been low compared to the economy size in India since a long time. The value of Indian corporate bonds outstanding was equivalent to only 9 per cent of gross domestic product in 2014, according to the International Organization of Securities Commissions. In absence of a deep corporate bonds market, in the past decades many projects had to be funded by debt from banks. In this scenario, bond market reforms were much needed by the investors. This will open up the global markets and make availability of fund easier. As Rajan returns to academia, he has given the bond market a breath of fresh air by introducing the necessary reforms.