All’s well with the corporate bond market. Or is it?

First of a two-part series

Every now and then the issue of corporate bond market in India surfaces.

A policy maker somewhere will comment that market requires development and there will be a debate on what is to be done.

This has been going on for a decade now, if not more, and while there have been beneficial changes emanating, the core structure of the market remains the same.

The growth of the economy has not suffered due to the perceived lack of corporate bond market nor has any corporate faced lack of funds due to the non-development of the corporate bond market.
So why all the fuss?

The corporate bond market has increased in size as well as depth. The amount of bonds issued has grown close to four times from Rs55,000 crore in 2000 to Rs190,000 crore in 2009-10.

The table alongside gives the yearly amount of corporate debt (over 365 days maturity) issued over the last 10 years. And the issuances of bonds by public sector undertakings have almost doubled from Rs16,600 crore to Rs29,900 crore in the same period.

Public sector undertakings accounted for close to a third of total in 2000-01. Today, they account for a sixth. The share of the private sector has risen significantly in the last ten years.

Going by the stats, there is no problem in the corporate bond market because the private sector is able to raise funds, is not crowded out by public sector and there seems to be no lack of a well-developed market. 

The number of investors have also gone up over the last decade. Foreign institutional investors (FIIs), who had a limited exposure to corporate bonds in 2000-2001, are now allowed to invest up to $20 billion in Indian corporate debt (of which $5 billion is in infrastructure bonds).

Private insurers have come up significantly over the years and account for around Rs 35,000 crores of investments in corporate bonds.

Mutual funds have grown six-fold in fixed-income assets over the last decade and have become sizeable investors in corporate bonds.

Traditional investors such as LIC and government-sponsored provident funds have grown in size due to the fast paced growth of the economy.

The growth in the size as well as the depth of the corporate bond market suggests that there is nothing wrong with the market in general.

The market has seen new developments such as centralised clearing of trades to eliminate counterparty risk, introduction of repo (yet to take off but system is in place), compulsory reporting of trades and better valuation tools.

And the Reserve Bank of India is close to signalling the start of the credit default swaps (credit derivatives) market, the lack of which was taking issuers to Hong Kong where a well developed CDS market engendered better pricing.

So, on the face of it, all seems well with the corporate bond market.

Or is it?