If there is scepticism about India sustaining 7 per cent GDP growth, it stems from the country's crumbling infrastructure. But financing infrastructure remains a constraint because equity seems to be the major option in raising resources.
Financing greenfield projects, which is what infrastructure with long gestation periods is all about, is like converting investors in equity into venture capitalists.
Flogging the equity sector to finance infrastructure could lead to annihilation of the internationally efficient segment of the securities market.
Further, in an environment where too much money chases too few scrips, investors inevitably fall prey to even non-serious entrepreneurs.
Unfortunately, the other leg of the securities market -- corporate debt -- remains primordial. The Indian debt market is still only wholesale, and efforts to encourage retail participation have neither been serious nor encouraging.
In 2003-04, the corporate sector raised Rs 52,752 crore (Rs 527.52 billion) through issues of debt securities, of which Rs 48,428 crore (Rs 484.28 billion) were privately placed and the share of debt in resource mobilisation was 74.75 per cent.
In fact, the current state of the debt market (dominated by private placements) hangs as a systemic risk over the financial system.
It is a happy augury that the finance minister in his last Budget speech announced the government's intention to focus on the corporate debt market; a committee to go into the issues involved and give recommendations, has also been appointed.
The issues hindering the development of the debt market can be broadly classified into product offering, issuance, listing, trading, and clearing and settlement.
A range of products provides, among other things, flexibility to issuers and investors in asset liability management, and facilitates integration of the domestic market with the global setting.
The introduction of interest rate options and swaps, in addition to interest rate futures and the development of a junk bond market, along with a corporate bond index, are fundamental to fostering vibrancy.
The other requirements are building the yield curve, corporate bond lending and borrowing, and repos. To increase liquidity for the bonds of less-known or infrequent issuers, there is a need to encourage the insurance industry to market bond insurance, which is quite common in developed markets. In fact, in the US four companies focus mainly on bond insurance.
Some fundamental ingredients are missing in the Indian micro structure, like standardisation of the day count convention, quotes, and yields.
There has to be uniformity in the market place along with standard specifications for the different parameters. The day count convention is used to determine the number of days between coupon dates, important in calculating the accrued interest and presenting value when the next coupon payment is less than a full coupon period away.
This may appear to be elementary, but unfortunately the problem does exist. In order to exemplify the point, whereas for dated government securities the market follows the 30/360 day count convention (i.e. each month is taken to have 30 days and a year 360 days, irrespective of the actual number of days in the month or the year), the corporate bond market does not follow any specific convention, leading to confusion in calculating accrued interest.
Further, while a majority of issuers follow the actual/365 day count, certain big issuers like the Indian Railway Finance Corporation follow a slightly different system.
There is serious concern amongst market participants with regard to the current disclosure regime, especially the efforts required by way of disclosures by companies that frequently issue debt paper.
In case a master-listing document for debt securities is put in place, to which the issuer can attach details of the pricing of each issue and update Schedule I for every fresh issue, many operational hassles can be obliterated.
The format prescribed for the annual report could be adopted for disclosure with regard to litigation and appeals, items like contingent liability, risk factors, and promise vs performance.
Similarly, incentives like reduced stamp duty, listing fees and demat application charges for reissued bonds will motivate issuers to access the market and list debt paper. Fluctuations and the thinning of interest rates make time and cost of great essence in the matter of raising debt capital.
The development and vibrancy of a debt market requires the trading of debt instruments on an exchange platform that offers greater transparency, wider participation and improved liquidity.
Though trading in corporate bonds and government securities was launched with fanfare, it has not taken off for a variety of reasons.
A unified trading platform, reduction of the minimum tradable market lot, market making and permitting financial institutions to participate are crucial in developing a secondary debt market.
Further, doing away with the counter party limits for corporate bonds for each secondary market transaction at the exchange, along with the removal of the single broker stipulation, will greatly help. Alternative tools for risk management, which do not impact volumes, and therefore vibrancy, can be marshalled.
Clearing and settlement are greatly facilitated if there is one clearing corporation/agency. If there is more than one, as is currently the case, it must be ensured that they talk to each other in real time and provide an environment similar to the equity segment.
One of the major arguments advanced against trading on the exchange platform is the length of the settlement cycle. While this has contracted rapidly to T+2, it is a day longer than the OTC trade cycle of T+1.
With match making conducted on the phone, it is not certain whether T+1 or T+0 actually obtains for the majority of transactions.
The Reserve Bank of India has been working assiduously on real time gross settlement and it should be possible to move to T+1 for the debt market, facilitated by rolling settlements and dematerialisation of securities.
Even though the outstanding issues in the way of developing a vibrant debt market are quite a few, they are not intractable. Given the will, it should be possible to tackle all of them.
A developed debt market will inter alia facilitate fund-raising for infrastructure and provide an incentive to FIIs to stay invested in India if and when the down cycle in the equity market takes place, thereby marginalising systemic risk posed by today's inflow of portfolio money.
The author is the former chairman of the Securities and Exchange Board of India (Sebi).
