Equity are more popular than debt market in india, says Assocham

November 19, 2010 : Though all over the a well developed capital market consists of both the equity and bond market, in India equity markets are more popular and far developed than the debt markets whereas in developed economies bond markets tend to be bigger in size then the equity market. Indian debt market is composed of government bonds to the extent of 92% of the volumes; the corporate bond market is still at the nascent stage.

Although India has the largest number of listed companies on the capital market, the share of corporate bonds in GDP is merely 3.3%, compared to 10.6% in China 41.7% in Japan, 49.3% in Korea among others. Further, close to 80% of corporate bonds comprises privately placed debt of public financial institutions. The secondary market, therefore, has not developed commensurately.

SEBI has made efforts to facilitate trading of corporate bonds on the stock exchange platforms, however, government securities trading have turned out a better performance owing to several structural changes introduced by the Government and RBI.

The Assocham study “Indian Financial Markets- Roadmap 2020” indicates that companies raised Rs 2.12 lakh crore through corporate bonds in 2009-10, up 22.71% from Rs 1.73 lakh crore in 2008-09. India has witnessed a boost in trading in the recent past. Total trading in corporate bonds more than doubled from an average of Rs. 1,550 crore in October 2009 to Rs 3,356 crore in March 2010, as reported by the National Stock Exchange and the Bombay Stock Exchange.

Government decisions to increase the FII investment limit in Government Securities and Corporate Bonds by US $ 5 billion would open up new avenues for FII investment in debt and cater to the growth of debt markets in the country.... Read More

SEBI stipulation that all trades in corporate bonds would now be routed through stock exchange platform, would help in reducing settlement risk and reduce transaction costs.

The Study recommendations for reforms in the corporate debt market include - means to uniform stamp duty, screen based trading, clearing house settlement, increase in secondary market activity and thereby assist in transparent price discovery and avenue for early exits for investors and consequently also lead to more Issuers of long tenor debt.

There should be a gradual relaxation of investment restrictions and forced rule based buying on long-term investors such as insurance companies, pension funds and Banks. This will give the required flexibility in deciding the investments based on its merit.

Relaxing FII limits for corporate bond participation when needed. Allow greater participation for FIIs (Not just limited by their exposure) as it will help create liquidity. Interest-rate derivatives are needed to hedge rate risks, the largest macro-economic risk. Make interest rate futures available on a broader range of securities (both long- and short-term)

Credit trading is an essential prerequisite for the development of the corporate debt market. Regulatory reforms are required in this space keeping in mind the learnings from the International space.The current withholding tax of 20% should be removed to encourage investors to invest in debt securities.

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