Primary and Secondary Markets for corporate debt

The corporate sector can raise debt funds either through prospectus or private placement. A wide variety of debt instruments have been designed by this sector to raise funds in the primary capital market.

Within the initiation of reforms and the development of equity cult, the proportion of debt issues in the total capital issues declined in the subsequent years. In 1997-98, the proportion of debt issues to total capital issues increased to 63 percent due to sluggish equity market conditions. However, there was a decline in this was a decline in this proportion from 1998-99 to 2000-01. This trend reversed in 2000-02 during which the amount raised through debentures substantially increased by 125 per cent and the proportion of debt issues to total capital constituted 85 per cent.

Debt issues comprise of debentures and bonds. The proportion of bonds to total debt issues was around 98 percent, 96 percent and 84 percent in 1999-2000, 2000-01 and 2001-02 respectively. Convertible debentures were popular in 2001-02 as against non- convertible debentures which dominated the debt market in the preceding three years from 1998-99 to 2000-01. Earlier, 20-30 per cent of bond issues were bought out in nature while the rest was normal private placement. Bought out deals flooded the bond market in 2002. In a bought out deal, the entire issue is picked up by a single investor. It is unlike a private placement where a debt paper is sold to several investors. In June 2002, corporates raised Rs 1,200 crore through bought out deals. Corporates do not prefer the private placement route because in a private placement, the issuer has to circulate the information memorandum to different market players and keep the bidding open for about five days. During these five days, the market can change due to fresh political uncertainties, border tensions, or an interest rate view aired by a central banker. A bought out deal avoids all these and hence it has become a preferred route for corporates. In a bought out deal funds can be raised within a very short time and with little disclosure. Corporates such as Finolex Hindalco, Grasim, Tata Tea struck bought out deals with ISec, ABN Sewc, Citibank, and Standard Chartered bank respectively.

The corporate debt securities are traded on the WDM segment of NSE, OTCEI and on the BSE (w.e.f 9.1.1996) The secondary market for corporate debt has not yet fully developed in India. The volumes traded are quite low. On BSE and OTCEI the volume of turnover is quite low, but the volume of turnover has picked up on the NSE WDM segment.

The traded volume of debt was highest in the year 1997-98. A declining trend was witnessed in the subsequent two years but this trend reversed in 2000-01. The trading activity of banks, mutual funds and insurance companies has increased in recent years due to subdued equity market conditions. The per cent of traded volume of debentures to total turnover is abysmally low and owing to this, the size of the corporate debt market is small.

The corporate debt market has a large potential to grow. The following are the problems and the measures that need to be taken to solve the problems.

1) There is no transparency in this market and there is virtually very little information available. Most of the corporate bonds are privately placed and there is lack of a regulatory framework to protect the interest of investors from risks associated with subscription in this market. With proper regulatory framework, this market can develop further as an integral and important constituent of the primary market for raising resources.
2) The absence of a benchmark rate has restricted the development of new and innovative instruments in the debt market. There is a need to develop a benchmark or a reference rate.
3) The corporate bond market needs well capitalized market markers just like primary dealers in the government securities market. Market making should be encouraged to enhance liquidity.
4) Cooperative banks and charitable trusts are permitted to invest in corporate paper but permission is granted only on a case to case basis for each specific issue rather than on the basis of broad investment guidelines. These banks and trust should be permitted to invest in a good quality rated paper by laying down broad investment guidelines
5) Provident funds currently hold funds close to Rs 1,00,000 crore. These funds are invested a per prescribed norms in government securities, state guaranteed papers, public sector debt, and recently in corporate bonds, PFs are traditionally risk averse and hence have shied away fro investing in private sector bonds. These PFs can be encouraged to invest in private sector bonds by assuring them better return and safety.
6) The private placement of corporate bonds has restricted open market trading in these instruments. An active secondary market is needed for reaching a wider investor base, reducing borrowing costs, and lengthening maturities. Efforts should be made to activate the secondary market by increasing the number of players and instruments. A liquid and active corporate debt market can aid in industrial growth and reduce the pressure on institutional financing.