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Corporate Bond Market:

Never ending issues and
challenges
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India
has
been
historically
witnessing
the
underdevelopment scenario of bond market. There has
been lots of buzz going around the Indian corporate bond
market. In the earlier write-up we discussed the changes
brought to streamline the regulatory regime surrounding
the Indian bond market. Recently, the Reserve Bank of
India came up with a detailed analysis on "Corporate Bond
Market in India: Issues and Challenges".
In India, the equity market is more vibrant and matured as
compared to bond market; however, the same is in
contrary to the other economies of the world, where bond
market is more vibrant. In order to boost the Indian
market, a High-level Expert Committee on Corporate
Bonds and Securitizationwas formulated under the
chairmanship of Dr. R.H. Patil with a mandate to identify
the factors inhibiting the development of an active
corporate debt market in India and recommend policy
actions necessary to develop bond insurance in the
country. In
early
2013, RBI advised banks to issue
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On similar lines the government official released a statement saying,"We are examining if
banks can be mandated to raise part of their requirements through public issue to retail
investors". Further, in the Union Budget 2016-17, the Finance Minister announced various
measures to facilitate deepening of corporate bond market. He further added that,"the
enactment of Insolvency and Bankruptcy Code would provide a major boost to the development
of the corporate bond market".
In this write-up, we intend to discuss the issues and challenges still faced by the corporates at
the time of issuance of bonds in the market.
Performance of the bond market
The Indian bond market has witnessed its highest peak of public issuance in the year 2013-14
amounting to INR 42382.97 crores and private placement in the year 2015-16 amounting to INR
458073.5crores. The table below reflects the issuance of bonds and provides a comparison to
understand the highs and lows of the history of the bond market in India.
Issues and challenges
The major investors in the bond market are viz., banks, financial institutions, insurance
companies, mutual funds, pension funds and foreign institutional investors. However, for each
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categories there seems to be restrictive conditions withwww.taxmann.com
respect to

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Banks:
In order to understand the restrictions on the investment in the corporate bonds, let us first
analyse the two important terms used in the prudential guidelines, i.e., SLR investments and
non-SLR investments.
SLR investment every bank is required to maintain certain portion of their deposits in liquid
assets. These liquid assets can be cash, gold or government securities. SLR is maintained by
the bank to control the expansion of bank credit and the ratio is determined by the Reserve
Bank of India. Currently, the prescribed statutory liquidity ratio for banks is 21 per centof their
deposits.
Non-SLR investments Other than granting loans, the banks are allowed to invest in capital
market instruments such as stocks and bonds issued by public and private sector companies
and commercial papers. Further, banks were also permitted to invest in mutual fund schemes.
The prudential norms issued by RBI for Classification, Valuation and Operation of Investment
Portfolio by Banksprovides for restriction on non-SLR investments. Para 1.2.9 of the prudential
norms provides for an restriction on bank's investment in unlisted non-SLR securities which
shall not exceed 10 per cent of its total investment in non-SLR securities as on March 31, of
the previous year, and such investment should comply with the disclosure requirements as
prescribed by SEBI for listed companies. The aforementioned capped percentage shall also
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Further, if the investment is on account of investment in Securitisation papers issued for
infrastructure projects, and bonds/debentures issued by Securitisation Companies and
Reconstruction Companies set up under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and registered with the
Reserve Bank then an additional cap of 10 per cent is permitted on such investment. (Para
1.2.10).
Insurance Companies:
The Insurance Regulatory and Development Authority in consultation with the Insurance
Advisory Committee amended the Insurance Regulatory and Development Authority
(Investment) Regulations, 2000 (hereinafter referred to as "Investment Regulations") by way of
an Insurance Regulatory and Development Authority (Investment) (Fifth Amendment)
Regulations, 2013 (hereinafter referred to as "Fifth Amendment Regulations") dated February
16, 2013. The investment restrictions are as follows:
Regulation 9 of the Fifth Amendment Regulation provides for substitution in the Investment
Regulations wherein the corporate bonds or debentures rated not less than AA or its equivalent
and P1 or equivalent ratings for short term bonds, debentures, certificate of deposits and
commercial paper, by a credit rating agency, registered under SEBI (Credit Rating Agencies)
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Regulations,
would be considered as 'Approved Investments'.

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