Indian Corporate Bond Market – Waiting for Godot?

Corporate bonds, as a percentage of India’s GDP, are at an abysmal low. This is in stark contrast to the equities market which has seen tremendous growth over the last few decades. Corporate bonds in India add a mere 5.48% to GDP versus USA (90.27%), Japan (37%) and China (24.05%).

Source: BIS Quarterly Review and IMF World Economic Outlook Database

Growth of the corporate bond market is vital as it creates low cost investment opportunities for businesses apart from banks, and offers yield premium opportunities for investors. Did you know that the National Stock Exchange (NSE) was originally set up to facilitate bond trading? The picture today belies the fact.

How did this happen?

Corporate bond market in India – The premise

The bond market segment in the country predominantly consists of government securities. Corporate bonds capture a small slice of 4.74% of the debt market. YoY growth in corporate bonds is also slow – only 19% versus 90% in Treasury bills. Also, the existing corporate bond market in India is largely driven by banks and other financial institutions rather than infrastructure companies or the manufacturing sector (considered indicators of infrastructural growth in the country). The lack of participation has dampened corporate interest and media attention in corporate bonds, making bank loans the primary source of debt capital. This lack of liquidity also forces corporate borrowers to prefer private placements over public issues for bonds.

bonds as a percentage of gdp

Lastly, the RBI controls most of the bond market and is not in any hurry to loosen its control. Interestingly, there has never been a dearth of corporate bond buyers with foreign investors more than willing to put in their money into creditable bonds. There just hasn’t been much for them to buy.

Challenges facing the corporate bond market

Infrastructural improvements made to facilitate the equity market are conspicuously absent in the debt market space that has to contend with:

  • Reduced incentive of Indian banks as the statutory lending ratio of 23% requires them to put roughly a quarter of their deposits into government bonds
  • Illiquid securities
  • Low investor awareness
  • Lack of transparency – no live trading market or access to live pricing
  • Resistance from bond houses and debt arrangers

The future of corporate bonds

In February, Reliance Industries Limited [stockquote]RELIANCE[/stockquote] raised $800m via perpetual bonds from investors abroad at a coupon rate of 5.875% – a first strong move in a struggling national corporate debt market. In fact, all Indian issues that completed in Jan 2013 have been very well received and oversubscribed, demonstrating the strength of international capital markets for Indian corporate bonds.

Recently, the government decided to reduce withholding tax on infrastructure bonds – a positive move for the corporate bond market. Are these reforms too late in the day for the corporate bond market to thrive? I don’t think so. The Indian market is gradually opening up to foreign investors and larger corporate stakeholders. Once liquidity starts pouring in, corporate bonds are sure to become a critical pillar supporting India’s growth.

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