Seven years after India’s policy makers agreed on steps to expand a corporate bond market that’s less than a 10th the size of China’s, they’re still talking about implementing most of them.
The government is seeking to simplify rules and taxation to attract investors and boost trading in municipal debt, asset- backed securities and contracts that insure against credit risk, Economic Affairs Secretary Arvind Mayaram said at conference in New Delhi on Nov. 9. These proposals were made in 2005 by a panel led by Ramchandra H. Patil, who founded the National Stock Exchange of India Ltd., and included the heads of the central bank and the capital-market regulator.
A doubling of bond sales by Indian companies in five years to 1.8 trillion rupees ($33 billion) in 2011 was dwarfed by a six-fold surge in issuance in China to 2.69 trillion yuan ($432 billion), data compiled by Bloomberg show. Foreign holdings of rupee-denominated notes are now at $32.5 billion, or less than half of the amount allowed, even after Prime Minister Manmohan Singh more than tripled the investment limit since 2009.
“People seem to have had given up on Indian bonds,” Philippe Petit, a Singapore-based senior investment manager at Pictet Asset Management SA who helps manage $24 billion in emerging-market debt, said in an interview yesterday. “They should do away with the quota system and other restrictions, cut the withholding tax, and then you’ll see massive inflows.”
In its December 2005 report, the so-called high-level committee headed by Patil, who died in April, called for uniform provincial duties on company bonds, easing of taxes and fiscal concessions for municipal debt to encourage investors and issuers. The panel also recommended setting up settlement and trading systems for corporate notes and backing securities with features such as guarantees and cash flows to cut credit risk.
“The 2005 report still remains a wish list,” Prithvi Haldea, chairman of New Delhi-based research firm Prime Database who was part of the panel, said in a phone interview yesterday. “The report should be deliberated seriously with market stakeholders and implemented.”
Developing the company debt market is vital to the success of India’s goal to attract $1 trillion of funding for roads, ports and power plants by 2017 and reviving the economy. The central bank predicted last month that expansion will slow to 5.8 percent this fiscal year, which would be the smallest gain in a decade, according to official data.
India’s opposition parties are threatening a no-confidence vote as the government will try to push through the nation’s biggest opening to foreign investment in a decade in the parliament session from today through Dec. 20. Singh in September opened retailing and airlines to foreigners, pared fuel subsidies and cut a tax on companies’ overseas debt in a burst of policy making after two years of legislative gridlock.
“We are very keen to develop the corporate bond market,” Mayaram said. “This will require several things. One is strengthening the legal framework for regulation of corporate debt by amending rules. Also removal of legal and regulatory constraints for nascent products such as covered bonds, municipal bonds, credit default swaps, credit enhancement and securitization receipts.”
Policy makers have implemented some of the committee’s proposals, introducing repurchase contracts based on company notes and allowing the formation of infrastructure debt funds.
The failures of market segments such as securitized debt, municipal notes, credit-default swaps and bond futures suggest they haven’t done enough, according to SJS Markets Ltd.
Sales of asset-backed securities in India slid 43 percent in five years to 366 billion rupees in the 12 months ended March 31, according to ICRA Ltd. (ICRA), the local unit of Moody’s Investors Service. Restrictions by the Reserve Bank of India, which released final guidelines for securitized debt this year, will boost risk for banks in some transactions, leading to a further decline in issuance, the credit assessor said in a report in May.
India hasn’t seen a municipal bond sale since 2008, data compiled by Bloomberg show, when Vishakhapatnam Municipal Corp. issued notes due 2017 at 11 percent. There has been little trading in rupee-denominated credit-default swaps since they were introduced a year ago. Government debt futures also have had almost no activity since an attempt in 2009 by the central bank and the Clearing Corp. of India to revive the market.
China, which started efforts to develop a local debt market after India, is now moving faster.
Guo Shuqing, the 56-year-old head of the China Securities Regulatory Commission, has taken steps to consolidate regulatory power over bonds since he became chairman last year. He’s set up an office to study new products, and in May the CSRC, the equivalent of the U.S. Securities and Exchange Commission, said it’s considering introducing municipal bonds. In June, Guo started a program to allow small and medium-sized companies to sell debt comparable to speculative-grade bonds.
Companies in Asia’s largest economy issued the equivalent of $582 billion in local-currency debt so far in 2012, compared with the $34 billion raised by Indian borrowers, according to data compiled by Bloomberg.
India’s relatively high yields and its potential for infrastructure development and economic growth are attractions for international fixed-income investors, according to William Streeter, a Singapore-based infrastructure debt adviser at Westpac Banking Corp. (WBC)
Rupee-denominated company debt rated AAA by Crisil Ltd., the local unit of Standard & Poor’s, pay 9.05 percent, according to data compiled by Bloomberg. Comparable notes offer 4.88 percent in China and 1.25 percent in the U.S. Ten-year sovereign bonds in India yield 8.21 percent, compared with 3.53 percent in China and 1.68 percent in the U.S.
The yield on the 8.15 percent debt due June 2022 was little changed today, offering an extra amount of 653 basis points over Treasuries.
“Investors want to invest in those assets that produce economic and social benefits to people and infrastructure projects provide that function,” Westpac’s Streeter said in an interview on Nov. 9. “Yields on the projects make Indian debt attractive to overseas investors.”
Indian sovereign notes returned 9.11 percent this year, trailing the 11.39 percent earned by Indonesian securities in the best performance among Asia’s 10 biggest markets, according to indexes compiled by HSBC Holdings Plc. The rupee slipped 0.1 percent to 55.16 per dollar today.
Bond risk for Indian companies has slid this year. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers declined 160 basis points to 301, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
“The Indian market is reasonably complex and doesn’t seem a free market,” Hemant Dharnidharka, head of credit research at SJS Markets in Bangalore, said in an interview on Nov. 20. “Overseas investors have to deal with issues such as local registration and applying for quotas that lapse if not used within a certain period. There have been improvements too. Seven years ago, foreigners couldn’t invest at all but now they can.”
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