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An alternative source of funds

The corporate bond market, or the private debt market as it is sometimes called, continues to languish in India. This is in sharp contrast to the equity market and the government securities market, the two markets relied upon by both the corporate sector and the government to mobilise resources. Since the early 1990s, in the wake of financial sector reform, several policy initiatives were taken to develop the financial architecture. In some areas such as payments and settl ements, the facilities available in India today are comparable to those anywhere. However, the benefits have gone only to the gilts and equity markets. Consequently, companies do not have access to a well developed alternative source for raising long-term money. Just as it was in the pre-reform days, there is an overwhelming reliance on bank finance and, to a lesser extent, on specialised financial institutions — such as those in infrastructure areas — and on the equity market. The experience of many other countries establishes the need to diversify the sources of long-term capital. In the Asian economic crisis of the late 1990s many companies in South East Asia were dragged into bankruptcy along with banks on whom they were totally dependent. A liquid bond market complements the banking system, helps companies minimise their risks, and enables them to tailor their requirements of capital in a much more flexible manner, thereby cutting costs. For policy makers, the interest rate structure in a well developed bond market can give important clues on interest rate expectations. Both retail investors and large investors such as mutual funds have been deprived of important investment avenues.

In a way, the state of the corporate bond market in India is typical of what obtains in many other emerging markets. Historically in India large projects had been funded by the all-India public financial institutions, such as IDBI, ICICI and IFCI. Commercial banks bridged the gap and provided working capital. With the conversion of these institutions into banks, a serious lacuna has emerged. As a rule, commercial banks have serious problems in lending for long periods of the kind required by, say, infrastructure projects. It is in the context of the huge funding requirements of infrastructure projects — estimated at some $475 billion by the Deepak Parekh Committee — that a case for developing the corporate bond has been made out. Policy initiatives have unfortunately not reflected those concerns. Two years ago, the R.H.Patil Committee made a number of valuable suggestions but progress on their implementation has been very tardy. Sooner rather than later, the absence of a well-developed private debt market may turn out to be a drag on industrialisation.

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