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A long neglected area

A vibrant corporate bond market has become closer to realisation with the capital market regulator, SEBI, announcing new guidelines for issuance of debt capital. Corporate bonds form an important but neglected part of the debt market. Over the past two months, the rules for making a public offer of corporate bonds have been simplified. While earlier two investment grade ratings from reputed agencies were required for accessing the market, just one rating — even if it is below investment grade — will suffice now. Disclosure requirements have been rationalised and certain onerous conditions attached to the issue of debt securities dropped without diluting the scope of regulatory oversight. Drawing heavily from the better-evolved regulation over equity issues, SEBI has made merchant bankers responsible for the exercise of due diligence and proper disclosures in the case of debt issues too. Companies whose equity shares are already listed can float corporate bonds for public subscription after complying with a minimum number of disclosures. That is because a great deal of information about such companies should already be in public domain. All these give a greater flexibility to the companies and reduce the time span of the bond issue process.

These and the regulatory measures announced by the Reserve Bank of India were long overdue. The relatively underdeveloped state of the bond market, or the private debt market as it is sometimes called, is partly due to the fact that, until just over a decade ago, companies did not have to raise debt capital from the market because all-India financial institutions such as the IDBI were giving them long-term finance. By the mid-1990s, most of these institutions had reoriented their roles, taking on a commercial banking character. Among the factors inhibiting the bond market’s growth, besides the complex rules governing the bond issue, is a lack of awareness among the investors of the benefits of a long-term, rated debt instrument. Given the volatile nature of equity prices today, the time for fixed income investment avenues is keenly felt. Infrastructure finance, especially, would require a large measure of debt capital to be raised through the corporate bond route. The requirement of compulsory listing where the subscription offer is made to 50 or more persons would help in making public issues of bonds more popular.

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