MUMBAI: Indian bond markets fare the worst among emerging economies in facilitating fund raising by companies that are less than top-rated, data from Acuite Ratings & Research show.

The share of AAA-rated bonds in India is highest compared to emerging market peers including China (50%), Malaysia (40%), Thailand (48.7%), Indonesia (49%), as well as the US (0.7%).

In India, the share of top-rated company bonds is at 70.9%.

Pension funds and insurance regulators are key to narrowing the gap between top-rated and non-AAA rated bonds, according to experts.

India’s two largest institutional debt investors — Employees’ Provident Fund Organisation (EPFO) and LIC of India — are not seen betting on non-AAA rated corporate papers. Market regulators including the Insurance Regulatory Authority of India (IRDAI) have not yet relaxed norms for investment in lower-rated debt securities.

“There is a multiplicity of regulations from different regulators that govern the domestic bond markets,” said Suman Chowdhury, Chief Analytical Officer at Acuite Ratings. “Close co-ordination between the regulators and consistency among different regulations will help to diversify the investor base and strengthen the markets.”

Bond market is the only way for long-term funding, as banks have asset-liability mismatches and capital constraints, he added.

Source: Acuite Ratings


In fact, Securities and Exchange Board of India (SEBI) chairman Ajay Tyagi last week called for immediate reforms of the corporate bond market.

“Due to the events during Covid-19, we have unfortunately seen retrograde progression in the credit markets, funds buying non-AAA papers have suffered,” said Rahul Banerjee, CEO at BondEvalue, a Singapore-based company.

In April, Franklin Templeton mutual shut six schemes, citing redemption pressure and little liquidity in the bond market.

“The US Fed showed the way when it stepped in to buy both bonds and Bond ETFs including Junk bonds, this was the pivotal move that restored investor confidence,” Banerjee said.

Last month, the US Federal Reserve said it would buy shares of Exchange Traded Funds that include some junk bonds. This lifted investor sentiment, triggering a rally in US junk papers.

“Transparency of prices is the lifeblood of a credit market,” Banerjee said.

India needs a robust recovery mechanism and transaction transparency to make lower-rated bonds popular, he added.

Although the development of the corporate bond market has been widely discussed for over a decade, lower-rated companies continue to face difficulties in raising money via bond sales.

The corporate bond market has, however, expanded steadily.

The outstanding corporate bonds have grown to over Rs 32 lakh crore as of June, from around Rs 8 lakh crore in June 2010.