Paper on large cos sourcing 25 per cent of finance needs from bond markets soon: SEBI

The move follows the Budget 2018 proposal in this regard, and is aimed at part-funding the huge investments needed in the infrastructure space which is projected at USD 4 trillion over the next decade, SEBI chairman Ajay Tyagi said.

He also said the regulator has not received any definitive open offer proposal from the Life Insurance Corporation (LIC) on its plan to take over the crippled state-owned lender IDBI Bank.

"We have not received any concrete proposal in this regard," Tyagi told reporters.

The move assumes importance as the banking sector is in deep morass following a massive spike in bad loans which is hovering around 12 per cent of the system now. This has made banks, especially the state-run lenders, wary of lending to low-rated corporates, and the resultant spike in the demand for good quality debt papers from corporates.

"The bond market has a huge potential to grow, which will need a robust secondary market. We will soon come out with a consultation paper on making it mandatory for large companies to source a quarter of their financing needs from the bond market. Final guidelines will be drafter in consultation with all the stakeholders," said Tyagi.

He said this will go a long way in developing a robust secondary market for the debt segment.

It can be noted that the corporate bond market is valued at around USD 290 billion, which is only around 17 per cent of GDP, way lower than equity market at 80 per cent.

"Given the relatively nascent stage of development of the bond market, such a framework has to be relatively a soft-touch approach, and will be finalised in consultation with stakeholders soon," Tyagi said while addressing a conference on corporate bond market organised by Assocham.

Noting that lot of things need to be done for increasing liquidity in the secondary market, he said that SEBI "in consultation with the Reserve Bank and government, and will take steps to enhance a secondary market for corporate bonds, so that liquidity improves."

The repo platforms launched by the BSE and NSE for tripartite repurchase of corporate bonds is expected to improve liquidity of and investor appetite for these securities, which in turn will boost the corporate debt market, Crisil said in a report today.

While private placement of corporate bonds have shown uptake especially since FY17 onwards, there are genuine concerns about liquidity in the secondary market, Tyagi said.

He said the secondary market products such as interest rate futures, credit default swaps, repo and others have to be made more attractive to the participants to develop a secondary market.

"The efforts made in development of private placement of bonds have to be necessarily complemented with increase in liquidity in the secondary market," he said.

Tyagi noted that stress in the banking sector has helped many corporates raise funds from debt and this is one of the reasons for the increased volume in the bonds market from electronic bidding platform in the recent years.

"Clearly there is an opportunity to deepen the bond market amidst the present NPA crisis. Though the RBI intervention is a step in the right direction, its effectiveness is yet to be measured," said Tyagi.

He also said loan bond arbitrage has to be removed by measures such as allowing banks to classify and re-classify bonds and loan assets into held-to-maturity or available-for-sale buckets, based on their declared intention rather than automatically based on legal documentation.

The SEBI chairman also noted that with the Insolvency and Bankruptcy Code coming in to force, it has addressed default risk of bonds to a large extent as bondholders are kept on higher priority.

"In the medium term, this would facilitate deepening of bond market. But researchers should keenly watch how this plays out in the next three to five years, how the bond market as a percentage of GDP grows, which as of now is at about 17 per cent," the SEBI chief said.

He also noted that setting up of a credit enhancement fund, as announced in the Budget 2017, would facilitate raising of bonds by the infra companies.