Know about corporate bonds

The country’s nascent[ney-sunt(beginning,शुरुवाती)] corporate bond market has seen extremely limited retail investor participation till now. In a bid to reverse this trend, the RBI is considering a slew of options that include encouraging issuance of zero coupon bonds, providing clarity on taxation issues, including the provision of special quota for retail investors in debt issues and providing reduced transactions costs for retail investors.

A well-developed corporate bond market is widely seen as a means of addressing the travails[tru'veyl(effort,प्रयास)] of the existing bank-dominated financial system.

In India, total issuance last year was worth less than 3 per cent of GDP, which places the country below most of its Asian peers with the sole exception of Indonesia.

What is corporate bonds

Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a number of purposes, such as setting up a new plant, buying equipment, or investing in organic growth of the business. When investors buy a corporate bond, they effectively lend money to the issuer, or the company that issued the bond. In exchange, the company promises to return the principal amount on a specified maturity date. Until that date, the company usually pays a stated rate of interest, generally semi-annually.

In recent months, the corporate bond yields[yee(-u)ld(return,मुनाफा)] have seen a hardening trend despite growing expectations that the RBI will continue to maintain an accommodative monetary policy stance. A downgrade of Jindal Steel and Power Ltd followed, creating more turmoil[tur,moyl(violent disturbance,खलबली)] in the corporate bond market.

Apart from these short-term worries, continuing lack of activity in India’s bond markets stem from the fact that a majority of new bond issuances are concentrated in the 2-5 year tenor.Reissuance of bonds has not picked up and the lack of functional trading platform with Central Counter Party facility like NDS-OM — a screen based electronic anonymous order matching system for secondary market trading in Government securities owned by RBI — impedes[im'peed(block,बाधित)] the growth of secondary market.
RBI Deputy Governor Harun R Khan, in an October 27 address at a FICCI event in Mumbai was emphatic in his assertion that the development of an efficient and robust[row'búst(strong,मजबूत)] bond markets was a challenge globally and only a few jurisdictions can claim to have genuine local currency bond markets.

Steps such as putting in place an efficient trading platforms for corporate bonds could make a difference in increasing the penetration[pe-ni'trey-shun(entry,प्रवेश)] of these instruments. But that, by itself, may not be adequate[a-di-kwut(enough,पर्याप्त)]. NSE, for instance, has developed a dedicated trading platform for privately placed corporate bonds but there is trifling[trI-f(u-)ling(negligible,नगण्य)] activity on this platform.

On the positive side, the RBI is already working on addressing some of the market infrastructure issues, including development of an electronic platform for repo in corporate bonds. ‘Market making’ in corporate bonds, according to Khan, has proved to be a challenging issue, particularly the funding of brokers

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