Just as times change, markets also keep evolving, sometimes altering their behaviour forever. After decades of waiting, Indian bond market is gearing for tectonic transformation – a huge movement equivalent to the 1994 moment when screen-based electronic stock trading began with setting up of the National Stock Exchange.
The benefits of this big leap from loans market to bond markets, for corporate borrowers as well as investors, and of course the government were plenty and led India to the developed markets league. This one single transition attracted billions of dollars in long-term fresh capital, which was much needed for building the country’s modern infrastructure, the sector with capacity to absorb that much size of the flows and also deliver sustainable returns to investors.
From April 2019, several companies, perhaps all large listed ones, are going to hit the Bond Street for their borrowing needs armed with freedom to price and structure their debt instruments; instead of queuing up at the banks with begging bowls for loans delays, which at times have proved fatal causing failure for certain honest entrepreneurs. At the same time, investors too will have a choice—whether to buy high grade bonds of Reliance Jio offering coupon similar to Government of India’s sovereign paper or invest in high-yield bonds of lesser-known companies. There will be a variety of instruments like zero-coupon, deep-discount and mortgage-backed all at market-determined rates. There is scope for innovation in structuring bond instruments and indices for benchmarking the same.
And these will be listed and freely tradable on the stock exchange like companies’ equity shares. Investors and their financial advisors are reasonably matured today who are intelligent with analytical tools and want to capture gains from asset price movements as interest rates and their outlook varies over time with change in economic winds. Investors are currently wedded to fixed deposits available in the market that do not have liquidity and at times are at the mercy of corporate borrowers even for repayment of maturity proceeds. Some companies that have gone for bankruptcy proceedings are examples where small depositors or investors have suffered the most.
Unlike in the current loan system where unwilling depositors are forcibly exposed to undesirable companies where bank’s monies have already sunk. This primarily has been one of the main reasons for allowing too-big-to-fail borrowers in the first place to raise large loans and thereby control, through questionable means, nation’s financial and other resources which could otherwise be productively utilised for industrial and societal development. Even when depositors are unwilling to lend money to a corporate borrower with lower credentials, but through bank loans, they are forcibly exposed to the same promoter because banks are always ready to give them loan.
When these corporates launch their bond offerings, investors have choice to invest with both eyes open, whether to put money or not. They can choose from either high-grade bonds or high yield bonds. Investors buying junk bonds will get market-driven automatic haircut by fall in bond prices and blame themselves.
Corporate debt’s date with bonds will make borrowers more responsible towards capital and investors, and lead to efficient resource allocation when and where needed. To prevent such financial misadventures, regulatory authorities and government too must own up responsibility. They should carry forward the initiative in the form of broadening the bond market and force large borrowers to tap only the bond markets.
Tectonic shift in behaviour of borrowers and investors will decidedly remove burden away from the government that is repeatedly called upon for banks re-capitalisation as corporate delinquencies rise. Besides, government can also save itself from the avoidable media blemish for interfering in capital market governance.
A bonus to the nation would be huge rise in trading volumes in bonds which is going to exceed that of the equity markets and thousands of new jobs in stock exchanges, depositories, rating agencies.
The author is managing director, Sun Capital Advisory Services Ltd.