Developing Corporate Bond Markets in India: A Long Standing Dream

The corporate bond markets,plays a vital role in the development of an economy, as it provides stable, cheap, disintermediated, tailor-made mode financing to corporates. At around 12% of the GDP, the Indian Corporate Bond Market holds significant growth potential.

In this regard, in 2005, the Government of India had set up a High Level Committee on Corporate Bonds and Securitisation, under the directive of late Dr R H Patil, Founder and Managing Director NSE. The recommendations of the Report were accepted by the Finance Ministryat which point a slew of initiatives were introduced by the regulators, including SEBI and RBI. In the last 3 years, the bank loan market has been shrinking due to legacy asset quality concerns and limited capital availability. Considering the current limitations of loan market and growth capital requirements, the development of a vibrant corporate bond market especially for private sector companies, holds the key to future fund requirements for the country. Not only would it aid future growth requirements, butwould also reduce the dependence of Indian corporates on the banking sector
The government and regulators have taken serious view of this situation and the same has been observed from recent initiatives undertaken in the last one year

Table 1: Recent regulatory initiatives

Time Scale

Initiatives undertaken



  1. Budget amends Income Tax Act to provide for income tax treatment of REITs; lays foundation for REIT guidelines

  2. RBI circular permits Banks to raise Long Term Bonds specifically for financing Infrastructure & Affordable Housing

  1. Tax incentives crucial to success of REIT

  1. Immediate success with ICICI Bank first one to issue these Bonds although inter-bank subscription limited its success


SEBI issues final guidelines on Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (Infra InvIT)

REIT guidelines notified


SEBI issues draft guidelines on issuance Municipal Bonds [Approved by SEBI Board recently and expected to published soon]

Market potential of INR 450 Bn. If treated at par with Central or State Government securities for SLR / other regulatory permissible investment, it can open up the Muni Bonds immediately


  1. Budget removes capital gains tax on sponsors and brings listing of REITs at par with an IPO

  1. Other Key budget measures include reintroduction of tax free bonds, gold bonds and IFC norms

  1. Areas such as SPV level corporate tax & DDT and applicability of MAT on transfer to SPV need to be addressed to open up REIT markets

  2. Tax free and gold bonds expected to attract significant retail participation


  1. RBI circular permitted IDF-NBFC to invest in Infrastructure Projects having no Project Authority without the Tri-Partite Agreement

  2. Ministry of Finance Gold Monetisation Scheme notified

Changes to IDF-NBFC norms by Income Tax Authorities maintaining tax exempt status and Rating Agencies of the proposed changes would be crucial

# Finance Bill has been passed by both the Houses (LS-Apr 30, 2015; RS-May 07, 2015)

The above initiatives were supported by record FII inflows and peak mobilisation by debt mutual funds. This growth was fuelled by fall in commodity prices, rally in global bond markets and easy monetary policies by monetary authorities

Indian private sector bond market: A Challenge with huge Growth potential
India has all the basic ingredients required to build a robust corporate bond market for private sector enterprises. It has:

  1. Developed Government bond markets
  2. Experienced and credible rating agencies
  3. Dependable national stock exchanges
  4. Established Depositories
  5. Adequate talent pool, and
  6. Developed financial intermediaries such as mutual funds, insurance companies, provident / pension funds and retail distribution channels

However, despite the record inflows last year, Government/State/Public Sector Securities continue to dominate the Indian bond markets and the creation of a vibrant bond market for private sector companies is yet to catch up to its full potential

Corporate Bond Market: Requires Boost
Participation from coreinvestor segments such as Banks,Insurance, Provident Funds, Pension Funds and Retail Investors in private sector bonds is still muted due to risk averse approach being adopted by Investors,as well as significant supply ofGovernment bonds

Table 2: Investor Segments and Investment Pattern

Investor Segments / Authority

Investment Pattern



  1. Only 10% permitted in non PSU corporate bonds that comply with AAA rating, high net-worth and profitable track

  2. Latest changes proposed too stipulate minimum credit rating of “AA”

Only select few private companies qualify under the criteria

IRDA (Insurance Companies)

  1. Investment limit 15%

  2. Investment in a Co’sbond not to exceed 10% of its TNW

Top 5private life insurers have <10% investment in non PSU bonds


  1. Max 40% can be invested in min AA rated instruments

Government thrust on NPS would have led to more participation but recent AA stipulation will limit participation


  1. No restriction on tenure & credits

  1. High SLR requirements (21.5%) limit the appetite for further participation in bond markets

  2. Further corporate lending in form of loans is an evolved practice &offers regulatory benefits over bonds

Retail Investors

  1. No restriction

Public debt issuances continue to be limited due to stiff regulatory compliances

Mutual Funds

  1. Mutual Funds continue to deepen the corporate bond market

  2. Recently, funds have significantly increased their presence in A rated companies

Sustained increase in credit funds can play active role in development of bond markets

Securitisation Market

Witnessed significant growth initially but regulatory changes / opinions have limited the potential

Regulatory support can push up securitisation volumes

#TNW=Tangible Net Worth

Taxation policies can be considered in the larger interest of developing bond markets
Initiatives to developcorporate bond markets can be supplemented with tax incentives. The capital market segments such as securitisation and REIT can benefit significantly from clarity / incentives in taxationpolicies

Long tenures and AA credits have few takers [AA is investment grade in bond market]
Capital markets continue to be dominated by AA or above placements due to limited risk appetite of investors. Further, the limited participation of provident/pension/insurance funds and short term fund availability with debt mutual funds (only 14% AUM of non-equity mutual fund schemes as on Mar’15 has more than 2 year maturity), sectors such as infrastructure arestrained by lack of long term funds

Infrastructure Debt Funds (IDF): Emerging solution for Infra projects
The combined efforts of regulators such as SEBI, RBI and Income Tax saw successful emergence of IDF under both the NBFC and MF mode. Recent changes in RBI IDF NBFC guidelines are expected to boost the market and acceptance of these changes by Income Tax authorities and Rating Agencies will be crucial.

IDF-MFscan scale up by seeking more contribution from foreign / domestic insurance / pension / provident funds,however the recently enhanced scope for IDF NBFC may increase competition

SustainedTransformation to realise Dreams
The convergence of all vital pieces needed to develop a vibrant corporate bond market will not just open new stable borrowing avenues for private corporates, but will also offer opportunities to investors to earn higher returns
The following key areas being pursued aggressively by the Government,will decide the future growth in corporate bonds:

  1. Widening of investor base: Regulatory relaxation for EPFO/Pension /Insurance Funds would not only provide liquidity but also provide much needed long term funds to sectors such as Infrastructure and Housing
  2. Newer financing avenues such as IDFs can play an important role in reviving investments in the infrastructure sector,reduce banks concentration and free up their capital for funding future growth
  3. Municipal Bonds: While guidelines for Muni Bonds have been notified, their inclusion in at par with Central / State Government securities may lead to instant success and support development of much needed local urban infrastructure
  4. Securitisation: Addressing support required from taxation officials can drive the growth in Securitisation / REIT / Infra Inv IT Trustsand would open up investment avenues for Real Estate/Infrastructure/NBFC

Clearly, after a decade of efforts taken by the Government, Indian corporate bond markets are at an inflexion point andpoised to realise their Dreams

Vishal Gabda

Assistant Vice President with Project Debt Syndication Group, IL&FS Financial Services Ltd



Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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