Govt may allow bank guarantees to deepen corporate bond market

Budget 2011-12 is likely to announce significant measures to deepen the corporate bond market. Among the several measures on the government's agenda is allowing banks to provide guarantees for bonds issued by companies.

A senior finance ministry official said the suggestion, which had come from the country's top bankers, is under active consideration.

He added that the bankers have pointed out to Finance Minister Pranab Mukherjee that such a move could act as a catalyst for corporate fund raising.

Two years ago, State Bank of India had guaranteed a Rs 4,500-crore bond issue by Tata Motors.

The Reserve bank of India had initially objected to the backing, as it felt it distorted the market. However, SBI was later allowed to go ahead with the guarantee.

Sources familiar with the developments said other measures may be on the anvil to increase the participation of foreign institutional investors, whose presence in the bond market is limited due to a ceiling on their investments.

The current cumulative sub-ceiling on investments in corporate debt is $0.5 billion.

In the absence of diverse investor interest and an established institutional mechanism, the corporate bond market in India is still struggling.

Despite several rounds of discussions at various levels in the past few years, the government has done little to give the market a fillip.

Prithvi Haldea, CMD, Prime Database, pointed out that one of the reasons for the corporate bond market still being shallow is the lack of retail participation.

"Products should be developed for retail participation. If corporate bonds can give them better returns, combined with safety, then small investors will certainly come," he said. He felt the government could play a part here by introducing special incentives.

According to Sebi data, corporate bonds are a Rs 3.5-lakh crore market. Haldea said it is necessary to institutionalise online trading in this segment on the National Stock Exchange and the Bombay Stock Exchange. This would instil investor confidence, he added.

Value Research CEO Dhirendra Kumar, however, is not too optimistic that the government's steps will enliven the corporate bond market.

"This can happen only when you have a large number of both short-term and long-term investors," he stressed.

Kumar pointed out that currently, investors buy bonds only to hold until maturity. "The corporate bond market is deep in the US because of the diverse investor participation, which is missing in India," he said.

According to him, there is no certainty that bank guarantees for these bonds would activate the secondary market.

He also felt that strengthening an institutional mechanism for corporate bonds was necessary to improve the current scenario.