Corporate Bond Markets in India


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business. When one buys a corporate bond, one lends money to the "issuer," the company that issued the bond. In exchange, the company promises to return the money, also known as "principal," on a specified maturity date. Until that date, the company usually pays you a stated rate of interest, generally semiannually. While a corporate bond gives an IOU from the company, it does not have an ownership interest in the issuing company, unlike when one purchases the company's equity stock.
Recent Initiatives for further Development of Corporate Bond Markets
(i) To permit banks to take limited membership in SEBI-approved stock exchanges for the purpose of undertaking proprietary transactions in the corporate bond markets.
(ii) To enhance liquidity in the corporate bond markets the Insurance Regulatory and Development Authority (IRDA) has permitted insurance companies to participate in the repo market. The IRDA has also permitted insurance companies to become users of credit default swap (CDS).
(iii) In consultation with the Technical Advisory Committee on Money, Foreign Exchange, and Government Securities Markets, it has been decided to reduce the minimum haircut requirement in corporate debt repo from the existing 10 per cent/12per cent/15per cent to 7.5 per cent/8.5per cent/10 per cent for AAA/AA+/AA-rated corporate bonds.
(iv) MFs have been permitted to participate in CDS in corporate debt securities, as users. MFs can participate as users in CDS for eligible securities as reference obligations, constituting from within the portfolio of only fixed maturity plans (FMP) schemes having tenor exceeding one year.
(iv) Revised guidelines on CDS for corporate bonds by the RBI provide that in addition to listed corporate bonds, CDS shall also be permitted on unlisted but rated corporate bonds even for issues other than infrastructure companies.
(v) Users shall be allowed to unwind their CDS-bought position with the original protection seller at a mutually agreeable or Fixed Income Money Market and Derivatives Association of India(IMMDA) price. If no agreement is reached, then unwinding has to be done with the original protection seller at FIMMDA price.
(vi) CDS shall be permitted on securities with original maturity up to one year like CPs, certificates of deposit, and nonconvertible debentures with original maturity less than one year as reference/deliverable obligations.
 
 
 

Friday, 14th Mar 2014, 07:59:03 PM

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