Presenting the General Budget for the year 2008-09, Union finance minister Palaniappan Chidambaram said that he planned to enhance the tradability of domestic convertible bonds by putting in place a mechanism that will enable investors to separate the embedded equity option from convertible bonds and trade them separately.
“I intend to encourage the development of a market-based system for classifying financial instruments based on their complexity and implicit risks,” he said. He said that these proposals were in line with his earlier Budget announcement in 2006 announcing that the RH Patil Committee report will be implemented and an exchange-traded market for corporate bonds be created.
Reacting to the Budget proposal on the debt market, RH Patil, chairman of Clearing Corporation of India (CCIL) said that the finance minister’s announcement was a welcome step. “Now, Sebi has to act to make these proposals a reality,” he said.
In line with the finance minister and Patil, Sebi also seems to have geared up to intensify its attempts to spearhead the corporate debt market.
TC Nair, whole-time member, Sebi, working on the corporate bond market said, “The move by the FM in his Budget will definitely see the Indian bond market taking off in the next eight to 12 months. The last hurdle of differential rate of stamp duty with different states will also be tackled as FM has requested empowered committee of state finance ministers to closely work with the Centre to develop truly pan-India bond market."
However, there is mixed response among market participants on the Budgetary proposal. One section is of the opinion that the talk on developing corporate bond market has been going on for a long time. Sandeep Bagla, CIO, fixed income, AIG Investments, said that one can come to know about the impact of these proposals on the debt market and mutual fund industry only once these proposals become a reality.
However, the bond market rallied by four basis points following the Budget announcement because the government’s borrowing numbers are lower than market expectations.
On the other hand, Sandesh Kirkire, CEO, Kotak Mutual Fund said that the Budget proposal on the corporate bond market and other related issues were an indication of a move to deepen the debt market. He said, “Bringing liquidity in the bond market is very important for the success of the debt market.”
These initiatives can be further strengthened if the RBI makes the corporate bonds repo-able, he added. Making them repo-able will mean borrowing and lending of the asset could be done in the market
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