Corporate Bond Market in India

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New thinking on corporate bond market in India

Sanjay Banerji Krishna Gangopadhyay Ila Patnaik Ajay Shah

New thinking on corporate bond market in India

Foreword In the rush to produce urgent policy documents and briefing notes that any government has to do, it is easy to let matters that may not be quite as urgent to go unattended. However, the not-so-urgent often includes matters of great importance for the long-run well-being of the nation and its citizenry. Research papers on topics of strategic economic policy fall in this category. The Economic Division in the Department of Economic Affairs, Ministry of Finance, has initiated this Working Paper series to make available to the Indian policymaker, as well as the academic and research community interested in the Indian economy, papers that are based on research done in the Ministry of Finance and address matters that may or may not be of immediate concern but address topics of importance for India’s sustained and inclusive development. It is hoped that this series will serve as a forum that gives shape to new ideas and provides space to discuss, debate and disseminate them.

Kaushik Basu 29th May, 2011 Chief Economic Adviser

Disclaimer and Acknowledgements

The ideas presented in this paper are personal and do not reflect the views of the Ministry of Finance, Government of India. The authors thank Vimal Balasubramaniam for excellent research assistance and Debashish Mallick and Partha Sarathi Mukherjee for many helpful discussions on the subject. This paper was produced under the NIPFP-DEA Research Program. The authors are grateful to seminar participants at the Ministry of Finance for many insightful comments and suggestions.

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New thinking on corporate bond market in India

Table of Contents
Executive Summary............................................................................................................................. 3 1. 2. 3. Structure of the paper ................................................................................................................ 4 A review of how large firms in India finance themselves ........................................................... 5 Key issues with Indian corporate bond market functioning ....................................................... 8 3.1 Transparency ........................................................................................................................... 10 3.2 Liquidity ................................................................................................................................... 11 3.3 Market Making ........................................................................................................................ 12 4. Why debt matters in corporate finance: An analytical perspective ......................................... 13 4.1 Why debt market? .................................................................................................................. 13 4.2 Adverse selection .................................................................................................................... 15 4.3 Rating agencies ....................................................................................................................... 19 4.4 Liquidity ................................................................................................................................... 20 4.5 A unified analysis of rating agencies and liquidity .................................................................. 21 4.6 Theoretical model – Results and Implications ........................................................................ 24 5. Policy Recommendations .......................................................................................................... 27 5.1 Ensuring quality through institutional architecture................................................................ 27 5.2 Application of external...
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