Securities and Exchange Board of India (SEBI) chairman Ajay Tyagi on Wednesday called for unification of the financial markets, adding that the corporate bond market needed reforms without any further delay.
“Unification of financial markets is an idea whose time has come. The market infrastructure for corporate bond and G-Secs markets should be integrated,” Mr. Tyagi said in his inaugural address at the FICCI Capital Market Conference ‘Atmanirbhar Bharat: Role of Capital Markets’.
“Having two separate ecosystems results in artificial segmentation of investors and divergent governance and regulatory norms for institutions in the two markets performing similar functions,” the SEBI chief noted. The market infrastructure institutions dealing with these two types of securities should follow the same rules and regulations, he said, adding that the economies of scope and scale would also dictate such unification.
Observing that the equity markets had seen a big surge in participation of retail investors in the last few months, he said that the rise in new demat accounts indicated the entry of first-time retail investors.
He said it would be ideal for first-time investors to begin their capital markets journey by investing in risk-free government bonds. “I would suggest that, to achieve this, the G-Secs may be issued in demat form,” Mr. Tyagi added.
“These new demat account holders, after gaining experience of investing in G-Secs could then gradually add other securities to their demat accounts,” he added.
Observing that the government planned to borrow an additional ₹4 trillion this year on account of COVID-19, he said the issuance of G-Secs in demat form would facilitate easier borrowing.
He said the National Infrastructure Pipeline envisaged an investment of ₹111 trillion in infrastructure projects in five years. and Since bank lending to infrastructure projects had been a challenge due to inherent ALM issues, such projects could to be funded by the bond market to the extent possible.
“However, the issuances by the infrastructure projects do not typically fall in the category of top-rated corporate bonds. It would be virtually impossible for these projects to access the bond market unless a credible credit enhancement mechanism is set up and operationalised at the earliest,” he said.
Corporate bond market
Stating that the corporate bond repo market had not taken off as expected, he said SEBI was examining policy options to make it work, including a central clearing facility for tri-party repo trades in corporate bonds.
He said development and deepening of the corporate bond market ought to be one of the topmost agendas of the policymakers, more so considering the problems with the banking sector.
“The amount of outstanding corporate bonds in India has grown from ₹15 trillion in 2013-14 to ₹33 trillion in 2019-20, reflecting a CAGR of about 14%. If we consider the secondary corporate bond market, we saw an increase in trading volumes from ₹10 trillion in 2013-14 to ₹20 trillion in 2019-20, amounting to roughly 10% of the GDP,” he said.
Since the market was getting restricted to top-rated corporate bonds, there was a dire need to move down the rating curve, he said.
Highlighting the challenges of the current difficult, stressful and uncertain times, he said the revival of the stock market and an uptick in fund-raising by the corporates had been encouraging.
“As clearly demonstrated by its actions during the last four or five months, SEBI is fully geared to meet the challenges of the COVID era. We are all treading untested waters today. Only time will tell how and when will we reach the shore,” Mr. Tyagi said.
He said the focus of Atmanirbhar Bharat was on increasing investments in sectors of strategic importance in India.
