Mumbai: Securities and Exchange Board of India chairman Ajay Tyagi said on Wednesday a unified market for government securities (G-Sec) and corporate bond would enable the trading of such securities on the same platform and utilise common infrastructure for trading, clearing, settlement and holding of securities.
“Unification of government bond and corporate bond markets is an idea whose time has come,” Tyagi said while speaking at a bond market seminar. “This would lead to seamless transmission of pricing information between G-Secs and corporate bonds.”
Corporate bonds, which are generally priced on the basis of G-Secs of comparable maturity, would therefore be more appropriately priced.
“The proposal would lead to economies of scope and scale, and increased liquidity for both G-Secs and corporate bonds. This would also facilitate greater participation by retail and non-institutional investors,” the Sebi chief said.
Market participants believe this proposal could stoke the old turf war between the Reserve Bank of India(RBI) and Sebi over the bond market.
At present, RBI regulates the G-Sec market, while Sebi overseas the corporate bond market.
Tyagi laid out various other steps that need to be taken to further develop the bond market.
He emphasised the need for expanding the investor base with preference for lower rated corporate bonds for deepening the corporate board market.
“.. with appropriate disclosures, mutual funds can tailor schemes with higher risk-return profile for investors with higher risk appetite. Accordingly, it is not surprising to note that the share of mutual funds trading in below AA rated bonds is touching 25%. With a conducive ecosystem, mutual funds can be expected to play an even bigger role in the development of relatively lower rated corporate bonds,” Tyagi said.
The Sebi chairman said credit ratings should be used for guidance purpose and financial institutions should continue to have the onus for due diligence of their investments.
“They should develop their own expertise in rating evaluation/due diligence of their investments and should not be solely dependent on the ratings given by credit rating agencies,” the Sebi chief said.
He also noted that a credible credit enhancement mechanism is required to improve the rating category of infrastructure SPVs(special purpose vehicle), which, in turn, would facilitate these SPVs to raise funds from the corporate bond market.
The issuances by infrastructure projects do not typically fall in the category of top-rated corporate bonds.
“This would be crucial to meet infrastructure financing targets as per the National Infrastructure Pipeline,” he said.
Tyagi also said the regulator is in discussions with the government on the budget proposals.
The government has proposed the creation of a permanent institutional framework to purchase investment grade debt securities both in stressed and normal times and help in the development of the bond market.
“Such body would provide liquidity to the bond market by purchase of corporate bonds at any point of time including during times of stress. Such a facility would surely lift the confidence of the investors in liquidity of corporate bonds which is very much required especially for relatively lower rated bonds,” Tyagi said.
Sebi is discussing with various stakeholders about the possible structure of such a facility so that the same could be operationalized at the earliest, he said.
The regulator also said it has shared its views with the government on having a single securities market code.
The government in the budget had also proposed setting up of a professionally managed Development Financial Institution (DFI) for debt financing of infrastructure.
“It is our view that the mandate of DFI should also include provision for equity financing,” Tyagi said. Adding that as infrastructure projects are long gestating in nature, their debt repayment capacity is constrained in the initial years. SPVs, which manage such projects, would initially prefer financing in the form of equity and subsequently, when cash-flows start accruing, opt for debt financing.