Evaluation of various government policies in strengthening the secondary Money Market and Debt...

IRJMSH Volume 5 Issue 2 [Year 2014] online ISSN 2277 – 9809

International Research Journal of Management Sociology & Humanity Page 712

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Evaluation of various government policies in strengthening the

secondary Money Market and Debt Market

Sanjana Juneja Assistant Professor, Ramanujan College

University Of Delhi

New Delhi, India

[email protected]

ABSTRACT

It is well known that the secondary market for debt is not as efficient as the stock markets in

India and efforts have been made to develop the secondary debt market, through the introduction

of both regulatory measures and innovative products. Notwithstanding with the deregulation

process initiated by RBI and several innovation, the Indian money market is not free from

rigidities which are hampering the growth of market. The secondary debt market in India is

practically non-existent. This paper argues that with the recent economic reforms, an efficient

and active debt market, particularly in long-term private debt instruments, is essential for the

country to realize the full benefits of the reform process and to achieve its potential.

The radical improvements in the quality of the equity markets in India during the last decade

have been directly as an outcome of the initiatives taken in setting up of NSE and NSDL and

strengthening of SEBI through various measures including empowering it with necessary

regulatory powers. Lot of committees has been formed from time to time for better functioning of

secondary market. On the basis of studies done by these expert committees and their

recommendation , SEBI and RBI both have tried to understand the reasons for

underperformance of secondary market and also have done a lot in implementation of these

committee’s suggestions to improve its functioning. India’s debt markets and money market have

experienced considerable growth since 1992. The RBI has helped the government securities

market expand by introducing new instruments and creating market structures to boost activity

in the primary corporate debt market has also increased, following the liberalization of

investment regulations for banks, insurance companies, and provident funds. To date, the

increased primary activity has not had much effect on secondary market activity owing to the

stamp duty on secondary market debt transactions.

Government securities and corporate debt markets currently face a number of impediments to

growth. Many can be easily surmounted. Others will require a firm commitment by the parties

affected. The RBI, Ministry of Finance, and SEBI must work together to remove these

obstructions as soon as practicable. The Regulators (particularly the RBI, Ministry of Finance,

and SEBI) should adopt a flexible approach to changing market infrastructure and formulating

supporting policies because it is essential to achieve material improvements within a relatively

short period of time.

mailto:[email protected]



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Key words : Bonds, SPV, NFO, IPO

INTRODUCTION

The Indian financial system is changing fast, marked by strong economic growth, more robust

market, and considerably greater efficiency. But to add to its world-class equity market, and

growing banking sector, the country needs to improve its secondary market. While the

government and corporate bond markets have grown in size, they remain illiquid. The corporate

market, in addition, restricts participants and is largely arbitrage-driven.

To meet the needs of participants i.e. borrowers and lenders, the bond market must therefore

evolve. This will mean creating new market sectors such as exchange traded interest rate and

foreign exchange derivatives contracts. It will need a relaxation of exchange restrictions and an

easing of investment mandates on contractual savings institutions to attract a greater variety of

investors (including foreign) and to boost liquidity. Tax reforms, particularly stamp duties, and a

revamping of disclosure requirements for corporate public offers, could help develop the

corporate bond market. And streamlining the regulatory and supervisory structure of the local

currency bond market could substantially increase efficiency, spurring innovation, economies of

scale, liquidity and competition. Such reforms will help level the playing field for investors.

Correcting this situation will not be easy. In the first place, the public sector will continue to play

the major role in infrastructure development in the foreseeable future, and it can be nobody‘s

case that it should be denied access to long-term debt funds. More importantly, until the

regulatory limitations on and management preferences of institutional funds change, most of

these resources will continue to be directed towards investment in public debt instruments. Given

the hyper-sensitivity of the social and political system in India to safety issues, it does not appear

very likely that these limitations will change very soon. Thus, expanding the availability of long-

term debt to the private sector will be contingent upon attracting investments through alternative

routes. Second, in the past, a fair proportion of long-term debt funds for the private sector,

especially for small and medium cap companies, came from the development finance institutions

(DFIs).These agencies, whose principal function was maturity transformation, borrowed medium

term funds to lend long. The intermediation margin was derived principally from tax and other

concessions that were granted to these institutions. With fiscal and financial sector reforms,

however, all the DFIs are under serious stress, and their lending activities have been curtailed

drastically. As a result, the flow of long-term debt to small and medium companies has reduced

sharply. In the absence of an active debt market, these companies cannot raise such funds, since

the large institutional investors have simply no appetite for debt instruments issued by them,

preferring to invest in bulk in the bonds of large corporates. Meeting this demand will require

investors whose approach is more retail and who are less Constrained by the prudential

regulations governing the larger funds.

LITERATURE REVIEW

The literature on ―Role of Government Policy In Strengthening of Indian Secondary Market‖ is

vast. Much attention has been devoted to such issues as whether RBI‘s, Government policies and



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specially Working Groups and Committees has contributed in finding the solutions for

improving the functioning of secondary Debt and Money market and to what extent

recommendations made by them have been implemented. Lot of research has already been done

in past on the concerned topic. Making those past studies as base, further consideration has been

given to point out some more prevailing hurdles and providing their possible solutions.

OBJECTIVES

The Present paper is basically concerned with the following objectives:

To explain the concept of money market, Debt market

To highlight the problems prevailing in secondary money market, Debt market, Equity

market

To study the role of various working groups and committees in development of Indian

market.

Study of suggestions made by working group for market improvement

How RBI and Government haveImplemented the Recommendations made by these

committees and

What scope is still available for further improvement in secondary market ―The Road

Ahead‖

RESEARCH METHODOLOGY

Looking into requirements of the objectives of the study the research design employed for the

study is of descriptive type. Keeping in view of the set objectives, this research design was

adopted to have greater accuracy and in depth analysis of the research study.Available secondary

data was extensively used for the study.

Meaning of Securities

Securities are financial instruments that represent a creditor relationship with a corporation or

government. Generally they represent agreements to receive a certain amount depending on the

terms contained within the agreement.

Primary Market

Primary market means the market of new issues i.e. IPO and NFO. It means the market where

the securities are issued for the first time by the issuer.With primary issuances of securities or

financial instruments, or the primary market, investors purchase these securities directly

from issuers such as corporationsissuing shares in an IPO or private placement, or directly from

the federal government in the case of treasuries. After the initial issuance, investors can purchase

from other investors in the secondary market.

Secondary Market

http://en.wikipedia.org/wiki/Primary_market

http://en.wikipedia.org/wiki/Issuers

http://en.wikipedia.org/wiki/Corporations

http://en.wikipedia.org/wiki/Shares

http://en.wikipedia.org/wiki/IPO

http://en.wikipedia.org/wiki/Private_placement

http://en.wikipedia.org/wiki/Treasuries



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Secondary market refers to stock exchanges where existing securities can be regularly purchased

and sold. These markets are an important element in mobilisation of resources. They enhance the

efficiency of the flow of savings.The existence of these markets fulfils a basic need of the

investors namely the liquidity. In these markets, holders of securities can easily dispose of their

securities and obtain cash. Thus viable secondary markets by providing marketability to

securities encourage savers to take risk and make investments in the existing securities.

Money Market

By convention, the term "Money Market" refers to the market for short-term requirement and

deployment of funds. Money market instruments are those instruments, which have a maturity

period of less than one year. The most active part of the money market is the market for

overnight call and term money between banks and institutions and repo transactions. Call Money

/ Repo are very short-term Money Market products. The below mentioned instruments are

normally termed as money market instruments:

1) Certificate of Deposit (CD)

2) Commercial Paper (C.P)

3) Inter Bank Participation Certificates

4) Inter Bank term Money

5) Treasury Bills

6) Bill Rediscounting

7) Call/ Notice/ Term Money

Debt Market

The Debt Market is the market where fixed income securities of various types and features are

issued and traded. Debt Markets are therefore, markets for fixed income securities issued by

Central and State Governments, Municipal Corporations, Govt. bodies and commercial entities

like Financial Institutions, Banks, Public Sector Units, Public Ltd. companies and also structured

finance instruments.

The instruments traded can be classified

into the following segments based on the

characteristics of the identity of the issuer

of these securities: Government Securities

Central Government Zero Coupon Bonds

Coupon Bearing Bonds

Treasury Bills STRIPS

State Governments Coupon Bearing Bonds

Public Sector Bonds Government Agencies /

Statutory Bodies

Govt. Guaranteed Bonds,

Debentures

Public Sector Units PSU Bonds

Debentures

Commercial Paper

Private Sector Bonds Corporate Debentures,

Bonds,

Commercial Paper,



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Floating Rate Bonds,

Zero Coupon Bonds,

Inter-Corporate

Deposits

Banks Certificates of Deposits,

Debentures, Bonds

Financial Institutions Certificates of Deposits,

Bonds

The issue and trading of fixed income securities by each of these entities are regulated by

different bodies in India. For eg: Government securities and issues by Banks, Institutions, Public

Corporations are regulated by the RBI. The issue of non-government securities comprising

basically issues of Corporate Debt is regulated by SEBI.

It is well known that the secondary market for debt is not as efficient as the stock markets in

India and efforts have been made to develop the secondary debt market, through the introduction

of both regulatory measures and innovative products.

Rigidity in Indian Money Market

Notwithstanding with the deregulation process initiated by RBI and several innovation, the

Indian money market is not free from rigidities which are hampering the growth of market. Some

of the important problems are:

i) Markets not integrated

ii) High volatility

iii) Interest rates not properly aligned

iv) Players restricted

v) Supply based-sources influence uses

vi) Not many instruments

vii) Players do not alternate between borrowing and lending

viii) Reserve requirements

ix) Lack of transperancy and

x) Inefficient payment system

Problems of the equity market

In the pre-reform phase (i.e. the pre 1991 period) the Indian equity market was confronted with a

number of problems, the chief among them being as follows: 5

1. As of 1992, the Bombay Stock Exchange (BSE) was a monopoly. It was an association of

brokers, and imposed entry barriers, which led to increased costs of intermediation.

2. Trading took place by 'open outcry' on the trading floor, which was inaccessible to users. It

was usual for brokers to charge the investor a much higher price from that actually traded at.

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3. As with all trading-floors, there was no price-time priority, so users of the market were not

assured that a trade was executed at the best possible price.

4. A variety of manipulative practices prevailed, so that external users of a market often found

themselves at the losing end of price movements. No strict action could be taken against errant

brokers.

5. Retail investors, and particularly users of the market outside Mumbai, accessed market

liquidity through a chain of intermediaries called 'sub-brokers'. Each sub-broker in the chain

introduced a mark-up in the price and the investor thus had to pay a much higher price than the

actual trade price.

Problems of the debt market

The Indian debt market faced the following important problems in the pre-reform phase.

1. In 1992, debt trading took place without an exchange in the picture. Trades were bilaterally

struck between known counterparties without anonymity.Personal and political influences

impacted upon trade prices; each leg of the transaction was exposed to the credit risk of the

other; dealer markets suffered from a fragmentation of orders and trades; and there was no price-

time priority to ensure that each trade took place at the best price in the country.

2. The problem of credit risk served to narrow the Market down to a ‗club market‘, a set of

participants with homogeneous credit risk.

3. The lack of anonymity made it easier to form and enforce cartels which would indulge in a lot

of manipulative practices.

4. The debt market relied on dealers who, as with the Bombay stock exchange, did not

unbundled their intermediation price from the transaction price.

5. Trading took place by telephone in Mumbai. Hence, the debt market was effectively restricted

to Mumbai.

6. Since traders took place bilaterally, trade prices were not centrally reported and observed,

even ex post.

7. There were serious problems with the settlement of trades. The reserve bank tracks ownership

of government securities of trades. The reserve bank tracks ownership of government securities

in a database called the SGL.SGL was maintained manually.

Main Committees

Lot of committees have been formed from time to time for better functioning of secondary

market. On the basis of studies done by these expert committees and their recommendation ,

SEBI and RBI both have tried to understand the reasons for underperformance of secondary


International Research Journal of Management Sociology & Humanity 18

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market and also have done a lot in implementation of these committee‘s suggestions to improve

its functioning. To name few important among them:

Tandon Committee (1975)

Chore Committee (1979)

Marathe Committee (1983)

Chakravarty Committee (RBI 1985).

Committee to Review the Working of the Monetary System (Chairman: Professor

Sukhamoy Chakravarty) [1985]

The Working Group on the Money Market (Chairman: Shri N. Vaghul) [1987],

Rangarajan Committee, 2002

Narasimham Committee - I (1991) and II(1998)

The radical improvements in the quality of the equity markets in India during thelast decade have

been directly as an outcome of the initiatives taken in setting upof NSE and NSDL and

strengthening of SEBI through various measures includingempowering it with necessary

regulatory powers. Despite the fact that the Indianequity markets have a long history of more

than a century, markets had remainedhighly inefficient, confined mainly to metros and large

cities, and non-transparent.They were not considered to be investor friendly. The major equity

marketplayers did not show any particular desire to upgrade market standards even afterthe

equity markets were opened up to the foreign institutional investors. A limitednumber of

powerful market intermediaries who benefited from inefficient andtransparent system were

opposed to any type of reforms that would minimise theirclout in the system and eat into their

high profits. All the quantum improvements in the quality of markets that took place were

afterinstitutional and regulatory initiatives.

For creating robust corporate debt markets it was desirable that appropriate policyreforms should

be introduced to encourage building up of necessary marketinfrastructures that facilitate growth

of an active primary market and also a vibrantand transparent secondary market. In this context it

is worth recapitulating briefly the important reforms that havetaken place in the G-sec market.

When reform measures were introduced by theRBI about a decade ago there was already a large

captive base of investors andthe floating stock of the government debt was sizeable. The only

limitation underwhich RBI had to introduce reforms in the G-sec market was that it could not

beallowed to have the same degree of freedom as the equity markets because of thecontinuing

huge fiscal deficit. Nonetheless, RBI has succeeded in bringing aboutseveral reforms to improve

transparency and efficiency of the secondary market.

Vaghul Group Report

Until few years ago Indian money market was small with transactions generally confined to

overnight borrowing and lending money by banks/financial institutions. Except commercial bills,

there was no other major short term negotiable instrument for dealings. The fixed interest rate

regime along with restriction on entry of participants in the market provided little incentive for

market development, which was almost dormant. The money management was therefore



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regarded as, therefore, as no consequence by the investors, aspiring for better returns on short

term funds.

The RBI, however in due course of time,recognised the need for an active secondary money

market in India,especially in the context of the setting up subsidiaries by many banks for

operating mutual fund schemes and ever expanding business of the Unit Trust of India, LIC,IDBI

and other financial institutions which needed avenues for the development of funds. For an in

depth study and to make recommendations on the steps required to be taken for the development

of healthy and active money market, the RBI appointed a working group under the chairmanship

of Shri. N. Vaghul in September 1986.The recommendations of the working group laid

foundation for systematic action by RBI for the development of Indian money market. The broad

strategy and objectives as laid by the Vaghul group served as a milestone in the development of

Indian money market. The working group recommended that the money market should be broad

based by introducing new negotiable instruments and allowing more participants. Turnover or

volume of trading is a sure indicator of growth of market, and for increase in turnover, there has

to be a free play of market forces in fixing the rates and prices. The working group therefore

recommended that the administered interest rate regime should be given up initially in such

financial transaction as are put through the money market.

Patil Committee had suggested setting up a unified exchange at the National Stock Exchange, the

panel had recommended making use of the infrastructure available with the national exchanges

for disseminating information related to trading in corporate bonds. The report stated: "As

market participants gain experience with trade reporting and the first phase of clearing and

settlement systems, efforts should be made to develop online order matching platforms for

corporate bonds. Such trading platforms can be set up by the stock exchanges or jointly by

regulated institutions like banks, financial institutions, mutual funds, and insurance companies,

etc. SEBI would frame specific guidelines for setting up such trading platforms. Any platform,

other than the one offered by a stock exchange, would effectively be performing the functions of

an exchange to a limited extent and, as such, would need the specific approval of SEBI."

The Finance Minister, Mr P. Chidambaram, in his Budget speech, accepted the

recommendations of the Patil Committee report and stated that the Government would take steps

to "create a single unified exchange-traded market for corporate bonds". The internal committee

at the Securities and Exchange Board of India recommended having the unified exchange at the

Bombay Stock Exchange. In fact, it was reported that the BSE is ready with trading solutions

and, subject to regulatory clearance, would commence operations as soon as possible.

The R. H. Patil Committee report suggested that the rating rationale should be the basis for

listing of bonds issued by listed entities. The corporate bond market is dominated by banks and

institutions which invest mainly in higher-grade paper, the market for lower quality paper is

almost non-existent.

The market has good number of quality paper and if it becomes liquid, it would enthuse issuers

to tap the primary market for funds, thereby reducing the pressure on bank credit. The measures

suggested by the Committee will help develop a robust primary issuance market.



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The secondary corporate bond market is purely a telephone market, where brokers are believed

to play a dominant role in bringing together buyers and sellers.

SEBI issued a circular some time ago advising that all non-government securities trades to be

executed through the electronic order-matching trading system of the exchanges and banned off-

market broker-driven deals in corporate bonds. However, this did not in any way change the

market practice as the trading system at the exchange allows setting up counter-party exposures

at participant levels.

If a trade is routed through a broker in the OTC market and is required to be put in the exchange

for compliance of the SEBI circular, the participants set the required counter-party limits against

each other while setting zero limits for other market participants.

The recommendations of the Sukhmoy Chakravarty Committee on the Review of the

Working of the Monetary system, and the Narasimham Committee Report on the Working of

the Financial System in India, 1991, The Reserve Bank of India has initiated a series of money

market reforms basically directed towards the efficient discharge of its objectives. The bank

reduced the ceiling rate on bank advances and on inter-bank call and short-notice money. There

has been a significant lowering of the minimum lending rate of commercial banks and public

sector development financial institutions from 18% in 1990–91 to 10.5% in 2005–06.

Government Policy

India has debt markets for government securities, corporate bonds, and short-term bank and

commercial paper. The Government securities market is far the largest market, it has expanded

considerably since 1991, as has the range of available maturities and secondary market activity

in both short- and longer-term maturities. Since 1997, when banks were permitted to hold

corporate debt securities, the market for these securities has grown as well, although it is

dominated by paper issued by state-owned enterprises rather than private sector entities, and

trading is limited.

India‘s debt markets as a whole have grown steadily since 1992, and many efforts are under way

to support further development. However, policymakers face a number of major challenges to

further market development particularly by providing a more supportive economic, legal, and

regulatory policy environment; upgrading market infrastructure; authorizing the use of new debt

instruments; and improving education services for debt market participants.

If the impediments to growth identified in this study can be removed, secondary market trading

in government and corporate debt securities should increase significantly. In the short term,

secondary market trading in corporate debt securities is likely to show the strongest growth, once

the planned stamp duty reforms are implemented.

India‘s government and corporate debt securities markets face a number of regulatory problems.

One is the uncertainty regarding which apex organization will be responsible for the debt

markets. Another is the delay in implementing planned stamp duty changes, which is limiting

secondary market trading in corporate debt securities. Yet another is the need for some minimum

regulation of the corporate debt private placement market. These issues can be subdivided into

those concerning regulators and those having to do with regulations.



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Regulators. The two main questions that need to be addressed here are how can regulators

improve their knowledge and how should the RBI and SEBI split responsibility for regulation of

the local bond markets? The regulatory parties (Ministry of Finance, RBI, and SEBI) do not

always have the technical knowledge required to deal with more complex issues relating to the

development of the debt markets. As for the question of whether RBI or SEBI is officially

responsible for supervising the corporate debt markets, this matter will be resolved when the

Securities Contract (Regulations) Act is amended. The uncertainty surrounding the question for

the time being is hindering market development.

Regulations. Wholesale investors have expressed support for some (limited) regulation of the

private placement market. This matter will inevitably be considered by RBI and SEBI in light of

the present inquiry into the performance of numerous trustees for corporate bond issues and the

findings arising from a recent HLC subgroup study of the debt markets.

Impact of Reforms

The debt market reforms process has encompassed important developments in active policy

making, institutions, clearing and settlement systems, trading expansion, diversification of

participants and instruments, better regulatory systems, introduction of new technology and

appropriate enabling legislation. These reforms enabled a systematic process for integration of

the different segments of the domestic markets as well as some integration of the domestic

financial markets with the international markets. This also shows that development of a debt

market is a difficult and long drawn out process and requires active cooperation between

different institutions.

In contrast to equity markets, the government and corporate bond markets have been held back

by the more restrictive regulatory framework. A number of reforms were introduced to the

government bond market in 1992 when the price of newly-introduced bonds was set by auction.

But it was not until 2005—11 years after the equity market—that bond market became an

electronic order limit market. Several measures were implemented to minimize risks in equities

trading and to create a national market in stocks. These included the introduction of a clearing

and settlement system, creation of a centralized counterparty for transactions, establishment of a

modern depository system for stocks, and a shift from a relatively primitive carry-forward

system to the introduction of futures contracts. Trading in derivatives on the NSE started in

2000—the Indian market is now the tenth largest globally for futures contracts on single stocks

and indexes and the largest for futures on single stocks.

The challenges before RBI in managing capital flows had been dealt with extensively in the

Report of the Internal Group on Liquidity Adjustment Facility (November 2003) and the

RBI Working Group on Instruments of Sterilisation (December 2003). It was underscored

therein that "In order for the LAF to function as the principal monetary policy instrument for

signalling the Reserve Bank's stance on interest rates, it is desirable that LAF operates to

primarily manage liquidity at the margin on a day-to-day basis". The dilemma before any central

bank under that situation was put forth as "while operationally it is difficult to distinguish

between the sterilisation operations and liquidity management operations under LAF,



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conceptually there is a need to distinguish surplus liquidity of 'temporary' nature from surplus

liquidity of a somewhat 'enduring' nature". Considering these issues, the LAF Group

recommended that in order to improve the effectiveness of LAF, introduction of additional

instruments of sterilisation against the backdrop of declining stock of government securities with

RBI should be explored. Accordingly, the RBI Working Group on Instruments of Sterilisation,

after considering pros and cons of various instruments, recommended that "Government may

consider setting up of a Market Stabilisation Fund (MSF) …. for mopping up enduring surplus

liquidity from the system". Taking into account all these issues, the revised LAF scheme as well

as the Market Stabilisation Scheme were operationalised in April 2004.

Overall approach to reforms

It is significant to note that the reform process in the corporate debt market began way back in

the early 1990s. The Government took an important decision to abolish all controls that it used to

exercise on the interest rates that corporates could pay whenever they raised capital through

debentures. In May 1992, after consulting RBI, Government abolished the ceiling on interest

rates that the erstwhile Controller of Capital Issues used to stipulate in regard to the issues of

corporate debentures May 1992. During the last decade RBI also gradually abolished all the

stipulations in regard to the level of interest rates that the banks could charge on their loans to

corporate entities. Another major development that has taken place during the last decade or so

was the withering away of the development banks which were the major source of external long

term finance for funding their new/expansion/diversification projects. All these major

developments should have encouraged corporates to approach the capital market to raise

resources through debentures of various maturities financing their investment plans. This in turn

would have led to the growth of an active and vibrant corporate debt market. Strangely not only

has this not happened but whatever developments that we notice in the corporate debt market

have been in the direction of making the primary or issue process highly non-transparent and

secondary market highly dormant and average daily trading volumes miniscule in relation to the

outstanding stocks of the corporate debt.

Rules, Regulations, and Regulators. As soon as the government has determined whether RBI or

SEBI is to be responsible for regulating the corporate debt market, the organization selected

should review the regulatory requirements for the corporate debt private placement market to

determine whether any regulation of this market is necessary. From time to time, the RBI,

Ministry of Finance, and SEBI need help in understanding technical issues associated with the

development of the debt market and in formulating related policies. That means the Indian

government should increase its financial support to the ministry and SEBI to allow them to play

larger roles in promoting the debt markets.

Central Market Infrastructure. The regulatory agency for the corporate debt market should

monitor clearinghouse arrangements and act as a catalyst for development of additional

infrastructure, if necessary. Current trading in corporate debt securities undertaken outside the

NSE structure is limited because the appropriate trading and settlement infrastructure is lacking.

This matter must be addressed in the long term. The immediate concern should be to develop the

government securities market infrastructure, which is slated within the next two years.

SUGGESTIONS



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The RBI is well aware of the concerns of market participants and has taken several steps to

improve market infrastructure, while also continuing to evaluate other possible changes. This is

in line with its policy objective of progressively developing the government securities market.

Market participants remain skeptical, however, that the RBI will be able to implement pending

major changes in market infrastructure within proposed time frames.

Measures to Address Bond Market Liquidity

Deep and liquid bond markets provide a safety valve when access to bank credit tightens—by

providing an alternative source of financing. To address the lack of bond market liquidity,

authorities could (1) relax exchange controls on bonds to facilitate investment by foreign

investors and broaden the domestic investor base; (2) ease investment mandates on contractual

savings institutions that encourage funds to hold bonds to maturity; (3) develop exchange and

OTC derivatives and swap markets; and (4) consolidate the outstanding stock of government

bonds.

Development of Secondary Market

There is a need to develop a transparent and efficient secondary market forcorporate bonds,

incorporating the global best practices and systems to the extentthey are relevant and consistent

with the Indian securities market. SEBI, being charged with the responsibility of development

and regulation of corporate bondsmarket, should provide the necessary regulatory framework.

The following roadmap is suggested to this end.

Reform the stamp duty.

Reform disclosure for public offers of corporate bonds.

Trade Reporting System

Clearing and Settlement System

Order Matching Trading System

Phased Implementation of Recommendations relating to Trade Reporting, Clearing &

Settlement and Order Matching System

Reduction of Shut Period

Unified Market Convention

Repos in Corporate Bonds

Introduction of Interest Rate Derivatives



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Reduction in Market Lot

Fiscal Concession for Municipal Bonds and Infrastructure SPVs

The recommendations submitted by the various Committees appointed by theGovernment to

review interest rates on small savings instruments need to beimplemented to ensure that interest

rates paid on small savings instruments arealigned with market rates. The resultant fiscal savings

could be used to providetax benefits for municipal bonds and for credit enhancements to bonds

issued bySPVs for infrastructure development. Municipal bonds may be given some fiscal

support with such support taking theform of bond insurance or providing credit enhancement so

that municipalities areencouraged to issue such bonds for development of urban infrastructure

either onstand alone or on pooled basis. A plan should be drawn for developing this marketin

India.

CONCLUSION

India‘s debt markets and money market have experienced considerable growth since 1992. The

RBI has helped the government securities market expand by introducing new instruments and

creating market structures to boost secondary market trading. These steps have been very benefi-

cial, as can be seen in the increasing volume of securities traded. Even so, market volumes in

government securities remain below the levels prevailing before the 1992 scandal emanating

from fraudulent trading in securities.

India has developed a number of unique features in its bond market—for example its CBLO

system and the successful electronic trading platform—which could usefully be studied by its

neighbors, many of which suffer from limited repo markets or which have (like India) tried

unsuccessfully to move bonds on to electronic platforms.

Activity in the primary corporate debt market has also increased, following the liberalization of

investment regulations for banks, insurance companies, and provident funds. To date, the

increased primary activity has not had much effect on secondary market activity owing to the

stamp duty on secondary market debt transactions.

Government securities and corporate debt markets currently face a number of impediments to

growth. Many can be easily surmounted. Others will require a firm commitment by the parties

affected. The RBI, Ministry of Finance, and SEBI must work together to remove these

obstructions as soon as practicable. The Regulators (particularly the RBI, Ministry of Finance,

and SEBI) should adopt a flexible approach to changing market infrastructure and formulating

supporting policies because it is essential to achieve material improvements within a relatively

short period of time.

THE ROAD AHEAD



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In India, however, a number of pre-conditions have been met or are in the process of being met.

First, there is a well functioning government securities market with adequate benchmark issues;

the regulatory and legal infrastructure is in place; clearing and settlement systems have been

developed; and technological infrastructure is also in place with the implementation of RTGS.

Second, the money market is also working relatively efficiently so that the transmission of

monetary policy can be effective. Third, with decline in inflation since the late 1990s,

inflationary expectations have been tempered, interest rates have fallen and have been relatively

stable. Fourth, the last decade has also been the emergence of credible credit rating agencies.

Fifth, with improved regulation of equity markets and enhanced attention to corporate

governance, public disclosure of corporate balance sheets has improved considerably with proper

accounting, auditing and disclosure rules. Thus the stage is set for the emergence of a well

functioning corporate debt market and money market.

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Evaluation of various government policies in strengthening the secondary Money Market and Debt...

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