Why the bond market has failed to take off

When Prime Minister Manmohan Singh said in Mumbai last week that the debt market has failed to deliver the desired results and called for more reforms to deepen and strengthen the market, financial experts and investors were not surprised.

While other markets like stocks, bullion and real estate are booming, the poor activity in the corporate bonds market has been raising concerns for quite some time with various regulators agreeing to disagree on debt market issues and several committees looking into the problems. The government is now banking on the revival of the debt market to raise a major part of over $320 billion required to build infrastructure that the country badly needs.

What's wrong with the debt market? The biggest problem is liquidity. The market is dominated by a limited number of players — mainly banks and institutions — with inadequate disclosures about the securities which were issued mainly through the private placement route during the past. "The development of the debt market has been stalled by the lack of awareness amongst retail investors," said G. Narayanan, MD, Securities Trading Corporation of India.

"The trading was mainly confined to PSU bonds and commercial papers. There was very little or no retail interest in corporate debt due to institutional structure of the market," says the R.H. Patil Committee that studied the debt market recently.

According to R. Jayakumar, chief operating officer, Fitch Ratings, the key factor is that the government is the biggest borrower in the debt market, crowding out others.

"The government securities market is active and developed while corporate debt market has still not fulfilled its potential as there are investment restrictions," said CES Azaria, CEO of Fixed Income Money Market and Derivatives Association of India (FIMMDA). The activity of foreign investors and big players like insurance companies is restricted.

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