Review of factors constraining the development of Indian corporate bond markets

Abstract

Purpose – The paper aims to understand the factors that have limited the development of this market in India. With a conservative bank-based economy in the backdrop and with the Central Bank pulling the strings, the sovereign debt market occupies the most space in the bonds universe of India. The latter and almost minuscule portion of this market is occupied by the corporate and industrial houses that have forayed into the market to raise finances. This has led to a cycle where lack of participation leads to lack of liquidity and underdeveloped rating mechanisms which further pressurizes the development of this market in India. Design/methodology/approach – The paper is designed as a literature review which has attempted to identify the commonly agreed upon factors that have constrained the development of Corporate Bond markets in India especially and some other emerging economies who are successful or unsuccessful in their attempt to establish a corporate bond markets. These factors have then been categorized into broader heads and commented upon as a part of the analysis. Findings – Corporate bond markets in India, although steadily progressing, is still impeded by the nature of the market itself. While the necessary steps have been taken to implement some of the recommendations by the Expert Committee, the response solicited has not quite been as expected. The poor liquidity, weak rating-mechanisms, absence of standardization and disclosure nomenclatures and illiquidity in the government bond market itself need to be addressed objectively. Research limitations/implications – The research adopted attempts to validate prior research and the attempts by regulators to implement an action plan. However, further progress on the changing scenarios is encouraged to be tested through a quantitative analysis. Originality/value – The government and the Central Bank have constantly emphasized the importance of developing the Corporate debt market. Several studies have attempted to analyze the factors that have crippled the growth and steps taken by the Central Bank and Securities and Exchange Board of India by appointing an Expert Committee. This paper has attempted to visit all these factors and analyze the attempts to overcome by the Expert Committee including the backdrop of other nations who have a vibrant corporate debt market today. It sets the tone for further quantitative or statistical analysis.

Is government borrowing crowding out long term debt resources

“…A review study by Thukral et al (2015) points out to the huge space occupied by the sovereign debt, among other factors that have limited the development of corporate bond market in India. It is further aggravated by the fact that India has been a conservative bank-based economy with central bank pulling the strings.…”

A Preference for Corporate Borrowing in Alternative Markets over Borrowing from Banks under the Impact of Monetary Policies: a Lithuanian Case

“…General economic determinants cover the general economic development of a country, the level of stock market development, the size of the banking sector and the level of financial market development. The significance of the environment surrounding a company, including the general health of the economy, was emphasised by Antoniou et al (2002), Bokpin (2010), Misati and Nyamongo (2012), Thukral et al (2015), Sukcharoensin (2017) and many other authors. Developed economies ensure openness of capital markets and promote transparency of business financial behaviour (Mutenheri & Green, 2003).…”

“…Interaction between the policies of the central banks, commercial banks, and stock and bond markets has a tremendous effect on availability of the sources of funding that business companies can choose. In spite of the fact that a company's capital structure largely depends on its own specific characteristics (Antoniou, Guney & Paudyal, 2002;Thukral, Sridhar & Joshi, 2015;Hutchinson et al, 2016;Sukcharoensin, 2017, etc. ), the role of financial institutions in fund provision is also extremely important for business and industrial development (Beck, Demigurc-Kunt, & Martinez, 2007;Daquila, 2007;Bokpin, 2010;Beck, Demirg€ uç-Kunt, & Levine, 2010, etc.…”

“…According to Spr cic and Wilson (2007), companies in advanced countries have mixed capital structures, whereas companies in less advanced countries mostly depend on bank credits and loans. The reason for dependence on bank funding lies in the fact that corporate bonds are profitable only to large companies with a high credit rating (Datta, Iskandar-Datta & Patel, 2000;Spr cic & Wilson, 2007;Sukcharoensin, 2017), while small and medium companies-as well as large companies with lower credit ratings-find bank loans to be a more attractive method of external financing (Thukral et al, 2015;Sukcharoensin, 2017).…”

Impact of foreign economic sanctions on the Russian market of bonds denominated in foreign currencies

“…Sridhar, and M. Sh. try to understand the factors that have limited the development of Indian corporate bond markets [8]. H. Blommestein studies the impact of new regulatory factors on liquidity in government bond markets since the onset of the global financial crisis [9].…”