A report of the Working Group on Development of Corporate Bond Market in India released by the Securities Exchange Board of India (SEBI) on Thursday also said that a centralised database for corporate bonds markets may be established expeditiously in two phases, for secondary market trades by the end of August 2016 and for both primary and secondary markets by the end of October 2016.
The report said though equity indices serve as popular benchmarks for equities, designing debt indices has posed challenges in India as the market lacks breadth and depth.
"Market participants, however, need a debt market index as benchmark. SEBI is in dialogue with stock exchanges to design a suitable debt market index. Stock exchanges/other entities may design a suitable corporate bond index to serve as a benchmark," the panel recommended.
Among various recommendations, the panel said corporates should be encouraged to tap the bond market beyond a cut-off level. "Large corporates with borrowings from the banking system above a cut-off level may be required to tap the market for a portion of their working capital and term loan needs."
"Necessary guidelines may be issued by RBI (Reserve Bank of India) taking into account market conditions by September 2016," the report said.
The panel also suggested necessary amendments in FEMA regulations to urge foreign portfolio investors (FPIs) to invest in corporate bonds. "Necessary amendments may be made in FEMA regulations to allow investment by FPIs in unlisted debt securities and pass through securities issued by securitisations SPVs/Special Purpose Distinct Entity (SPDE) as announced in the Union Budget 2016-17," the report said.
Necessary notification, in this regard, may be issued by the RBI by end August 2016, it said.
In order to standardise bond issuance, it said, "...SEBI may have a re-look at the guidelines issued in October 2013 so as to clarify on day count convention, shut period, basis for yield calculation, calculation of coupon interest and redemption with intervening holidays with illustrations."
The working group comprises nominees from Reserve Bank, Finance Ministry, SEBI, Insurance Regulatory Development Authority of India and Pension Fund Regulatory and Development Authority (PFRDA).
The report said given that the public sector banks would be required to raise around Rs 80,000-85,000 crore by way of issuance of AT-1 instruments, there is an implicit need to broaden the investor base and make these instruments more attractive to the investors.
"Insurance companies and EPFO (Employees' Provident Fund Organisation) may be allowed to invest in AT-1 bonds of banks subject to prudential limits with credit rating up to investment grade," it said.
The panel also said regulated entities like banks, PDs, in addition to brokers, may be encouraged by the regulators to act as market makers in corporate bond market subject to appropriate risk management framework.
The panel suggested the credit rating agencies may be mandated to strictly adhere to the regulatory norms with regard to timely disclosure of defaults on the stock exchanges and their own website.
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