RBI revised guidelines on credit default swaps for corporate bonds very soon: Official

New Delhi: If more industries come, there’ll be more scope for LIC to invest in corporate bonds: MD, Vipin Anand

New Delhi, 29th October 2020: The Reserve Bank of India will soon come out with revised guidelines on credit default swaps for corporate bonds, a top Union Finance Ministry official informed at an ASSOCHAM e-summit held today.

“With limited number of trades in the bond market, there are a lot of challenges – fair valuation is one challenge and the activity in the secondary market is another challenge because the bulk of dealings have been happening only over-the-counter (OTC),” said Mr Anand Mohan Bajaj, additional secretary, Department of Economic Affairs, Ministry of Finance at an ASSOCHAM National e-summit on Positive Response of Corporate Bond Market to Recent Challenges.

Mr Bajaj added, “We are aware of all this, we are putting our minds together and doing a lot of things, latest being in order – develop the credit default swap market we have been working and RBI would be coming out with revised guidelines very (soon).”

He pointed out that although fund-raising through corporate bonds have almost doubled from 2012-13 to 2019-20 but the traded volume is around 22 lakh crore which is not very much. Besides, 98 per cent of the debt issuances in 2019-20 have been through private placement and even in that, 80 per cent of issuances have been through major NBFCs, HFCs in the private sector and PSUs which accounted for about 15 per cent.

Highlighting the steps taken by the government, he said, “Latest being what we have done is Bilateral Netting Act and uniform stamp duty which has now been implemented and the rate for issue of bonds is reduced to 0.005 per cent from various different rates which were there depending on state to state.”

He also said, “Recently now we have been also conscious that corporate bond repo segment also must be activated although the trilateral repo was also launched but it has not been active and therefore, you would have noticed that SEBI has announced creation of limited purpose clearing corporation of the corporate bond repo segment which I think is a very important step.”

Mr Bajaj said that issuance of AT-1 instrument will also be compulsorily run through electronic book building platform. “We have also now mentioned that Request for Quote (RFQ) platform would be a single interface for price givers and price takers and for that mutual funds have been mandated to undertake at least ten per cent of the total secondary market rates by value in the corporate bonds.”

Similarly, he said IRDAI has also mandated insurers to undertake ten per cent of their transactions through RFQ platforms.

Elaborating on the recent measures taken by the government he said, “In order to attract foreign capital in government security (G-Sec) market, we recently have opened a fully accessible route where foreign investors can come in and do transactions without any capital controls and we have notified the securities which have been earmarked for this and also recently we have set up a special purpose vehicle to provide liquidity for the bonds issued by NBFCs and HFCs.”

Noting that lots of steps have been taken and many more are in the pipeline, Mr Bajaj said, “But still, we all understand that in most of the jurisdiction, corporate bond market has taken time to evolve and in majority of cases it is still in the OTC, we are aware of that.”

He also said that corporate bond market is very important for requirement of infrastructure financing particularly which have announced through national infra pipeline. “So, a big-big push on infra financing is needed and importance of corporate bond market cannot be emphasised more.”

The Finance Ministry official further said that the government and the regulators i.e. RBI, SEBI, IRDAI, PFRDA have together been working towards having a robust and vibrant corporate bond market in India.

In his address, Mr Vipin Anand, MD of LIC said that while LIC is a regular investor in the market, it being a long-term investor and has long-term liabilities, for matching its asset and liabilities it is necessary that it looks at very stable kind of investments. “So even though it is a regulatory requirement that we invest only in AA and above. I think prudence also demands that for long-term investors like us anything below that may be difficult.”

Mr Anand added, “If more industries come in to the bond market, like SEBI stipulation of 25 per cent there will be more scope for LIC to make more investments in corporate bonds.”

He further said that challenges confronting India in developing a robust and vibrant corporate bond market post-covid are tremendous but not unsurmountable.

Ms Navita Yadav, chairperson, ASSOCHAM National Council for Corporate Bond Market and Country MD & CEO, Vistra India said, “Ease of business in any country is actually about by the ease of exit, hence various initiatives by Government and regulators continue to be in this direction.”

Amid others who addressed the ASSOCHAM national e-summit included: Mr Neeraj Kulshrestha, chief regulatory officer, BSE Ltd.; Mr Vikas Jain, ED, A. K. Capital Services Ltd.; Mr Ashvin Parekh, managing partner, APAS LLP; and Ms Nipa Sheth, co-chairperson, ASSOCHAM National Council for Corporate Bond Market and founder-director, Trust Group.