July 7, 2017 / 6:48 AM / 2 months ago

India's bond market deserves a good whipping

A bank employee counts bundles of Indian currency at a cash counter in Agartala, capital of India's northeastern state of Tripura, July 7, 2009. The Indian rupee opened higher on Tuesday after falling sharply in the previous day, supported by hopes for a pullback in the stock market, while bond yields rose further on concerns of excess supply.Jayanta Dey

MUMBAI (Reuters Breakingviews) - India's bond market deserves a good whipping. Ajay Tyagi, the straight-talking new chairman of the country's securities regulator, is cracking down on the fast-growing corporate bond market following a spate of scandals. With a large chunk of new issues coming from companies in dubious financial health, it is wise to force the market to raise standards.

Tough new rules now require rating agencies to collect a monthly confirmation from issuers that they have not delayed any interest or principal repayment. This follows a recent debacle at Anil Ambani's Reliance Communications; the company only formally announced a reprieve from lenders well after the share price of the telco tanked and local newspapers had already reported its repayment woes. Rating agencies were slow to act too. The Securities and Exchange Board of India will publish a broader discussion paper on these issues in the coming month.

Action is necessary. After years of sluggish volumes, new corporate debt issuance by Indian companies rose 57 percent in the first six months of the year, Thomson Reuters data shows. At the current pace, the annual total could hit a record $70 billion in 2017. One reason for the uptick is that banks are stressed and are lending less. At the same time there is a flood of liquidity as India’s rising middle class are putting more savings into conventional financial products instead of hard assets like gold and real estate. 

Graphic: Indian nascent corporate debt market is growing fast: reut.rs/2tXgPmS

Unfortunately the money is ending up in questionable places. One issue is that better quality industrial names are not tapping the fixed income market as India’s capital expenditure cycle has yet to pick up. Instead the majority of debt issuance in the full year ended March came from financial companies with deteriorating health, according to brokerage Ambit Capital. This includes riskier perpetual instruments that can convert into the equity of stressed public sector lenders. These issues themselves are also securing too generous ratings.

Tyagi was earlier part of a high-level committee that recommended measures to help develop the corporate bond market, so he is well-positioned to beat the nascent industry into shape. Forcing companies to become more transparent and making credit rating agencies more vigilant is critical to ensure the sustainability of any long-term diversification of funding sources for India Inc. The floggings will continue for some time.

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