The Securities and Exchange Board of India (Sebi) plans to overhaul the corporate debt market by pushing all issuance onto an electronic platform as early as November, sources with direct knowledge of the plan told Reuters, in a bid to boost market activity.
The markets regulator will announce the proposal drafted by an internal regulatory panel within a few weeks, and seek market feedback, said the sources, who declined to be named as the plan is not yet public.
India would be among the first countries to move online, one of the sources said, in a radical shift that comes after investors called for increased supervision of a $ 225 billion market dominated by a handful of heavyweight issuers.
The regulator believes an electronic platform for new issuance – as opposed to the current over-the-counter system – improves transparency and thus investor confidence in the sales process. It should attract more buyers, including foreign investors, which in turn would lure in more issuers, they said.
That would fit the government’s goal of bringing in new sources of cash and fostering cheaper credit to help companies invest, at a time when the economy is still struggling to take off despite lofty official growth numbers.
Banks, the most common source of cash for many Indian firms, are burdened with $ 50 billion of bad debt.
“Transparency is the most important factor which is driving the need to move the private issuance market to an electronic platform,” one of the sources said.
“Currently one doesn’t really know what is going on, how the arrangers solicit deals.”
When contacted by Reuters, Sebi did not immediately provide comment.
Almost 90 per cent of corporate bond issuances in India are in effect private placements. Issuers hire investment banks to find buyers, much like how debt is sold in many other countries.
Under this system, Sebi has little scope to oversee sales, and investors complain issuers cancel deals even when they have been announced, if the price is unfavourable.
India already uses electronic platforms for some equity sales as well as for weekly government bond auctions. An electronic platform for secondary trading of both government and corporate bonds began in 2013.
Hosted by stock exchanges or clearing agencies, buyers submit bids on these platforms. Although their identity and the amount bid remains anonymous, it leaves a record that can also be monitored by regulators.
The sources said Sebi believes an online system will attract more buyers, including foreign investors, into an underdeveloped rupee corporate debt market. India’s corporate bond market is a third of its sovereign debt market and is virtually closed to smaller firms, given a small investor base that prefers top-rated issuers.
Foreign investors own around $ 28.3 billion in Indian corporate bonds but seldom bid in primary deals because of their opaque nature. This contrasts with share sales, which are heavily marketed offshore.
But the move is meeting stiff resistance from investment bankers, who fear they would see commissions – already very low in India – reduced further, even though they would still likely play a role in marketing the new debt to investors.
“It would be better if they allow both OTC and electronic placements, and then we can gradually shift to only the electronic platform,” said the head of a foreign bank in Mumbai. “Otherwise bankers will lose interest.”