RBI reforms for corporate bond market

The measures RBI announced for the development of corporate bond and currency markets cover all three areas of market development: a) market regulations and institution support, b) market participants, and c) instruments. The measures, along with the `bankruptcy law', augur well for developing an alternative to bank financing — the corporate bond market. Until now, only govt bonds could be pledged to borrow money from the RBI, and masala bonds were restricted to companies, NBFCs and housing finance companies (HFCs). To deepen the corporate bond market and encourage quality investors into the market, the RBI will allow banks to pledge their corporate bonds to tide over temporary liquidity shortfalls and raise rupee-denominated masala bonds to fund infrastructure projects.

A corporate bond repo is the market where a permitted borrower like a company or a bank pledges corporate bonds with another company or bank to raise money. The pledger agrees to repurchase the bonds at a specified price after one day. As a policy for future, the RBI has revealed that it is considering corporate bonds as collateral in its famous Liquidity Adjustment Facility. Another suggestion by the RBI is to make transactions in the corporate repo market under electronic trading. This will multiply participation as transaction will be quickened. Most of the govt/bank transactions are now under electronic trading platform under the Negotiated Dealing System (NDS).

Now on, brokers authorised by banks will be allowed to participate in the corporate bond market helping them meet their funding requirement. Foreign portfolio investors will also be allowed to undertake direct trading in corporate bonds without intermediaries like the brokers. Even the retail participation in the bond market will be liberalised with the RBI planning to remove the remaining restrictions on seamless transfer of govt securities between depositories and the RBI. Participation in corporate bond repos is restricted to entities like banks, primary dealers, mutual funds, insurance companies, etc. To encourage market activity, brokers authorised as market makers will be allowed to participate in the corporate bond repo market. This is expected to meet their funding and securities requirement arising out of market-making activities. The RBI also proposed to allow listed companies to lend money to banks through repo market mechanism, essentially overnight money, something that can have wide-ranging ramifications for cal), money rates, short-term money market rates and banking system liquidity.

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