A Unified Bond Market: starting of an idea

THIS ARTICLE WAS WRITTEN BY ASHUTOSH JAIN, A STUDENT OF INSTITUTE OF LAW, NIRMA UNIVERSITY, AHMEDABAD. 

Introduction

On September 27, 2016, SEBI Chief U .K. Sinha emphases on creating a unified BRICS bond market.[1] In a seminar, Mr. Sinha, said that Brazil, Russia, India, China and South Africa should come together and form a bond market, which will benefit all the BRICS participating countries. It is to be noted that BRICS already has signed up for creating ‘New Development Bank’, as an alternative to World Bank and IMF. The Bank has been formed to fund infrastructure projects within the borders of the BRICS countries. The same has been seen as a huge step in the way of country’s growth. The new proposal, if accepted, will be another mile stone in the country’s growth. But before looking in to after effects of the proposal, let understand some terms, used in it.

Bond Market

The main emphasis was given on the creation of a unified bond market, therefore it is important to understand first, what is a ‘bond market’? A bond market is a financial market, where investors purchase and sell their debt securities.[2] It also knows as debt market or credit market. It is less risky than the equity market. In equity market, stocks  are purchased and sold every day on trading exchanges and it include high risk because every kind of stock has potential to create fluctuations in the market. Whereas, the risk level in Bond market is low, however, they do not offer high potential return on investment as compared to equity market.[3]   These markets are important source of funds, especially in a developing economy like India. The two main kind of bonds which are highly valuable are ‘Corporate Bonds’ and ‘Government Bonds’. Now lets have a look what do we mean by ‘Government bonds’ and ‘Corporate Bonds’.

Government Bonds: In a simple language, government bonds are kind of loan, which is issued by the governments around the world to raise capital to fund their projects, which are lacking capital. These bonds can be structured in number of ways but at the simplest government promise to pay buyer small cash payments in the forms of ‘coupons’ and set a fixed rate, usually twice a year and when the bond get matured, the buyer gets his money.[4] Recently there is growth in investors locking up for government bonds because the interest rate given by the government is higher than other products.[5]

Corporate Bonds:  In corporate bonds, investor who buy corporate bonds, give loan to company, on which company makes a legal commitment to return the principal amount along with the interest prescribed in the bond. Unlike, equity shareholders, who do not get any amount, if the company runs into losses, in the corporate bonds company has legal obligation to pay the amount with interest.[6] Recently the Reserve Bank of India has also unveiled new policies regarding the investment in corporate bonds in order to raise it to global standards. The RBI has thrown open ‘masala bonds’ to banks in order to maintain there fluctuating capital and financial infrastructure.[7]

It can be concluded from the above that, India’s bond market is getting stronger and still there are lot of opportunities for growth in the market. The same can be demonstrated from the fact that till March 2014, India is fourth largest bond market among the Asian countries with the total market of US $ 812 billion, with majority of government bonds of $ 569 billion, which is itself 30.4 % of GDP. On the other hand Corporate bonds share a relatively smaller part of $ 242.5 billion, which amounts to around 13 % of GDP. Also corporate bonds account only 30 % of total outstanding bonds in India. Also one of the other member country of BRICS, China is the second largest bond market among the Asian countries with the net outstanding debt of $ 4724 billion, which is 50.3 % of its GDP. In China also government bonds are covers major part of its bond market.[8]

Conclusion

Therefore, there is no doubt left why the unification of BRICS bond market can achieved all together. The bond market gives surety of return of money on investment. India is one of the fastest growing economy with huge investment in mega infrastructural investment, with the opening up of the FDI in various sectors and government keen interest in fostering growth by creating new environment, required huge investment. Therefore India is a huge market for the debt securities. The other BRICS countries that include Brazil, Russia, China and South Africa are also powerful economies and are investing a lot domestically, therefore needs huge amounts of funds. Brazil which hosted 2016 olympic, invested huge amounts of capital in mega infrastructures. The same is with other countries too. If there is a single bond market institution like New Development Bank, where the BRICS countries can issue bonds and raise capital and these bonds are available to all, then a huge amount of capital can be raised just from these kinds of bonds and all the member countries will be cash rich all the time and can invest in their projects. But, having said that, there are many challenges to this idea of unified bond market. The long term borrowers are still heavily dependent on banks because of various better options like cash credit and overdraft facilities. Also financial institutions does not get any tax incentives with bonds. It also has been observed that foreign portfolio investors have not shown that keen interest in the corporate bonds, may be because of low rate of returns. But the current scenario can be changed for the better and the idea of unified bond market can incorporate new dimensions which may suits every ones interest.

[1] Special Correspondent, “Time to create a BRICS bond market: SEBI Chief”, The Hindu, http://www.thehindu.com/business/markets/time-to-create-a-brics-bond-market-sebi-chief/article9154819.ece

[2] India Debt Market, business map of india.com, http://business.mapsofindia.com/india-market/debt.html

[3] Investopedia, http://www.investopedia.com/ask/answers/071415/what-are-differences-between-debt-and-equity-markets.asp

[4] Jill Treanor and Katie Allen, “What are the government bonds?”, The Gaurdian, https://www.theguardian.com/world/2016/aug/13/what-are-government-bonds

[5] Prashant Mahesh, “8 % Government of India Savings Bond make a comeback”, The Economic Times, http://economictimes.indiatimes.com/markets/stocks/news/8-government-of-india-savings-bond-make-a-comeback/articleshow/51797976.cms

[6]“ What are Corporate Bonds?”, Security and Excange Commission, https://www.sec.gov/investor/alerts/ib_corporatebonds.pdf

[7] “Raghuram Rajan hands pretty parting gifts to India’s corporate bond market”, The Economic Times, http://economictimes.indiatimes.com/news/economy/policy/raghuram-rajan-hands-pretty-parting-gift-to-indias-corporate-bond-market/articleshow/53864979.cms

[8] “Indian Bond Market: Striking a Chord with Asian Peers”, ARE Ratings Professional Risk Opinion, June 10, 2014,  http://www.careratings.com/upload/NewsFiles/Studies/Indian%20Bond%20Market-%20Striking%20a%20Chord%20with%20Asian%20Peers.pdf