This Paper has won Consolation Prize in the CoolAvenues' Paper-writing Competition - "In Search of Excellence" - for the Year 2005.

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Abstract

Junk Bonds simply mean high returns paying Corporate Debt Market with an obvious high risk associated with them. At present, we have a limited corporate debt market and a non-existent junk bonds market. In India, junk bonds could serve as an important source of funds by middle-market companies, either new entrepreneurial companies or older firms, which need new financing to change their way of doing business.

Thus, the regulator should look for developing a vibrant corporate debt market, and subsequently, the junk bonds market. The reason for absence of junk bonds market can be low investor confidence and current regulatory framework which discourages investments in below investment grade issues.

The key to development of this market can be to have a strong regulator to ensure the fair pricing of securities, as it prevents colluding and intermediary pricing bias and inefficiencies. The investor confidence can also be increased by ensuring appropriate transparency in the system through efficient credit appraisal mechanism by Credit Rating agencies. Investor base for this market also needs to be widened. Securitization by banks is one step in the right direction and mutual funds and pension funds should be allowed to invest in the market.

Junk bonds could eventually turn out to be a big success because there is an upswing in economy and the chances of a company's defaulting is less.

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* Contributed by -
H. Sandeep Reddy & Puneet Jain,
Indian Institute of Management Kozhikode,
Kozhikode, Kerala.