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

Page - 1

Synopsis

This paper highlights the groundwork necessary for building a Junk Bond Market in India and its likely impact on the overall economy. Diverse researches carried out earlier point out that junk bonds combine risk of a bond with returns of equity.
It could well and truly be an investment tool that augments growth of the SME sector battling due to shortage of funds. Bank loans can be a lot stressful as it has a lot of covenants attached which hamper flexibility, limiting such eventualities can be the USP of junk bonds. These bonds help in development of a vibrant market for takeovers, mergers, and leveraged buyouts. Closely associated are corporate restructurings involving divestitures, spin-offs, and large stock repurchases for cash and debt.

The market holds distinct opportunities for its diverse participants. The investors in junk bonds obtain risk premium that is considerably more than the additional risk undertaken by them. Moreover, there exists a realistic possibility of appreciation of security due to factors such as interest rate movements, bond rating appreciation, etc.

This high yield debt market helps in avoiding any unwarranted banking crisis which may arise on account of centralized source of funding. Junk bond market serves as a substitute as well as a complement to the existing banking framework of our economy.

Next

* Contributed by -
Saurabh Joshi & R. T. Sivasubramaniyan,
PGDM - II Finance,
SCMHRD, Pune.