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It is important to realize the significance of junk bonds in a diversified portfolio. To minimize the default risks, it is advisable to diversify the junk bond investment.

3) Reduction in arbitrage & speculation

Indian primary capital market has been affected to a great extent by speculators. With the junk bonds providing safer and better opportunities over a long term, we can expect the segment to stay safe from the arbitragers and speculators.

4) Fallen Angels in junk bond market should have a stringent regulation as they have a higher default risk. Rising stars should be encouraged to issue junk bonds as it offers them additional medium to gather funds.

5) A self regulatory organization

Like the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Primary Dealers Association of India (PDAI), we propose to establish a self regulatory mechanism for the junk bond market. It will be a crucial layer between the regulator and market, and contribute to develop new benchmarks and products besides providing training and development support to participants. It will formulated guidelines for dispute resolution mechanisms and would also be involved in the process of developing standard practices and codes of conduct.

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* Contributed by -
Ankit Chetan & Sudhanshu Duggal,
National Institute of Industrial Engineering (NITIE),
Mumbai.