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Need for Junk Bonds in India

The major issue amongst Indian bond markets has been how companies with poorer ratings can raise funds. At times the banks and FIs are reluctant to invest in even the 'AAA-rated' companies.
So far in the junk market, there should be a different debt market apart from the existing one. Second and third-graded companies can raise funds from there.

With the recent strong development in Indian capital market backed by strong confidence shown by FIs and with strengthening of rupee, this scenario of having a different debt markets for junk bonds is now looking feasible. In fact for our nation to progress, this would give a wonderful opportunity for the smaller companies to get funds and implement their ideas.

However, a proper regulatory mechanism also needs to be set-up to avoid high risk of default in the case of junk bonds.

As raising funds in the debt market is getting increasingly difficult for the financially weak companies, a junk bond market should be developed for them but with the provision that there should be a strong and efficient insolvency and recovery process. If a company fails in paying after say, the second quarter, then immediate steps should be initiated for winding it up.

This could also solve the problem faced by banks and financial institutions when investing in weak companies.

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