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It is quite evident that the growth prospects are good and investors would be willing to put in their money. A developed junk bond market will provide an option to raise low cost capital for corporates, in case they face credit crunch in the bank loan market. Another factor in favor of junk bonds is the fact that when there is an upswing in economy, the chances of company's defaulting are also reduced.

We also need to learn from the mistakes of countries which have developed junk bond markets. For instance, Korea's corporate bond market went through a turbulent period when Daewoo Group collapsed. It led to a liquidity crisis in the bond market as investors were withdrawing their positions. The financing conditions in the corporate bond market tightened considerably, reflecting the greater investor sensitivity to corporate credit risk in the face of a sharp downturn in economic growth.

In late 1980s, junk bonds were used as a source for takeover funding, which resulted in the collapse of the burgeoning junk bond market in USA. The leveraged buyouts, covering up of balance sheets using junk bonds resulted in a higher market risk and ultimately a collapse.

So the regulators must make sure that the capital raised through junk bonds is put to proper use.

Conclusion

Hence, we see that there is a strong case for the development of an active market for the trading of junk bonds in India. The most appealing example of a possible winning situation is that of the securitization of bank NPAs mentioned above.

Concluded.

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

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