Previous

Page - 4

Poor liquidity in secondary market is attributable to inadequate number of good papers and lack of sufficient investor base in terms of quantity as well as diversity. We can address the liquidity issue in the following ways: -

By enlarging number of investors - Existing players should be encouraged to invest in corporate bonds like mutual funds, pension funds, banks, etc.

By introducing good quality paper - It is obvious that if the best companies come out with bonds, investors will be ready to grab them.

Lack of reliable and up-to-date information - In India, 90% of the corporate debt takes place through private placement, and hence, there is not much dissemination of information.

This paper puts forward the case for a market in junk bonds in India, with the argument that such a market with the proper regulation and institutional capacity (in terms of credit ratings organisations, etc.) can provide impetus to high-risk ventures that wouldn't otherwise be able to secure funding from regular channels.

The Case for Junk Bonds

In India, there are various constraints preventing the growth and development of a thriving junk bond market. Since the only participants in the bond market are banks, primary dealers, financial institutions, mutual funds and corporates, there is absolutely no retail presence. Also, the market regulator SEBI prevents most market players including mutual funds from investing in junk bonds. Mutual funds can only invest in AAA or AA+/- or equivalent bonds.

Next

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