It’s unfortunate, but true! The strangest thing about the Indian capital market is its retail investing community. While they have already mastered the art of losing money in the equities market almost on a daily basis, they have no clue about a safe heaven called the corporate bond market. They are ready to bet their net worth for a 12-15% return on the tips given by the so called market pundits, but they are not ready to learn about how to earn 8-9% ‘risk-free’ returns by investing in corporate bonds. And the result? While the key nations across the world have a well balanced capital market with the bond segment complimenting the equities segment, India on the other hand has a capital market wildly tilted towards the equities – conspiratorially so, because of the lobbying power of the equity powerhouse FIIs. Between 1996 and 2008, the ratio of equity market capitalization to GDP has more than trebled to 108%, while that of the bond market has less than doubled to just 40%. The worst issue is that only 3.3% of this is contributed by the corporate bonds. Why should it be like this, I ask? Why is the Indian corporate bond market at such a dismal state despite having such a large number of listed companies?
Well, the major reasons are, one, a lack of interest on the part of India Inc., and two, as I mentioned before, a well managed calumnious tactic to never motivate retail investors in the bond market. So far, India Inc. has walked out of this responsibility by conveniently blaming the lack of demand for corporate bonds in India. But the truth underneath depicts an ugly picture of vested interests. While the corporate sector pays around 9-11% for raising long-term funds in form of bank loans or issue of bonds, in the latter case, the companies need to maintain a level of transparency for the whole world – they can do away with the same in case of loans from banks. Moreover, while raising funds through bonds, companies need to face the acid test of investors due to the due diligence process. At the same time, in a country like India, which ranks 87 in the world (Transparency International’s Corruption Perception Index 2010), paying a little bribe to get a loan clearance is not a big hassle and Indian companies know it quite well since the license raj days. While there is a lot that can be discussed, the LIC Housing Finance bribery scam, where the CEO got arrested, is the pristine example with which I shall rest my case.
But then, why blame the corporate sector alone? Has the government shown any determination to develop the market? None whatsoever. There is no doubt that the intent was there always (remember the 2005 R. H. Patil committee report, which is now biting dust somewhere on bureaucratic shelves), but the interest was always missing. While governments the world over have encouraged their bond markets with various tax incentive models, India is yet to formulate anything in this direction. At the same time, equity investors are enjoying a fair deal of tax free provisions. If that is not enough proof of some deliberate connivance between the government and the equity players, then what is? Despite the Prime Minister requesting his finance ministry for developing a ‘vibrant’ corporate bond market in India, the chapter was again missing in the latest Union Budget. Not that we were too surprised by such a ramshackle act of ignoring.
Keeping in mind that the country now needs a massive $1 trillion investment in the infrastructure sector to keep up with a near double-digit growth rate, the best way at the moment is to rev-up the corporate bond market. And when do I personally expect this to happen? 2015; no sooner...
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