The nascent debt market of India is likely to get a boost from the government's decision to allow greater participation of foreign institutional investors as it will help in creating liquidity, according to industry chamber Assocham.
"The government decisions to increase the FII (foreign institutional investment) investment limit in the government securities and corporate bonds by USD 5 billion would open up new avenues for FII investment in debt and cater to the growth of debt markets in the country," Assocham President Swati Piramal said.
According to Assocham's 'Indian Financial Markets-Roadmap 2020, Indian equity markets are more popular and evolved than the debt markets whereas in developed economies bond markets tend to be bigger in size then the equity markets.
Although we have the largest number of listed companies in the capital market, the share of corporate bonds in GDP is merely 3.3 per cent, compared to 10.6 per cent in China 41.7 per cent in Japan, 49.3 per cent in Korea among others, it said.
The Indian debt market is composed of government bonds to the extent of 92 per cent of the volumes; the corporate bond market is still nascent.
Companies in India raised Rs 2.12 lakh crore through corporate bonds in 2009-10, up 22.71 per cent from Rs 1.73 lakh crore in 2008-09, the study said.
Total trading in corporate bonds more than doubled from an average of Rs 1,550 crore in October 2009 to Rs 3,356 crore in March 2010, it added.
Assocham further said that measures should be taken to reform the debt market like -- uniform stamp duty, screen based trading, clearing house settlement, increase in secondary market activity, which would lead to transparent price discovery and avenues for early exits for investors.
Besides, there should be a gradual relaxation of investment restrictions and forced rule based buying on long-term investors such as insurance companies, pension funds and banks.
Credit trading is an essential prerequisite for the development of the corporate debt market.
Regulatory reforms are required in this space keeping in mind the learnings from the International space, Assocham said, adding that the current withholding tax of 20 per cent should be removed to encourage investors to invest in debt securities.