In a call for significant reform within India’s debt market, Mihir Vora, Chief Investment Officer at TRUST Mutual Fund, emphasized the need to revive the vibrancy that characterized the Indian bond market in the ’80s and ’90s. Speaking at the SEBI SAMVAD Symposium, Vora outlined several key challenges facing the sector today, stressing the need for proper regulation and market unification to improve trading efficiency.
Debt Market Settlement Complexity and Fragmented Systems
Vora expressed deep concern over the complexity of debt market settlement and the fragmented nature of the trading platforms currently in use. “The plethora of platforms and systems, each regulated by different bodies, is a significant issue for the industry,” Vora remarked. He highlighted the operational burden, explaining that debt fund managers and traders use 12 platforms daily, excluding newswires.
This fragmentation, according to Vora, impedes the efficiency of India’s bond market, which lags behind its equity market counterpart in terms of trading volumes and settlement efficiency. The introduction of innovations like T+1 and T+0 settlement cycles has propelled India’s equity markets to compete with global giants, but the bond market remains far behind, struggling with fragmented systems and regulatory gaps.
Bond Market Size and Low Turnover in India vs. US
Vora also painted a stark contrast between India’s bond market and that of the US, pointing out the considerable gap in market size and turnover. “In the US, the bond market is three to four times the size of the loan market, whereas in India, it’s the reverse. Corporate bond turnover in the US is approximately 2x annually, compared to just 0.3x in India,” he noted.
This low turnover rate in India underscores the underdeveloped nature of the bond market, a situation exacerbated by investor risk aversion, which has slowed market growth. Pre-2018, the market was growing at a healthy 16% CAGR, but growth has slowed to 8-9%, which is even below nominal GDP growth.
Insurance Companies and Banks: Hindrances to Growth
One of the key hurdles identified by Vora is the limited participation of insurance companies in corporate bonds. He explained that these companies are restricted by regulatory requirements that prioritize safer assets such as government securities and highly rated bonds. On the other hand, banks, despite their superior credit assessment capabilities, lack long-term liabilities, which limits their participation in the corporate bond market.
Retail Participation and Tax Disadvantages
Vora also tackled the issue of low retail participation in corporate bonds. He attributed this to tax disadvantages faced by bondholders compared to equity investors. “Addressing this disparity through tax incentives could encourage broader participation,” he said, underscoring the need for tax reforms to boost retail investor involvement in India’s corporate bond market.
Need for Unified System and Regulation
Vora’s insights shed light on the multiple challenges and inefficiencies plaguing India’s bond market. Unifying trading platforms, improving regulatory frameworks, and offering tax incentives are critical steps toward revitalizing the market and ensuring sustainable growth. This call for reform aims to enhance market liquidity, encourage investor participation, and ultimately bring India’s corporate bond market on par with global standards.
