Why India's infrastructure is poor
- From: Ajanta <ajanta@xxxxxxxxx>
- Date: Thu, 18 Aug 2005 21:02:10 GMT
<http://us.rediff.com/money/2005/aug/18guest1.htm>
Why India's infrastructure is poor
By G.N. Bajpai
August 18, 2005
If there is scepticism about India sustaining 7 per cent GDP growth, it
stems from the country's crumbling infrastructure. But financing
infrastructure remains a constraint because equity seems to be the
major option in raising resources.
Financing greenfield projects, which is what infrastructure with long
gestation periods is all about, is like converting investors in equity
into venture capitalists.
Flogging the equity sector to finance infrastructure could lead to
annihilation of the internationally efficient segment of the securities
market.
Further, in an environment where too much money chases too few scrips,
investors inevitably fall prey to even non-serious entrepreneurs.
Unfortunately, the other leg of the securities market -- corporate debt
-- remains primordial. The Indian debt market is still only wholesale,
and efforts to encourage retail participation have neither been serious
nor encouraging.
In 2003-04, the corporate sector raised Rs 52,752 crore (Rs 527.52
billion) through issues of debt securities, of which Rs 48,428 crore
(Rs 484.28 billion) were privately placed and the share of debt in
resource mobilisation was 74.75 per cent.
In fact, the current state of the debt market (dominated by private
placements) hangs as a systemic risk over the financial system.
It is a happy augury that the finance minister in his last Budget
speech announced the government's intention to focus on the corporate
debt market; a committee to go into the issues involved and give
recommendations, has also been appointed.
The issues hindering the development of the debt market can be broadly
classified into product offering, issuance, listing, trading, and
clearing and settlement.
A range of products provides, among other things, flexibility to
issuers and investors in asset liability management, and facilitates
integration of the domestic market with the global setting.
The introduction of interest rate options and swaps, in addition to
interest rate futures and the development of a junk bond market, along
with a corporate bond index, are fundamental to fostering vibrancy.
The other requirements are building the yield curve, corporate bond
lending and borrowing, and repos. To increase liquidity for the bonds
of less-known or infrequent issuers, there is a need to encourage the
insurance industry to market bond insurance, which is quite common in
developed markets. In fact, in the US four companies focus mainly on
bond insurance.
Some fundamental ingredients are missing in the Indian micro structure,
like standardisation of the day count convention, quotes, and yields.
There has to be uniformity in the market place along with standard
specifications for the different parameters. The day count convention
is used to determine the number of days between coupon dates, important
in calculating the accrued interest and presenting value when the next
coupon payment is less than a full coupon period away.
This may appear to be elementary, but unfortunately the problem does
exist. In order to exemplify the point, whereas for dated government
securities the market follows the 30/360 day count convention (i.e.
each month is taken to have 30 days and a year 360 days, irrespective
of the actual number of days in the month or the year), the corporate
bond market does not follow any specific convention, leading to
confusion in calculating accrued interest.
Further, while a majority of issuers follow the actual/365 day count,
certain big issuers like the Indian Railway Finance Corporation follow
a slightly different system.
There is serious concern amongst market participants with regard to the
current disclosure regime, especially the efforts required by way of
disclosures by companies that frequently issue debt paper.
In case a master-listing document for debt securities is put in place,
to which the issuer can attach details of the pricing of each issue and
update Schedule I for every fresh issue, many operational hassles can
be obliterated.
The format prescribed for the annual report could be adopted for
disclosure with regard to litigation and appeals, items like contingent
liability, risk factors, and promise vs performance.
Similarly, incentives like reduced stamp duty, listing fees and demat
application charges for reissued bonds will motivate issuers to access
the market and list debt paper. Fluctuations and the thinning of
interest rates make time and cost of great essence in the matter of
raising debt capital.
The development and vibrancy of a debt market requires the trading of
debt instruments on an exchange platform that offers greater
transparency, wider participation and improved liquidity.
Though trading in corporate bonds and government securities was
launched with fanfare, it has not taken off for a variety of reasons.
A unified trading platform, reduction of the minimum tradable market
lot, market making and permitting financial institutions to participate
are crucial in developing a secondary debt market.
Further, doing away with the counter party limits for corporate bonds
for each secondary market transaction at the exchange, along with the
removal of the single broker stipulation, will greatly help.
Alternative tools for risk management, which do not impact volumes, and
therefore vibrancy, can be marshalled.
Clearing and settlement are greatly facilitated if there is one
clearing corporation/agency. If there is more than one, as is currently
the case, it must be ensured that they talk to each other in real time
and provide an environment similar to the equity segment.
One of the major arguments advanced against trading on the exchange
platform is the length of the settlement cycle. While this has
contracted rapidly to T+2, it is a day longer than the OTC trade cycle
of T+1.
With match making conducted on the phone, it is not certain whether T+1
or T+0 actually obtains for the majority of transactions.
The Reserve Bank of India has been working assiduously on real time
gross settlement and it should be possible to move to T+1 for the debt
market, facilitated by rolling settlements and dematerialisation of
securities.
Even though the outstanding issues in the way of developing a vibrant
debt market are quite a few, they are not intractable. Given the will,
it should be possible to tackle all of them.
A developed debt market will inter alia facilitate fund-raising for
infrastructure and provide an incentive to FIIs to stay invested in
India if and when the down cycle in the equity market takes place,
thereby marginalising systemic risk posed by today's inflow of
portfolio money.
[The author is the former chairman of the Securities and Exchange Board
of India (Sebi)]
=
.
- Prev by Date: The truth about Article 370
- Next by Date: 'US to cap our N-program' Satish Chandra
- Previous by thread: The truth about Article 370
- Next by thread: 'US to cap our N-program' Satish Chandra
- Index(es):
Relevant Pages
|
