Former Sebi Chairman Ajay Tyagi has proposed bond market unification for “economies of scale and scope” in the market.
The government securities market (G-Secs) and the corporate bond market are currently separate and follow different regulatory regimes. “The unification of these two markets would allow transparent transmission of pricing information from G-Secs to corporate bonds. This would lead to the removal of artificial investor segmentation,” he said on Friday, as was addressing the 4th International Conference on Capital Markets and Corporate Finance at IIT Mumbai.
Unifying the regulatory structure for trading, clearing and settlement of corporate bonds and G-Secs will result in “economies of scale and scope” leading to greater competition, innovation and efficiency across the steps. “It will also lead to increased liquidity in corporate bonds as well as G-Secs, and actually help the government increase its debt,” Tyagi added.
“The most important step that needs to be taken and which I have been advocating for some time is the unification of the bond market… unifying the regulatory regime for government securities and corporate bonds, both for the issuance only for trading,” the former Securities and Trading said. Exchange Board of India (Sebi) said the chairman.
“Government borrowing to cover its budget deficit dominates the domestic debt market in India. As a result, within the global bond market – both the primary and secondary markets – the G-Secs have an overwhelming presence. Some have even argued that the ever-increasing size of government borrowing is effectively crowding out corporate borrowing. The pricing of corporate bonds is inherently dependent on the presence of a continuous yield curve in G-Secs,” he noted.
“There is a need to harmonize the rules of ownership, governance, risk management and compliance of market infrastructure institutions as well as the trading, clearing and settlement mechanism across platforms and class of products for all types of securities in the financial market,” he said.
The government’s decision to establish a Development Finance Institution (DFI) for infrastructure debt financing is a welcome step, Tyagi said, adding that the institution should be made operational soon.