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Corporate Bond Market in India - Indian Economy UPSC Notes

A corporate bond is like a loan taken by a company from the public or investors. When a company needs money for a long time it issues bonds.
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Corporate Bond Market in India 

What is a Corporate Bond Market?

  • A corporate bond is like a loan taken by a company from the public or investors.
  • When a company needs money for a long time (like 5-10 years) to build factories, infrastructure, or expand business, it issues bonds.
  • People who buy these bonds are like lenders, and the company promises to return the money with interest after some time.

Example:
Imagine a company like Tata Motors needs ₹1000 crores to build a new car factory. Instead of taking a bank loan, Tata Motors issues bonds to the public. People invest money in these bonds, and Tata Motors promises to repay after 10 years with 8% annual interest.

Importance of Corporate Bond Market in India

  • A strong bond market helps companies get long-term money easily.
  • It reduces the pressure on banks, which cannot always provide huge loans.
  • It is less risky compared to the stock market because bonds give fixed returns.
  • Helps India to raise funds for big infrastructure projects like highways, airports, power plants, etc.

Why is the Corporate Bond Market Growing Slowly in India?

  1. Lack of Good Companies (Transparency Issues):

    • Only a few companies are trustworthy with good governance.
    • Investors are scared to invest if companies are not transparent or reliable.

    Example: A new or unknown company issuing bonds may not get many investors because people don’t trust them like they trust Infosys or Reliance.

  2. High Cost and Complicated Process:

    • Publicly issuing bonds is costly and full of rules.
    • So, companies prefer taking loans from banks or selling bonds secretly to a few investors (called private placement).

  3. No Strong Laws for Investor Protection (earlier):

    • Earlier, India didn’t have good laws to protect investors if companies failed.
    • Now, Insolvency and Bankruptcy Code (IBC 2016) is helping fix this problem.

  4. Lack of Market Infrastructure:

    • India still lacks good systems and platforms to run a big bond market smoothly.
    • Setting up such infrastructure takes time and money.

What is the Government Doing to Improve the Bond Market?

  1. Foreign Investment Increased:

    • Foreign investors like big banks and funds can now invest up to 15% in corporate bonds (earlier, it was 9%).
    • More foreign money means more funds for Indian companies.

  2. Investor Charter:

    • Government is creating rules to protect investors’ rights.
    • It will make investment processes transparent and safe.
    • Example: If someone has a problem with their bond investment, there will be a way to complain and get help.

  3. Backstop Facility (Announced in Budget 2021-22):

    • Government will set up a "backstop" or safety net.
    • If investors cannot sell their bonds, the backstop facility will buy those bonds.
    • It acts like insurance, reducing risk for investors.
    • Example: If a company is facing a bad phase and nobody is buying their bonds, the government’s backstop will step in and buy them.

Conclusion - Why is it Important?

  • A good corporate bond market means companies can easily raise money for big projects without depending only on banks.
  • It will help India grow faster, especially in sectors like roads, railways, power, etc.
  • Also, it gives investors a safer option than the stock market for earning fixed income.


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