Source: FE
Context:
India’s corporate bond market is heavily skewed toward AAA-rated securities, leaving AA–BBB segments illiquid and unattractive despite their higher yields. To address this structural gap, Crisil and the Association of Mutual Funds in India (AMFI) are preparing a detailed proposal for a market-making framework for sub-AAA corporate bonds. The initiative aligns with consultations launched by the Department of Economic Affairs (DEA) under the Ministry of Finance.
Why a Market-Making Framework Is Needed
- About 66–67% of bond market trading is in AAA-rated securities.
- Nearly 33–34% involves AA-rated papers.
- BBB and other lower-rated segments see negligible trading, leading to low liquidity and high exit risk.
- MSMEs, mid-tier companies, NBFCs, HFCs, and startups—most of which do not enjoy AAA ratings—struggle to raise debt capital.
- A liquid market for AA–BBB bonds can unlock funding, reduce borrowing costs, and improve credit transmission.
DEA’s Proposed Models
The Department of Economic Affairs is reviewing two possible market-making structures:
1. Government-Backed Market Maker
- A government-sponsored entity will provide continuous two-way quotes (buy & sell).
- Ensures stability and market confidence.
- Useful for kick-starting liquidity in the AA–BBB space.
2. Private Entities as Market Makers
- Large institutions with high capital and net worth may act as market makers.
- Could be supported by a government backstop facility to mitigate risk.
- Encourages private sector innovation and competitive spreads.
What the Framework Will Cover
- Spread management for lower-rated papers
- Inventory handling rules for market makers
- Transparency and reporting norms
- Risk-mitigation safeguards to avoid concentration of exposure
- Mechanisms for price discovery in illiquid segments
Why This Matters?
According to industry participants:
For Investors
- Offers greater liquidity and better exit options.
- Encourages participation in higher-yielding sub-AAA bonds.
- Standardisation ensures better rate transmission and transparency.
For Issuers
- Expands access to debt financing, especially for:
- MSMEs
- NBFCs
- Housing finance companies
- Startups
- Reduces overdependence on AAA-dominated markets.
- Supports economic resilience by giving mid-tier companies new funding pathways.
