Crisil & AMFI Develop Market-Making Framework for AA–BBB Corporate Bonds

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.