SEBI makes trading in bonds through govt corps mandatory

On the eve of Diwali, Securities and Exchange Board of India (SEBI) has given a boost to the corporate bond market. The market regulator has mandated on Friday that all trading in corporate bonds shall be cleared and settled only through the clearing corporations, NSSCL and ICCL. This means that entities trading in bonds won't have to bother about the counter party not paying up. CNBC-TV18's Latha Venkatesh reports.

The primary problem this move solves is: will the counter party mutual fund not pay up? Until now, you just have the two parties bilaterally buying and selling bonds and there is this fear that people may not pay up and when it goes through the clearing corporation, it already has an escrow account and has tied up the funds of the other party and therefore the risk that it will not be paid up has been obliterated and that could boost volumes just a bit.

However, it's not an answer to all the problems plaguing the corporate bond market - the prime reason has also been that when you take a loan from the bank that is not mark-to-market but as corporate bond will be mark-to-market as interest rates fall of because of liquidity or market risks. Therefore, banks have been vary of getting too much into bonds even if banks get in, they do it only for the AAA companies. For AA companies, the loans sometimes becomes cheaper than a bond for the simple reason that it could be a priority sector, it could be an exporting company for various reasons and banks have a relationship with that corporate, so they are ready to give a loan whereas in the bond market, it's not that easy and it gets risky but the most important problem has been risk mitigation.

We know of many companies - even AAA ones - that have defaulted on debentures and investors have not been really able to get back their money. It's happened with some very respectable companies. So the corporate bond market has its own problems as to why you may not see such a huge issuance but nevertheless this is a first good step. Bankers are still cribbing that they would be very happy with the CCIL, which is the clearing corporation for government bonds, becomes the clearing corporation for corporate bonds too. Now they have to deal with two entities, which will mean two separate accounts and two separate minimum balances.