SEBI Considers Using Market Makers for Indian Corporate Bonds
(Bloomberg) -- India’s capital market regulator is proposing to create a set of market makers for further deepening and strengthening the country’s corporate bond market.
These entities will help bring liquidity to secondary market for corporate bonds, where trading is limited to a small number of highly-rated notes or restricted to trades by financial institutions, banks and mutual funds, the Securities and Exchange Board of India said in a consultation paper Tuesday.
The role of market makers in corporate bond market will be similar to that of primary dealers in India’s sovereign bond market. They will provide both buy and sell quotes in the market, help absorb temporary supply and demand mismatch as well as reduce the impact of shocks on market volatility.
“This move by the regulator will increase investor participation in the corporate bond market because these market makers will provide two-way quotes, helping buyers an easy entry and exit, thereby reducing the current illiquidity in the secondary market,” said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial Ltd. “It will also cut the funding costs for companies as more the number of buyers, the better is the price discovery.”
Indian authorities have long tried to expand the nation’s corporate bond market to better distribute credit risks and wean companies’ reliance on bank loans. Lack of liquidity in the secondary market forced Franklin Templeton last year to shutdown some of its Indian debt funds due to high exposure to lower-rated bonds, exposing the need to improve the nation’s corporate bond market.
READ: Why Franklin’s Indian Debt Funds Faced a Liquidity Squeeze (1)
The regulator has sought comments from market participants and stakeholders on the proposed introduction of market makers by Dec. 16.
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