SEBI intends to develop corporate bond market: An analysis

SEBI chairman C B Bhave ha ssignalled his intention to develop the corporate bond markets in the country. Bhave said SEBI is looking at clearing and settlement of corporate bond market deals through a clearing agency, a move that will significantly improve the settlement process.

"In the corporate bond market, we are looking at how to improve the settlement process. One of the issues that we have taken up is can the settlement be done through the medium of the central bank. Between the pay in and pay outs for sometime the money lies somewhere. The markets would feel the safest if the money lies with the central bank rather than with any one entity, so we are trying to see it," Bhave added.

It certainly signifies the intension on the part of SEBI to improve the corporate bond market or actually to build a corporate bond market – we hardly have a market now. The problem that the SEBI chairman is referring to is that at the moment the corporate bonds are dealt one-on-one i.e.

If A buys from B, the deal is between them – over their counter. But what SEBI would like or what market development means is that the counterparty comes and like the NSE is the counterparty or BSE is the counterparty for trading of shares. Likewise there is a clearing agency. So you sell to that agency and buy from that agency and therefore the risk of uncertainty of whether the seller will deliver will be wiped out.

What Bhave is saying is that the RBI should be either acting as the clearing corp or putting in some kind of a settlement process. The Clearing Corporation of India which is the CCIL is the settlement agency for government bond transactions. He is probably hinting at that. It isn't very clear from his statement whether he is hinting at the RBI or whether he is hinting at say an agency like the clearing corp but the point is the settlement has to go through an agency and not just be done bank-to-bank, bank-to-broker or bank-to-trader or bank-to-corporate. That's where it doesn't develop into a market.

May be with his efforts and with some corporation from RBI, may be some such a clearing corporation will come through. If that happens then a lot of problems get sorted out. Then there will be more interest from many parties and then repo-ability of a corporate bond – all that can happen. The corporate bond market development has been through several fits and starts but one hopes this time around it will come out good.