Drawbacks of SEBI’s Rule

Why in news?

Securities and Exchange Board of India is planning to make new changes in the bond market.

What are the difference between Bond market and Banks?

• In the bank-based system, banks play a dominant role in mobilising savings, allocating resources among the various sectors of the economy and regions of a country, and providing risk management facilities.
• Developed countries such as Japan, Germany, France and Italy and developing countries such as Argentina, China, India and Pakistan follow Bank based system.
• In a market-based system, the intermediary role of banks is reduced to a great extent and the investors or the savers directly park their funds with the borrowers (corporates).
• Developed countries such as US, UK, Singapore and Korea and developing countries such as Brazil, Mexico and Turkey follow the market-based system.
• Economists have found that financial systems tend to become more market-based as the economy develops.

What are the concerns with recent decision of SEBI?

• Stringent regulation - Market regulator makes it mandatory for companies with over Rs. 100 crore debt and a credit rating of ‘AA and above’ to compulsorily raise 25 per cent of their debt from the bond market.
• The move seems to be a premature one, Instead of allowing the market to function on its own based on demand and supply, there seems to be an effort to arm-twist firms to go in for a particular type of financing.
• Investor’s attitude - Indian savers find it comfortable to lend the funds to banks and pass on the risk management to banks.
• For this transfer of risk management, they are willing to accept lower return on their funds, Thus forcing depositors to take the market risk will not work out.
• If the investors shun the equity or bond market, it is because of their risk aversion.
• Structural issues - Given the highly leveraged state of corporates and the banks’ huge NPA problem, it is not good idea expect corporates not to default on bonds on maturity or interest payment.
• Any default in interest payment by the company will make the bond price plummet in the market and there may not be buyers, which makes liquidity of the bond unreliable.

What is the way forward?

•  Market participation has to mature on its own over a period and regulators can only provide conducive environment to facilitate that.
• The basic function of SEBI is to protect the interests of investors in securities market.
• Thus forced borrowing through bond market cannot be in the interest of the investors or corporates.

Source: Business Line