India Bond Market Roadmap

October 2013www.asifma.org

1. Introduction
Over the last decade India has been considered a
key growth economy in Asia, one of the “markets
to be in” for foreign investors and a target of many
international corporations looking to outsource
their services to better compete on aninternational scale. In short, India was considered
an emerging success story. However, the reality is
now significantly different as the country grapples
with serious economic and financial infrastructure
issues that are, among other things, impeding
foreign investment. This report proposes anapproach for the implementation of a consistentand coordinated policy to further develop the
Indian bond market for the benefit of India and its
citizens. A more structured approach would enablea much safer and more appealing market for

A combination of a strong equity culture andpersistently high and rising interest rates biases
investors against fixed-rate securities, more so if
such investors are a) forced to take mark-tomarket losses when such instruments are sold andb) typically do not trade their portfolios –traditional public sector banks fall into thiscategory. The advent of floating rate notes (FRNs)
and loans priced off a floating rate (such as LIBOR
or equivalent “base rate”) does help insulate
ASIFMA – October 2013

issuers and investors and ultimately result in astronger overall economy for India.
Unlike most emerging countries, such as China,
India has solid aggregate demand and a consumerdriven economy. At the international level, India
has fairly diversified exports including software,iron ore, commodities and non-commodities
merchandise like machinery and chemicals;
however, the prevalence of a consumer-based
economy gives the country a great advantage overmany other emerging markets that are overly
reliant on exports. Nevertheless, the depth of the
Indian capital markets lags the mature markets -and even China -- and languishes somewhere at
the lower end of the Asian emerging markets.

financial institutions against higher rates, but thisstill does not address the issue of mark-to-market(MTM) losses on legacy fixed-rate instruments inbank portfolios and the reluctance on the part ofthese institutions to take MTM losses. Thus, thereluctance to hold more than the bare minimum in
fixed income securities by a number of influential
market participants results in an in-built bias
against fixed rate securities. Of course, having
more tradable floating rate securities such as FRNs
1

would help address this bias, but FRN issuance hasby and large not picked up.
The still-massive government fiscal deficit burdens
the banking system as banks must comply with a
Statutory Liquidity Ratio (SLR) which contributes tothe low depth of the Indian financial bond market.
Indian banks are required to “buy and hold” alarge portion of Indian government bonds by the
SLR. Consequently, this negatively affects bothinfrastructure funding as well as the private
corporate sector, which are ultimately crowded
out as banks are required to fund government
debt rather than invest in their development.
These sectors are therefore unable to benefit fromthe financing needed for growth and expansion.
Perhaps raising the limits for Foreign Institutional
Investors (FIIs) and other foreign investors toinvest in government securities would lessen thecrowding-out effect, and the government could
borrow offshore since it has a better credit rating
than domestic companies, with the aim to free up
capital domestically for the corporate andinfrastructure sectors. Clearly, there is animmediate and urgent need to bolster a clear,
supervised and straightforward foreign investment
regime to encourage investments in the bondmarket whether it is for government, corporate or
infrastructure requirements.
Finally, there are good policy reasons forconstraining foreign investment into the Indian
capital markets or making that access not as easy
as for the capital markets of mature economies. In
a high inflationary environment with a significant
2. Current Status of Indian Bond Market
In 2012, the size of the Indian bond market wasapproximately equivalent to 27% of the Chinesebond market and 69% of the Korean bond market.
Towards the end of 2012, the total volume ofoutstanding bonds accounted for roughly USD 1
trillion, reflecting an overall increase of 24% fromthe previous year which both government
securities and corporate bonds contributed.

ASIFMA – October 2013

current account deficit, India needs to effectively
manage its currency. As has recently been seen,
foreign money exiting the Indian capital market insignificant amounts can put the currency underpressure and create volatility which has negative
economic consequences. As with most emerging
markets, there is a real desire to attract long term
investment rather than speculative “hot” money.
However, regulation normally put in place toprefer long term investment can have the opposite
effect. Long term investors also need deep, liquid
capital markets as this “real money” still may
require the option to exit an investment. The more
complex the restrictions on market entry, themore likely long term investors will seek flexible
markets elsewhere. Therefore, the deeper andmore liquid the market, the more likely long term
investors will be to participate. Moreover, “hotmoney" flows can actually act as an early warning
mechanism for policy makers to make requiredchanges to their approach before it is too late.
When long term investors exit markets, they are
far less likely to return in the near term.
Without doubt India needs to work on is its
infrastructure sector. The sector lacks thenecessary funding and investment required. For
instance, roads and highways are significantly
underdeveloped, especially in rural areas. Complex
regulation combined with an underdeveloped
bond market hinders investment to flow to theinfrastructure sector.

Government securities comprise 79% of the total
amount of outstanding bonds, a larger percentage
than government securities in China, which is 73%,
and in Korea, which accounts for only 39%. Last
year, the amount of outstanding government
securities increased more steeply, at a growth rateof 23% and reaching USD 792 billion, compared tothe average rate of 18% per year over the period
spanning from 2000 to 2012.

2

Note: Percentage figures at top of bar chart refer to corporate bonds

The percentage of outstanding corporate bonds to
GDP indicates the small size of the Indian
corporate bond market. The total share accounts
ASIFMA – October 2013

for 5.48% representing an extremely small
proportion of the total. In the Asia-Pacific region,
the corporate bond markets of namely Malaysia,
3South Korea, Thailand, Singapore and China,
exceeds that of India as a percentage of GDP. Only
Indonesia has a weaker corporate bond market in
the region. Although it is very small in size as ashare of GDP, the corporate bond market isactually one of the largest in East Asia outstripping
most of these emerging bond markets, with thenotable exceptions of China and Korea. However,the non-financial corporate sector is not actively
represented in the Indian bond market. In fact,
financial institutions, such as banks and non-bankfinancial, together comprise 72% of the overall
amount of outstanding corporate bonds.
As of end 2012, government securities andgovernment bonds accounted for the largest
proportion of the market at approximately USD
543 billion or 68%. By contrast, state government
as well as municipal bonds amounted to 20% of
the total securities, growing on average at anannual rate of 22% from 2000 to 2012. The steadypace of growth can be explained by the increasingneed to fund and finance several large-scale
infrastructure plans.

3. The Need for a Well-Developed Capital Market
India’s growth over the last decade has
contributed to the emergence of a large middle
class, although the GINI coefficient (a statisticalmeasurement of economic inequality) started
climbing over the last twenty years. The availabilityof capital market instruments will assist in a) thegrowing pool of middle class savings being used todevelop a more sustainable and solid foundation
for the Indian economy and b) providing
alternative investment vehicles that provide agreater return than that available on bankdeposits.
For a number of reasons, the bond market shouldbe the leading force in this important process.
First, it would significantly help strengthen andgrow the private corporate sector. Corporations
currently rely heavily on banks as the major source
for financing their businesses. Going forward thismust change. Currently, due to a variety ofreasons, covered in more depth later in the paper,

ASIFMA – October 2013

The different types of bonds in the Indian bondmarket can be categorized into the following:
1- Government bonds: issued directly by thegovernment of India, the so called G-Sec;
2- Borrowing by state governments: madeby single states within India;
3- Tax free bonds: issued directly by quasisovereign companies allow market
expansion for investors and, in particular,
embody retail interest into the market;
4- Corporate bonds: this market must be
further developed as proved by the ratioof outstanding government bonds to total
outstanding bonds;
5- Banks and other financial institutions
bonds: they are underperforming;
6- Tax-savings bonds: issued directly by thegovernment of India, they provide
investors with tax rebates, in addition thenormal rate of interest;
7- Tax-saving infrastructure bonds: issued
directly by infrastructure companies
approved by the government, they offer
tax rebates along with a decent rate ofinterest.

the investor mindset tends to hold securities in a
hold-to-maturity portfolio. An under-developed
bond market gives the banking sector a quasimonopoly position in the lending market. As aconsequence, banks have less and more costly
capital to lend to the small and medium-size
enterprises.
Establishing regular and fair access to the bondmarket for the private corporate sector would
certainly boost overall business growth. In turn, amore liquid and accessible bond market acrosssectors, maturities and ratings classes, would
create investment opportunities for a growing
domestic institutional investor base. This virtuous
cycle could assist in attracting foreign investors;
thereby help the markets become even more
liquid. While it is true that higher rated Indianbonds in the AAA to AA ratings classes haveliquidity (due to a large class of investors such as
insurance companies being restricted to only
investments in high rated bonds), there is a need4to attract additional investors to the lower rated,but still investment grade, and high yield bonds.
By easing investment restrictions on certainclasses of domestic investors this could help todevelop a broader investor base. Additionally, abroader investor base could ultimately function asa shock absorber, creating more stable markets. As
the private corporate sector grows, it will
constitute a solid foundation for employment,
which would in turn contribute to the enlargementof the middle class and continue to further reduce
the wealth gap.
Developing a sound bond market in conjunction
with creating an adequate credit rating industry
would contribute to increased transparency. By
doing so, both the private and public spheres
would benefit enormously. Higher rated firms in
the private sector would benefit as lower
borrowing costs would permit more investmentgrade corporations to fund themselves at lower
rates while investors can use various ratings
metrics to distinguish across companies andsectors. Sub-investment grade firms would also
benefit as access to funding becomes available(albeit at a higher price). The alternative to thesefirms is the current situation of largely being shutout of the markets (as banks and other financial
institutions consider these High Yield issuers to bepoor credit risks). This is clearly not optimal. As far
as the public sector is concerned, lower cost ofcapital (under the assumption that a sovereign or
quasi-sovereign issuer is typically highly rated)would increase the amount the government canactually invest to meet the needs of the real
economy, including education, health care andinfrastructure.
Previous crises have underscored how important it
is for companies to rely on a sound bond market.
The Indian loan market works through arelationship system and therefore companies are
more eager to go through the banking system for4. Establishing a More Robust Bond Market
Promoting the development and the expansion ofbond markets would significantly increase thedepth of the financial markets in India. The
expansion and deepening of the bond market
ASIFMA – October 2013

funding. However, the banking sector cannot be
the only source of long-term investment financing.
At times when the banks’ books are weak andbanks rationalize and tighten lending, the bondmarket becomes the cornerstone for keeping the
economy going, by providing an alternative avenue
for raising capital. Moreover, with the tightened
capital requirements under Basel III and withbanks having to inject huge amounts of capital tosupport their balance sheets, a number of banks,
both local and foreign, have scaled back theirlending activities throughout the Asian region –thus, this is yet another argument in favour of thecontinued development of local bond markets, as
an alternative to the bank loan markets. In
addition, companies needing to pay back loans,especially if stipulated in foreign currency, become
vulnerable to abrupt changes in offshore interest
rates. The recent trend of high exchange rate
fluctuation and the significant devaluation of the
Indian Rupee have squeezed corporations’ profits,
in particular if they have to meet foreign exchange
obligations. Lowering the level of borrowing
stipulated in foreign currency would insulate thedomestic financial system, in effect blocking achannel through which external shocks can beconveyed to the country, and therefore alleviating
the exposure of the corporate sector to currency
and liquidity volatility. This was clearly in evidence
during the Asian financial crisis of the late 1990s,
when countries with relatively low offshore
borrowing by onshore entities (such as India andChina) fared better. By allowing new participants
to take part in the local currency bond market,
credit risk would be smoothed across different
sectors of the economy, alleviating the pressure on
the banking system and making the financial
system as a whole more secure, sounder and lessprone to crises and downturns, which havenegative knock-on effects on the real economy.

would better serve the needs of both the private
and public spheres. Further on in the report, thetechnical aspects for the establishment of a well-5

functioning government and corporate bondmarket will be discussed.
At a very broad level, it is clear that the Indian
regulatory and monetary authorities recognizethat developed capital markets (and especiallywell-established bond markets) confer several
benefits. However, it is worth recognizing theinherent reservations that authorities in Emerging
Market (EM) countries have on the subject of
totally free and open capital markets, especially insituations where investor sentiment towards acountry or group of countries within the EM or aregion, turns substantially negative – the capitaloutflows and accompanying volatility destabilize
not only markets but also the very economic
foundations that underpin a stable and functioning
society (the Asian crisis of the late 1990s and theaccompanying weakness in a number of Asian
countries is but one example of this). Thus, theA. Interest Rate Liberalization
One of the most important factors needed tocreate a vibrant, attractive and accessible bondmarket is the freeing of interest rates to reflectmarket conditions, without artificial caps andfloors. In this regard, ASIFMA supports the effort
made by the Reserve Bank of India (RBI) in
deregulating the interest rate on savings. Before
the liberalization, the rate of interest was fixed at
4%; however, since 2011, banks are free to set
B. Government Bonds
To begin, ASIFMA will address the reform put inplace by the RBI to remove the cap on the amountof government securities per issuance, which waspreviously fixed at INR 700 billion. Removing thiscap has encouraged many new issuances,
outstripping the ceiling which is no longer in place.
Currently, there are more than sixteen bonds
above INR 700 billion, and at least five securities
well above INR 900 billion. This allows large issues
to be traded “on-the-run” for a longer period oftime without distortions.
Another way to prolong the period a security is
traded “on-the-run” could be by allowing on-tap
issuances, i.e. issuing bonds from past issues at theoriginal par value, maturity and coupon rate but at
ASIFMA – October 2013

instinctive desire on the part of the leadership indeveloping economies (India included) to havesome reservations to unfettered capital markets isunderstandable and we acknowledge thesereservations. That said, we still believe that as apractical matter, several steps could be taken to
improve the functioning and efficiency of markets,
without sacrificing prudential control measuresthat could remain in place to prevent undesirable
volatility arising from fickle capital flows. We
outline these practical steps and proposed
initiatives below. Moreover, as we attempt to
explain the best protection against the volatility
caused by rapid "hot money" inflows / outflows is
the development of deep liquid capital markets
with fewer and better designed constraints. Long
term investors also need deep liquid markets andfrequently are put off by excessive constraints on
investment.

their own rates. This is particularly relevant
because it leaves each bank the option to decide
which rate to apply.
With the introduction of the base rate in July 2010,
banks were then able to fix a floor on the lending
rate. Banks are also required to publicly show theirown base rates in order to render the lending
system, as a whole, more transparent and fair.

the current market price. This would relieve
issuers from the pressure of their issuances
moving “off-the-run” too quickly.
Related is the problem of the issuance calendar. In
particular, smoothing out the particularly large
issuances over a longer period of time -- perhaps
over a year or even longer -- would attract
investors’ attention for a more extended period.
ASIFMA acknowledge the solid effort of publishingthe issuance calendar twice a year, in March and
September, thereby alleviating uncertainty in themarket and providing investors with moretransparency.

6A more open and accessible government bondmarket would also be extremely beneficial forgovernment financing and the real economy
development. Adding the Indian government
securities to popular bond indices, such as in the
J.P Morgan GBI-EMGD index, would likely cause amassive up-tick in government bond purchases,
USD 20 to 40 billion according to a research reportby Standard Chartered. Large inflows, along with afreer capital control system, which is a prerequisite
for being included in popular bond indices, would
constitute an avenue for the government tofinance its balance of payment current accountdeficit and to strengthen the Rupee in the medium
to long term. Certainly the cap imposed on FIIs
C. Benchmark Yield Curve
In a properly functioning bond market, the needfor accurate and reliable benchmarks is pivotal inboth the primary and the secondary markets. In
fact, they sway and define the structure of theinterest rate and investors’ expectations for futureinterest rate fluctuations, and they are used as
hedging tools to balance risk. Therefore, thepresence of a liquid benchmark yield curve is thebasis for a sound and robust bond market in whichgovernment as well as corporate bonds can be
traded. By doing so, the markets can achieve ahigher efficiency of capital allocation and thegovernment would also be able to better foreseemarket expectations.
D. Secondary Market Trading
The development of a proper secondary market
constitutes the basis of an advanced and soundcapital market. Its expansion would bring multiple
advantages. First, it would help establish the “riskfree” reference yield curve mentioned above. It
also allows accurate derivatives pricing and thedevelopment of a sound corporate debt market,
which would be priced off the curve, while also
supporting the growth of solid money markets.
Further, it permits government to borrow for
longer terms at a lower price, thereby enabling thegovernment to better fund infrastructure andurbanisation projects across the country, which
are direly needed in India.

ASIFMA – October 2013

investments is deleterious. Although there havebeen recent positive changes towards thesimplification of the foreign investment frameworkfor debt, aggregate foreign investment ingovernment securities is capped at USD 30bn.
Strong FIIs inflows are beneficial for the real
economy as they contribute to lessening thecrowding-out effect on the corporate sector andbroaden the investor base for the purchase ofgovernment securities, which in turn makes themarket more resilient and less volatile. As a result,the combination of all these factors will relievepressure on the Rupee and finance the deficit the
government is running in its current account.

In India, the 10-year, the 5-year and the 2-year
government bonds are currently the main
benchmarks in the bond market. The
establishment of a benchmark at every level of theyield curve, though, would provide investors andissuers a better way to gauge both long- and shortterm securities as it would set a “risk free” rate
across the yield curve from which corporate andinfrastructure bonds can be priced. We strongly
encourage the government to continue supplying
liquidity. Developing term floating ratebenchmarks would as well help issuers swap fixed
rate issuance into floating, which is extremely
important in a high interest rate environment.

ASIFMA supports and recognizes the RBI's efforts
to promote and foster government securities
trading in the secondary market, the growth ofwhich is illustrated in the table below. However,
the market is still illiquid and therefore in need ofa more significant change. The aggregate trading
volume is misleading and does not provide theclear picture, since liquidity is fragmented across
many individual issues a number of which havevery limited trading. Low liquidity results involatility as even small trades can move themarket price significantly and, therefore, it
prohibits investors from exiting markets smoothlyor rebalancing their portfolios in a cost effective
manner.

7

Volume in Government Bonds Market
Year

Primary Issuances* (billion)

Secondary Market Trade $ (billion)

2005-06

1,527

8,648

2006-07

1,668

10,215

2007-08

2,238

16,5392008-09

3,911

21,602

2009-10

5,821

29,1392010-115,410

28,7102011-12

6,686

34,882*Gross for Central and State Governments. $ Single-Side Volume
SOURCE: RBI Web Site
Moreover, four fifths of most issues ofgovernment securities are held in “hold-tomaturity” portfolios. This clearly inhibits theamount of trading in the secondary market,
reducing the issues actually traded and further
dwindling liquidity. Understandably enough, theIndian government put in place a Statutory
Liquidity Ratio (SLR) to guarantee liquidity to thebanking sector as well as to guarantee a resilient
funding source. However, this inhibits the tradingof securities in the secondary market. Highstatutory liquidity ratio (SLR) and cash reserve
requirements applied to banks contribute to the“hold-to-maturity” (HTM) bias within the bondmarket. Under the new regulation the RBI cut the
SLR from 25 to 23% in quarterly phases of 0.5%,
liberating approximately INR 1500 billion.
However, in August 2013 the RBI restored it to
24.5%. ASIFMA urges regulators to revise thisdecision as it hinders the trading of government
securities. Besides SLR, the tendency of interest
rates to climb and remain high, due to an attempt
to hold against high inflation pushed up by risingfood costs, is another cause of distortion. In aperiod of rising interest rates, banks are awarethat this tendency will continue virtuallyindefinitely and therefore will never sell off bonds
recognising losses as they do not have to markthem to market if they hold them in their banking
books. As a consequence, they tend to hold themto maturity. ASIFMA urges the government andthe RBI to remove the SLR over time in order toeliminate the HTM bias. In fact, banks hold around28/30% in government securities, clear sign that,ASIFMA – October 2013

despite the SLR, banks lack a concrete variety of
remunerative projects to invest in.
Moreover, if investors held bonds in “held-fortrading” (HFT) portfolios they would not be free todecide when to execute trading. In fact, bonds
held in HFT portfolios are required to be traded at
the cut off of the 90th day. This enforcement puts
pressure on investors and could incur potential
losses for them so they are reluctant to keep afloat of bonds in their HFT book. If the holding
period were extended adequately to relieve
investors from the pressure to sell off their bonds
inefficiently, allowing a longer time frame within
which to allocate bonds in the secondary market,
although a stretched period would likely prompt adecrease of illiquid bond trading.
Allowing banks to move their government
securities’ purchase they make off their books will
free up capital which can then be lent to thecorporate sector. By doing so, the bond market
will be enriched by a diverse and wider range ofparticipants since more liquidity will be available,
creating a multiplier effect and facilitating its
depth. Another aspect of the establishment ofwell-functioning secondary market trading isrelated to the stability of the financial system as awhole. In the event of a crisis, a well-developed
secondary market acts as a shock absorber,lowering general systemic risk and easing costeffective risk management for market participants.
A government bond secondary market relies onseven basic requirements: 1) Disciplined issuanceand reissuance programs to support large

8benchmark issues (as noted above); 2) Liquid“classic” term repo markets that use standardised
master agreement; 3) the ability to cheaply andefficiently short sell government bonds 4) Active,
liquid government bond futures markets; 5) A
broad range of liquid OTC derivatives contracts
and exchange-traded derivatives (effective
electronic price discovery, trading, clearing andsettlement platforms); 6) A broad, active domestic
and foreign investor base (e.g., pension funds,
insurers, hedge funds); and 7) Market friendly
regulatory, accounting and tax regimes (noASIFMA – October 2013

withholding taxes and no transaction taxes). These
requirements are further expanded upon below.
The Indian bid-ask spread compared with other
Asian government bond markets is extremely highand dysfunctional. In fact, as shown in the graphbelow, it amounts to over 10 bps, calculated as anaverage between liquid, semi-liquid, and illiquid
government bond securities. A high bid-ask spread
is a source of uncertainty for investors insecurities, since they may risk recording huge
losses if they need to exit the market.

9As a topic for further study, it may be worth
carrying out a detailed comparison of bid-offer
spreads in Indian government bonds vis-à-vis other
E. Repo Market
In a “classic” repo market, the title of the security
is actually transferred as part of the agreement,
meaning the counterparty of the agreement
actually owns the security. This permits thecounterparty to further use the security it owns fora new repo, covering naked short positions,collateral, and securities lending or as a liquidity
management instrument. A “classic” bondrepurchase (repo) market is also a system whereby
the margining of exposure constitutes standardpractice.
A properly run and healthy repo market supports
primary markets as it provides security dealerswith cheap capital to finance their bids at auctionsof new issues. It also provides a hedging tool forprimary dealers to set off the risk taken on theunderwriting of new debt. For instance, a primary
dealer can take on a long position in a new issue
and, at the same time, hedge his/her position bytaking on a short position of a security carrying
similar characteristics. The short position can beeasily covered by a repo agreement. A term repo
market should be created for both sovereign andcorporate debt.

Asian jurisdictions for both “on-the-run” and “offthe-run” securities across the yield curve.

stimulating the development of the bond futures
market and the OTC derivatives market.
Additionally, repos provide primary dealers with abroader range of hedging strategies linking up
money markets, bond markets, futures markets
and OTC derivatives markets. Moreover, creating
the opportunity for the market to lend securities
overseas will enlarge the repo market itself.
Nevertheless, the status quo of the repo market inIndia differs from the classic one as the security
title is not actually transferred between the
counterparties but rather the security is justpledged, tying the security to the agreement as
collateral which cannot be reused by the receiving
counterparty, thereby preventing it from being
used to provide liquidity in the cash market.

Enhancing liquidity in the repo market will, in turn,have a knock-on effect on the cash market

ASIFMA supports the ongoing efforts of the RBI incontinuing to develop the markets. However, withregard to the Collateralised Corporate Bond
Receipts (CCBR), it is a tool to obviate the need tosign master agreements and also to improveliquidity in the secondary markets. While ASIFMA
appreciates the creativity and recognises that thismight be a well-meaning step, nevertheless the
CCBR falls short of the requirements of the“classic” term repo. In particular, it does notappear that the underlying bond collateral could
be “reused” (i.e., sold, pledged or repoed again)
which adds little to the liquidity of the corporatebond secondary market. Also, the development of
longstanding but critical issues for the promotionof the “classic” term repo, such as suitablebankruptcy treatment (including close-out netting)and use of master agreement, would risk being
sidelined. In addition to the above comments,
perhaps the central clearing of the repo
agreements carried out through a global platform
will enhance transparency and thereby liquidity.

F. Futures Market
Further to the expansion of a secondary market,
the Indian financial system needs to improve its

government bond futures markets. The
establishment of an active, liquid and closely-

The importance for market-makers to “go short”
cannot be overstated. If an investor desires topurchase a specific product from a market-makerwhich is not in its inventory, the market-makermust be allowed to borrow that specific product in
the repo market and then deliver. An adequate
repo market is fundamental to enhance liquidity
and to lower the cost of capital at investors’
disposal, since the interest rate at which a repo
agreement is stipulated is generally lower than the
borrowing rate.

ASIFMA – October 201310

overseen bond futures market will be extremely
beneficial for all market participants. In particular,
it constitutes an efficient tool for investors -underwriters, primary dealers and so forth -- tohedge risk of exposure to large-value transactions
with an actual derivative instrument. As a result, it
will also facilitate the growth of the OTC
derivatives market and contribute to its stability
and security. Also, since an active bond futures
market can only function if the market issufficiently liquid, it will enhance liquidity in the
cash market. Functioning as a hedging tool, it will
reduce systemic risk thus generating greater
market liquidity in the underlying securities market
and attracting both domestic and foreign investors
and therefore portfolio investments.
Also, since foreign investors cannot hedge theircurrency exposure, they tend to trade in the NonDeliverable-Swap (NDS) market, especially because
regulators do not have full control over it.
Regulators now are trying to bring NDS onshore, tobetter control the market, even though this calls
for a more convertible Rupee.

G. Interest-Rate and Currency Swaps
Interest-rate and currency swaps are key elementsof the fixed-income market. In particular, theformer gives investors the ability to exchange orswap a fixed interest-rate payment with a floatingone. The latter, in contrast, provides investors withthe opportunity to exchange or swap the principal
and interest rate of a loan taken out in one
currency with the same in another currency. These
two types of derivatives are pivotal for investors
who need them in order to hedge, speculate andoffset risk, which generates and enhances liquidity
in the fixed-income market.
Swap derivatives entail forward rate expectations.
Hence, the swap rate curve has become a truly
important benchmark for credit markets
internationally and, particularly, in mature
markets. In light of this, the non-development ofan adequate swap market would be highly
dysfunctional for corporations, taking away fromASIFMA – October 2013

There are a few caveats to be noted in theconstruction of the bond futures market. In
particular, it is highly advisable to not fix or put acap on the par coupon of government bonds. It isalso necessary to create an adequate delivery
mechanism whereby the short is able to decide
when to deliver, thereby avoiding dangerous
squeezes. In fact, if the shorts are not able todecide when to execute the delivery, at the timethey are asked to deliver, they may not possess
the commodity or security to deliver. Therefore, if
the futures contract complies with global
standards, it would also help to attract a steadystream of foreign capital, rendering the market asa whole safer and more transparent for investors.
In this context, it is worth noting that the RBI isplanning to introduce 10Y interest rate futures
shortly, to help address the concerns of market
participants who could end up with illiquid bondsin the existing delivery based 10-year interest rate
futures contract. The Indian authorities could also
examine what China and Korea did when thesecountries introduced their own futures contracts,
which have both been successful, despite not fullycomplying with international standards, especiallyas far as China’s futures contract is concerned.

them an important tool for participating in thebond market.
The reason why these types of swaps arefundamental in a well-developed bond market isthat they help the market of a specific country
integrate into the broader international financial
system by bringing together two counterparties
who have different interests in different markets.
These tools link up markets and attract a wider
number of foreign investors who in turn bring
portfolio investments thus enabling the markets togrow even further. A well supervised derivatives
market renders the total financial system safer,thus contributing to a general soundness thatfurther spurs investment and growth.
Swap derivatives are also key tools forcorporations, as they can profit from more
efficient local bond markets. In particular, they
help them keep under control and revise their11

outstanding debt by adjusting the interest rateaccording to current or future market conditions.
Swap derivatives will boost corporations’confidence by allowing them to access the bondmarket and raise capital, which contributes togrowth and stability.

H. Creditor Rights with Regard to Close-Out Netting
Investors’ confidence is fundamental for thegrowth of the repo, swaps, and other derivatives
markets. In order to achieve this, however,creditors’ rights must be improved andstrengthened to protect investors’ capital andliquidity.
An obvious reform that should be implemented by
the Indian government is the recognition of closeout netting, a well-established practice in the mostadvanced financial markets. In the event of acounterparty default, the terminated transactions
are valued and netted under close-out netting.
Thus, only the net amount is payable by one of theparties. This impedes a party from executing all its
obligations without receiving any revenues fromthe bankrupt counterparty. The immediate
implication is that close-out netting allows a party
to compute its exposure toward a counterparty on
a net basis, thereby alleviating credit risk. Also, it
permits a party to keep a lower amount ofreserves needed to cover exposure.
With a particular focus on the Indian bond market,
the investor’s right to off-set in the event ofbankruptcy is not well established. Therefore,
implementing a close-out netting system willprotect investors and give them more confidence
to remain in the market. This affirmation isparticularly relevant for banks and investment
managers who are significantly expose tocounterparty risk as exposures are grossed up andnot netted. Thus, these types of institutional
investors set limits to reduce the level of exposurein the market, hampering liquidity even further inthe secondary market.
In particular, legislation should explain clearly theconsequences stemming from a bankruptcy and
ASIFMA – October 2013

As far as systemic risk is concerned, the fear thatsome counterparties will fail to honour their sideof the agreement has been addressed by a few
changes in the way transactions will be carried out.
Mandatory central clearing, bilateral margining
requirements, and the creation of a Legal Identity
Identifier (LEI) are all meant to guarantee thesecurity of these transactions.

insolvency event, guaranteeing the enforceabilityof close-out netting and yielding it over generalbankruptcy rules. In order to protect investors’interests, netting should be applicable upondefault, even if bankruptcy is not involved, andbroad enough to embody a wide range of financial
products, including derivatives and title-transfer
collateral arrangements, to ensure that obligations
to return collateral of equivalent value are netted
against obligations under derivatives transactions.
Legislation should as well cover cross-product,
multi-branch and multi-currency netting. Also, itshould state that the inclusion of non-eligible
transactions under the netting agreement would
not invalidate close-out netting for eligible
transactions under a netting agreement. Besides, if
collateral agreements cover both eligible and noneligible transactions, they should remain protected
as far as the eligible transactions are concerned.
The standard provisions in ISDA masteragreements covering close-out netting provide aframe of reference which Indian authorities could
use in developing legislation permitting close-out
netting.
Additionally, due to the lack of an efficient
recovery mechanism in the bond market, investors
are not willing to participate in the high yield
market. The regulation is simply neither
sufficiently precise nor quick and, as a result,
events of bankruptcy are exacerbated. The
introduction of a clearer regulation, following theexample of Chapter 11 in the US legislation, will
help smooth over disputes and increasetransparency in the market. More specifically,mechanisms that allow for debtor-in-possession(DIP) financing, processes for the orderly
liquidation of bankrupt entities, the quick and easy
12

facilitation of debt-for-equity swaps andstrengthening creditor protections (especially visà-vis connected equity shareholders andpromoters) are all steps that could be taken, inorder to stimulate investor interest in the Indiandebt markets. Current regulations, such as
SARFAESI (Securitisation and Reconstruction of
Financial Assets and Enforcement of Security
Interests) and BIFR (Board for Industrial and
Financial Reconstruction), protect the interests of
I. Corporate & Quasi-Sovereign Bond Market
The corporate bond market in India is almost nonexistent. The number of public issues in India isinconsequential and all corporate bond issues are
made as private placements. On one hand, private
placements reduce issuance costs; however, on
the other, public ones are seen as more attractive
especially for foreign investors.
As mentioned above, the corporate sector relies
too heavily on banks for lending and raising funds
to finance their business going forward. Throughthe banking sector it is not possible for borrowers
to restructure the payment schedule, making thebond market a solid alternative for financing.
Developing a strong and sound corporate bondmarket will alleviate the pressure on banks andprovide corporations an alternative way to financethemselves. In turn, a corporate bond market
would foster competition in the lending sector andcontribute to lowering the cost of capital, i.e.
lending interest rate. Moreover, since thetransparency of corporate bond markets will force
corporations to respond directly to the concerns ofinvestors and stakeholders, a deep corporate bondmarket will improve the corporate governance,
efficiency and discipline within the corporate
sector.
Institutional investors such as pension funds are
not allowed to invest in securities that carry agrade lower than double A. Mutual funds,
although they can invest in securities carrying
triple B, adhere with the general trend and do notinvest in securities below double A. Furthermore,banks are not permitted to guarantee high yieldbonds issued by companies. Allowing banks to do
so will foster more high yield corporate bond
ASIFMA – October 2013

banks, financial institutions and companies against
bankruptcy petition, which is not an ideal situation
for development of broad based credit curves.
Liquidation and the disposition of assets in a
corporate bankruptcy in India can take aninordinately long time, in some instances several
years. This compares unfavourably with thewinding down of companies in other jurisdictions.

issuance, thus lowering the cost of capital forcompanies. Encouraging corporations to issue
bonds and having a bigger pool of investors willingto invest will require issuers to issue at different
spots on the yield curve. Along with the expansionof the yield curve, the credit rating scale will
widen, thus generating differentiation acrosscredits. In addition, it is necessary to deepen thecapital structure by having more types ofsubordinated debt, convertible bonds andpreferred stock. ASIFMA advises as well the needto introduce an index benchmark of the mosttraded corporate securities for active portfolio
managers.
Allowing corporations to access the bond market
will create more capital at their disposal andstimulate the development of infrastructure. As
companies will be able to rely on a safer and moreconstant stream of capital, this funding could bethen be used to finance infrastructure projects.
The establishment of a solid corporate bondmarket will reduce the crowding-out effect on
small and medium sized entrepreneurs, allowing
them to access the bond market to raise capitaland further expand their business and enablingbanks that would have loaned that funding to large
corporates to instead lend to SMEs.
Further to the expansion of the derivative swaps
market, corporations and general investors canuse swaps, and in particular credit default swaps(CDSs), to hedge risk in the corporate bondmarket. CDSs are a fundamental tool for investors
as they free up capital to be used for further
investments. An adequate swap market will13

enhance liquidity in the cash market as bondfutures and interest rate swaps do in thegovernment bond markets. Of course, mechanisms
need to be put in place to ensure that there is anadequate volume of deliverable obligations
referenced to each CDS, to ensure that there are
no undesirable short squeezes at the time of CDS
settlement in the event of default/restructuring.
One of the reasons behind the failure of the CDS to
become a common tool is the capital requirements
investors need to fulfil, especially for naked salepositions, which is two or even threefold thecapital that may be required to hold them tomaturity. ASIFMA acknowledges the introductionof "plain vanilla" single name CDS introduced by
the RBI in 2010.
We acknowledge all the reforms undertaken by
Indian regulators to develop the bond market. The
secondary market trade reporting system, forinstance, permitted the establishment of a tradereporting platform and information decimation
system to render the market more transparent formarket participants. Together with listing of issues
and private issuance database contributed to an
overall increase of the transparency in the market.
Further, by reducing the cost and time for public
issues, via a simplified listing procedure andreduced disclosure requirements, and byencouraging retail participation in mutual funds
and exchanges the corporate bond market gained
momentum (source: City of London). However,further needs to be done in this regard.
ASIFMA strongly recommends establishingautomatic trading for corporate bonds, similar togovernment bonds. While exchanges have been
allowed to introduce screens for corporate bonds,
it has not taken off as volumes will be divided
across multiple exchanges. Moreover, exchanges
are not the vehicle of choice for bond markets
around the world. Mature economies use request
for quote systems, which increase liquidity andease of trading. In addition, the prevalence ofelectronic trading will increase transparency in themarket even further, since market prices will be at
the market participants’ disposal thus minimizing

ASIFMA – October 2013

price distortions of any kind. It should be noted
however that electronic trading is only appropriate
for the most liquid corporate bond issues and forsmall sizes. Large trades and less liquid issues will
still be traded over the phone in order to protect
the investor from the market moving against
them. However, a screen-based trading backed byguaranteed settlement would facilitate theparticipation of retail investors in the market,
increasing, ultimately, its depth. In this connection,
SEBI’s requirement that stock exchanges are
required to provide settlement guarantees for
trades settled on DVP III basis and the requirementthat these exchanges also create settlement
guarantee funds is a positive development. Finally,
yet another class of instruments that would
encourage retail market participation are inflationindexed bonds, which would encourage retailinvestors to commit on fixed-income securities fora longer period, as they constitute a hedging toolvis-à-vis inflation.
Each fresh issuance from the same issuer receives
a new International Securities Identification
Number (ISIN), hence older bonds in the same
maturity become illiquid and trade at discounts.
Retapping the same issue for a particular maturity,
similar to Government Securities, can help
maintain liquidity. A major argument against
common ISINs is the bunching of maturities on thesame date which can lead to asset-liability
mismatch; however, this can be resolved byspreading out the redemption amount across theyear through amortizing payment.
One of the major issues that corporate Indianissuers face in issuing USD or other non-rupee
bonds are the restrictions under RBI’s ExternalCommercial Borrowings (commonly known as ECB
guidelines). This includes restrictions on size of theoffering; all-in-cost ceiling that restricts the
coupon that issuers can pay; restrictions on use ofproceeds; and restrictions on ability to provide
security over assets.

14

J. Municipal and Local Authority Bond Market
ASIFMA urges the development of a municipal andlocal authority bond market. ASIFMA also advises
the RBI to remove restrictions on infrastructure
financing through bond issuance.
The development of a quasi-sovereign bondmarket is of primary importance for a number ofreasons. Both local government and state-owned
enterprises such as utilities, power companies andothers engaged in different sectors, should be able
to issue bonds in the market in order to alleviatepressure on the government deficit, which is quite
high. Having a quasi-sovereign bond market would
create additional benchmarks and contribute to an
overall deeper capital market.
This will then guarantee a more secure, steadierand more reliable stream of capital to be used tofinance infrastructure projects, which are greatly
needed in India. In fact, a municipal bond is a longterm bond issued directly by the local municipality
or state-owned enterprise that can be used toK. Securitisation and Covered Bond Market
A well-regulated securitization system iscommonly recognized as an efficient financing
mechanism for mortgage financing, credit cards,
auto loans and even infrastructure enhancements
and municipal expansion. Covered bonds and highquality securitizations are a means of tapping thecapital markets for funding, backed by pools ofgood quality assets. Under the securitization
model, loans are issued by an originator (typicallya commercial bank), and then aggregated andpackaged into multiple securities with different
characteristics of risk and return that appeal todifferent investor classes.
More specifically, securitization permits banks tomove assets, like mortgages, off their balance
sheets, thereby reducing their exposure to nonperforming loans and freeing up capital to be lent
to other borrowers. Securitization will provide
banks with flexibility to tap other sources offunding other than deposits. This would also
constitute a relevant step forward to bolster the
expansion of the investor base to include pension
funds, insurance companies, banks, and other
ASIFMA – October 2013

fund infrastructure projects, e.g. public
institutions, roads, and highways. The formation ofthis type of market would enable domestic andforeign capital to mingle, thereby lowering lending
pressure on the government and the banking
sector.
In some well-established municipal and local
authority bond markets, issuers are able to keepinterest rates low, stimulated by tax incentives,
therefore lowering the overall cost of capital for
their financing needs. Implementing tax incentives
would attract a wide range of investors, thusincreasing the pool of potential buyers whichfurther keeps costs of issuance low.
Finally, a well-established municipal and local
authority bond market would create much bettertransparency in the use of taxpayers’ money andthe funding of local infrastructure projects. It
would set a market rate which would be better
linked to the credit risk of these projects.

market participants, by providing safe andcollateralized investments to invest in. Throughthis channel, companies will be able to access
capital markets without the need forintermediaries and use a cheaper source offinancing since the issuance of debt iscollateralized, thereby lowering investor risk.
India was one of the first countries in Asia Pacificto have developed a securitization market.
Transactions date back to the 1990s, recording ageneral increase from the early 2000s onwards.
After this, however, the securitization market
remained sluggish and incapable of further
development, creating an enormous disadvantage
for the financial system as a whole. Asset-backed
securities are the most traded product, accounting
for roughly Rs 250 billion. Mortgage-backed
securities grew at a rapid pace, averaging around
RS 30 billion. With regard to CDO and CLO, theirtrading averaged round RS 25 billion up until 2005
and skyrocketed thereafter (source: ICMA Centre).
However, for other types of assets the market
remained bleak.
15

Securitization is a channel predominantly used bybanks and insurance companies. Since the latterare forced by law to invest in bonds carrying a highgrade, with double A being the minimum
threshold, issuers structure their securitized assets
to guarantee a high rating, which creates holes inthe yield curve. ASIFMA applauds the effort of the
RBI to introduce subordinate tranches in themarket; however, their presence in the market is
low and investors are reluctant to buy or tradethem.
Securitisation is another tool available with issuers
to delink the rating of the instrument from that of
the issuer. However, the market has been stalled
due to restrictions around minimum holding
period (MHP), minimum retention requirement
L. Rates and Credit Market Infrastructure
Shallow financial depth combined with a weakmarketinfrastructure
system,suchasunderdeveloped credit ratings, renders India an
overall difficult country in which investors may bereluctant to invest. Additionally, the foreignexchange market is relatively small in size,accounting for roughly USD 55 to 60 billion
turnover per day. This less developed foreignexchange market stands in the way of the capitaland currency markets, making investors reluctant
to participate and the financial sector somewhat
volatile.
One of the most important elements missing inIndia is the credit rating industry, which renders abond market attractive and accessible. A wellsupervised and established credit rating industry
will provide investors with a guarantee of the typeof securities they are trading. In particular, one of
the reasons why investors are not willing toparticipate in the bond market is the mismatch
between the price of the bonds and the actual andreal risk they carry. To create a more attractive
environment for investments, the credit rating
industry must adhere to international bestpractices. By doing so, investors can takeadvantage of an international standardized rating,which will in turn make the market more

ASIFMA – October 2013

(MRR), etc. In the case of an issuer providing credit
enhancement, the requirement of MHP and MRRshould be removed as their commitment to theongoing performance of the facility is establishedthrough the credit enhancement. The taxation
structure also needs to be changed from
distribution tax at SPV level to taxation in thehands of investors as the current regime is notbeneficial for banks/NBFCs who have been thedominant investor class in the securitisation
market.
The development of an efficient securitization
market can also be extended to local
municipalities and authorities, providing them witha cheaper source of capital to fund infrastructure
projects by securitising the assets, and selling thebonds to investors to fund its development.

transparent and reliable which will attract both
domestic and foreign investors.
With the premise that the government is able tohalt the tendency of rising interest rates, banks
must also start to recognize mark-to-market
losses. By doing so, they would be compelled to
trade securities, rather than holding them tomaturity. The more advanced the trading in thesecondary market is, the more necessary is theestablishment of a solid risk management
function. If banks can actually develop an
independent risk management function, they can
become involved in the trading of corporate
bonds, at every level of the yield curve. This would
give the option of access to the bond market forsome corporations whose issued bonds carry a low
rating and high yield. This is the stage where an
appropriate risk management function kicks in,assessing the bank exposure to a certain type of
security and taking further action to hedge andbalance out the exposure.
Nurturing a thorough market infrastructure system
also entails meeting the need for an international
settlement and financing of local bonds. This will
help the Indian financial system to be further
embodied within the international system. Localbonds will then have a wider range of potential
16

investors, competing with each other andtherefore allowing more efficient and less costly
financing. Also, this openness will attract foreign
firms and give them the opportunity to participate
in the market and to reuse the bonds in theirfunding efforts.
To further integrate the Indian financial market
within the international marketplace, CCPs such as
the Clearing Corporation of India will have to beinternationally recognized by the European
Securities and Markets Authority (ESMA) in orderto provide clearing services for all market
participants. In doing so, CCPs will comply with theinternational practice, thus being even more
attractive to foreign investors. ASIFMA supports
the application made in September by CCIL for
ESMA recognition.
The clearing of government securities andcorporate bonds by CCIL, the clearing agency for
Government securities, and NSCCL, the clearingarm of the National Stock exchange of India, has
M. Broadening the Investor BaseOne of the most immediate consequences of ashallow bond market is the high investment
volatility in the financial markets. Investors are noteager to invest their capital in direct investmentsthat commit them for several years in shallow
markets. They also prefer to engage in portfolio
investments in deeper more liquid markets as theycan easily recalibrate their exposure by pullingback their capital. Looking at the amount ofinvestments, both direct and portfolio, flowing inand out the country provides a clear picture of
how the financial sector in India can be viewed as
hostile towards investors. In the period spanningfrom 2003-04 to 2007-08, the total inflow ofcapital shot up by over USD 90 billion up to USD
107.9 billion just before the outbreak of thefinancial crisis impacted it. In the aftermath, there
has been a slight pickup.
A diversified and wide investor base is pivotal for
guaranteeing steady and strong demand for all
bonds and stability of investments. An appropriate
investor base should include both domestic andforeign investors and all type of institutions,
ASIFMA – October 2013

been functioning smoothly, thereby giving morecredit to the clearing system as a whole. The use ofclearing systems for the reporting of usage of notjust cash bonds/securities but also derivatives
instruments such as futures, CDS and other swaps
is an encouraging step, since the focus will then beon the reporting of risk, rather than the restrictionof derivatives usage. Also, tailoring the use of
these derivatives instruments in line with theusage of similar instruments globally willencourage usage and acceptability.
Nonetheless, bridging the local settlement systemwith International Central Securities Depositary(Euroclear/Clearstream), ICSDs now allow easier
movement of global collateral across borders via
their “collateral highway” / “liquidity hub” would
constitute a further step in the development of thebond market. Combined with offshore settlements
could create the basis for using local bonds as
collateral in the event that market participants
need access to USD cash, as we have seen
recently.

spanning from commercial banks to insurancecompanies, pension funds, hedge funds andmutual funds in addition to individual investors.
With specific reference to pension and provident
funds, it is worth relaxing investment norms toallow these entities to invest in lower rated
credits, subject to limits. Also, if these pension
funds/other institutions were to use CDS to hedge
their exposures to individual issuers, credit risk
should be counted as an exposure to the hedge
counterparty rather than the issuer. In addition, it
is vital to include in an investor base different time
horizons, risk preferences and trading motives toensure sustainable active trading and highliquidity. Moreover, a broad investor base willcontribute to the growth of transactions andcompetition within the market, thus lowering thecost of capital as well as systemic risk as it
functions as a shock absorber.
To begin with, the investor base in India is
extremely narrow. Since there is not enoughdiversification of security products, mutual funds
and hedge funds are very small. Pension provident
17funds are also not developed. ASIFMA advises theauthorities to foster the growth of institutional
investors to tap the market. Also, fostering asset
managers to create funds for investing in
corporate bonds would be a significant step
forward for developing the market. Since FIIs have
limited access to the bond market due to a quota
which is too small in size, allowing offshore bondsin Rupee and rendering the currency moreconvertible, through changes in the accountstructure of the issue would permit them toparticipate in the bond market, thereby

broadening the investor base. Having FIIs willing tobuy government securities would boost liquidity,
due to the inclusion of more market participants,
and benefit locally, as there would be more money
and, thereby, more possibilities to raise capital.
Also, allowing primary dealers to undertake FXtransactions in both OTC and currency futures
markets would help them better offset risk, as FX
and interest rates are closely correlated, andtherefore better serving FIIs. Thus, giving primary
dealers an “authorised dealer” license would be awelcome step.

ASIFMA welcomes the government’s intention toalign the Know Your Client (KYC) rules according tointernational standards and best practice. The
designation of a risk-based ranking for foreign
investors will identify the parties carrying a low
risk profiles. Too stringent rules stand in the wayof new investment in the country or new entrants
in the financial system. Another important step isthe abolishment of the SEBI requirement of double
filing under KYC rules if the applicant has alreadyfiled them with any other jurisdiction or parent
country which is an FATF member.
The broadening of the investor base will bebeneficial for foreign firms willing to put up capitalfor direct investments in factories or infrastructure
projects. Currently, there is a tremendous need toclarify foreign investment rules. If these areuncertain, not fully disclosed and subject tochanges, foreign companies will not commit
resources and capital with the risk of a recording
losses. Allowing them to participate in the bondmarket and shaping a precise, investment-oriented
framework for foreign direct investment is theright path to sustainable economic growth.
More investment opportunities available within
the country will stimulate faster economic growth,
thereby helping to further expand the middle
class. The presence of a strong middle class is a

ASIFMA – October 201318

clear sign that the wealth and well-being of acountry’s population are rapidly increasing. The
important next step is to include them in thefinancial sector via long-term investment inpension funds, mutual funds or insurancecompanies. Putting in place a set of regulations toprotect individual investors’ rights is a strategy
that will serve this purpose as well. Individual
investors’ confidence will be boosted along withthe overall trustworthiness of the entire financial
system.

securities. 3) Eliminate foreign investor tax
assessments on government securities income,which is currently not in line with the international
norms for investment in government securities. 4)
Review and eliminate any barriers to foreign
investor participation in government security
auctions. 5) Allow FIIs to execute term repos andreverse term repos on an equal footing withdomestic investors. 6) Streamline on-boarding of
foreign investors and harmonize KYC rules withinternational best practices.

ASIFMA urges the RBI, SEBI and the Minister ofFinance to coordinate their efforts in order tobroaden the foreign investor base through thefollowing five measures: 1) significantly raising
government securities’ FII limits. This will attract
more real money through long term investors,
initially to the government securities market, thenlater to corporate bonds and then later on to
infrastructure bonds. 2) As a practical matter, thegovernment should at periodic intervals assess theforeign investment caps and fix debt limits, basedon the percentage of outstanding government

As for domestic investors, fostering a culture
among individual/retail investors that encourages
investment in fixed income products, rather thansimply leaving their money in bank deposits, would
be a positive development. In this context, thefurther development of an industry centred on
wealth management and retirement planning for
middle class investors (as opposed to only wealthyprivate banking clients) would be a welcome
development. Further liberalization of the life
insurance and annuity sectors would be an added
benefit in this regard.

N. Taxation
Along with the development of a sound andefficient bond market, the taxation system should
keep pace and ensure it can accommodate
structural changes. A sluggish taxation system will
only hamper the effort and the reforms put inplace by the RBI, SEBI and Minister of Finance.
ASIFMA applauds the Indian authorities forbringing down the withholding tax to 5 % oninterest payable to FIIs and QFIs on rupee
denominated bonds of an Indian company or
government security for a period of two years (to31 May 2015).

businesses based in other countries to access thesame source of funding. As long as theinternational capital markets have greater depth
and better pricing than the domestic capital
markets, Indian based businesses will need to“absorb” the costs of any withholding taxes andtaxes on capital gains on international investors
who supply capital not just to India but also toother countries that do not impose withholding
taxes and taxes on capital gains. Also, smoothingout tax discrepancies between equities taxed at 0
% compared to bonds taxed at 10 / 20 % may help
retail investors get involved in the bond markets.

In general, withholding taxes and taxes on capitalgains are costs that end up being passed back tothe borrowers who raise the funding in theinternational capital markets. The international
capital markets provide funding not just to
businesses in India, but also businesses in othermarkets in other countries. Indian based
businesses seeking to access the international
capital markets are effectively competing with

A key competitor to Indian based businesses forfunding is not just businesses in developing
countries, but also developed economies such as
businesses in the United States, or foreign
multinationals that are ramping up their activities
in the United States. In our view, the current
landscape for the foreseeable future puts
businesses in developing countries in competition
with businesses globally for cost effective funding.

ASIFMA – October 2013

19

It is a common misconception that businesses incertain developing countries offer outstanding
returns on investments for investors, andtherefore investors should bear the cost of thewithholding tax. Businesses that offer outstanding
returns in India deserve a lower cost of funding
commensurate with the risk reward opportunities
that they present. However, these excellent
businesses are competing with other excellent
businesses in developing and developed countries.
For instance, take a business that has low risks andexcellent returns, and it is able to raise funding at
1%. If this business were located in the US - itwould have access to a 1% cost of funding. In
India, its cost of funding will be grossed-up for
Indian withholding taxes and capital gains taxes.
The point therefore is that while India offers
certain excellent investment opportunities, these
excellent businesses are competing against otherexcellent businesses in other countries for funding.
The higher risk businesses are competing against
other higher risks businesses for funding frominvestors with a higher risk appetite.
The foregoing therefore supports the proposition
that the costs of withholding tax and capital gains
taxes are effectively passed back to the borrowers.
Once it is accepted that the costs of the tax are
effectively borne by Indian borrowers, the key
issue is then whether the higher costs of funding
reduces economic expansion, and whether the tax
collected from the economic expansion exceeds
the withholding taxes and the taxes from thecapital gains. It is beyond the scope of this paper
to articulate a definitive analysis as to whether thetaxes raised through withholding taxes and capitalgains taxes is outweighed by the reduced taxes
that would have been collected through increased
economic activity and growth, if any.
Another key impact is that the effective tax rate of
the Indian businesses that bear the cost of thesetaxes, is therefore higher than the headline tax
rate. This would therefore distort economic
decisions between business opportunities that relyon the depth of funding provided by the
ASIFMA – October 2013

international capital
activities that do not.

markets,andbusiness

A related but important point is that where thebusinesses are not making a profit or are
marginally profitable, for example, because they
are in a start-up stage, the imposition of taxes onthese businesses are precisely at the juncture
when the burden of taxation should not be
imposed. As may be observed, these taxes are
imposed on the gross-funding cost of thebusinesses rather than the economic profit derived
by the businesses.
Lowering the tax on interest payment to FIIs and
QFIs is a wise move, particularly to encourage
foreign investors to participate in the corporatebond market and to provide the corporate sector
with a new channel of offshore financing.
However, ASIFMA advises to keep the 5 %withholding tax for a more extended period oftime, perhaps up to five years, to further
incentivize foreign investors. There currently is noclarity on what is going to happen to the tax rate
once the granted period expires, forcing investors
to take a more reluctant and conservative
approach. Furthermore, the tax could be reduced
to zero for purchase of longer tenor bonds ininfrastructure. In doing so, foreign investors will be
more prone to direct investments beneficial forthe real economy. In addition, the treatment ofdebentures is currently unclear and ASIFMA
recommends that debentures should be treated in
the same manner as corporate bonds.
With regard to the General Anti Avoidance Rule
(GAAR), the authorities have recently announced
that GAAR will come into force with effect fromtax year 2015-16 and the Central Board of Direct
Taxes has notified the rules (Rules) for applicationof GAAR. Although the India authorities haveaccorded their time and effort in considering
issues that have been consistently highlighted by
the industry, the recent Rules still fall short ofproviding assurances to the FIIs that theirinvestments in India, particularly those routed via
Mauritius or Singapore, would not be subject to
GAAR.

20

The Rules clarify that the GAAR provisions would
apply to all tax benefits obtained after 1 April 2015
with the following exemptions:•
An arrangement where the aggregate tax
benefit of all the parties to thearrangement in the relevant tax year does
not exceed INR 30 Million•
An FII who has not taken any benefit
under a tax treaty entered into by India
with another country or a specified
territory and has invested in listed or
unlisted securities with prior permissionof the competent authority in accordancewith SEBI (Foreign Institutional Investor)
Regulations, 1995•
A non-resident investor who has invested
in an FII directly or indirectly by way of an
offshore derivative instrument orotherwise. Therefore the fear of GAAR
applying to P Note holders goes away.
•
Any income derived from transfer of aninvestment made before 30 August 2010
(the date of introduction of Direct Tax
Code Bill 2010) by such person
The Rules also state that where a part of anarrangement is declared as impermissible, GAAR
provisions would apply only in relation to such partand not to the entire arrangement.
The Rules also provide various forms for referenceby the Assessing Officer (AO) to the Commissioner
and returning such reference by the Commissioner
back to the AO in case GAAR provisions are not to
be invoked. The time limits for such procedure arealso laid down under the Rules.
Unfortunately, the rules provide that GAAR will
not apply to FIIs only if they do not claim the treaty
benefits. Given that most of them claim thecapital gains exemption available under the
Mauritius and Singapore treaties, they will be
subject to GAAR even though the Shome
Committee had recommended that the GAAR
application be limited to cases of blatant abuse
and contrived tax avoidance transactions.
ASIFMA recommends that guidance be developed
to provide clarity that GAAR rules do not apply to
ASIFMA – October 2013

FII capital market transactions where the main
purpose of these transactions are to provide
investment products to international investors
rather than the derive a tax benefit. The impact of
GAAR rules is wide-ranging and it is therefore
strategic to issue a well developed set ofinterpretational guidance, so that the tax
landscape in India achieves clarity and consistency.
In order to develop guidance rules that provide
clarity to business transactions, input from thevarious industries is required. ASIFMA and the
CMTC would be happy to be a part of this process
to provide the relevant business information, sothat the guidance rules developed are articulatedwith relevant details of the business transactions
and in the context of the issues faced by theindustry.
Clarity is particularly important in industries with ahigh volume flow, such as the capital markets andinternational
trade.
Investors
react
touncertainties, whether business or regulatory or
tax uncertainties by pricing in the risks of these
uncertainties. These uncertainties therefore
impact cost of funding and pricing of bond issues.
Interpretational uncertainties are “man-made”
uncertainties and therefore in general well within
the capability of the industry and the relevant
authorities to work together to articulate a fix, andtogether develop a better “product” – being a setof tax rules that are sound from a policy
perspective, and provide interpretational clarity.
FIIs are also concerned about the scope of the
grandfathering provision in the rules.
Their
investments prior to April 2015 are protected only
in respect of tax on income from a transfer of
those investments (i.e., capital gains). Other typesof income from these investments (e.g., dividends
and interest) will come under the purview of
GAAR. This may not be a substantive issue for the
FIIs given that dividends are exempt in the handsof investors, and FIIs may not have much income
from other sources.
Further, India has well established tax treaties withcountries such as the United States of America,
Switzerland, Luxembourg, the United Arab
21

Emirates and Finland, all containing precise
limitation of benefits (LOB). Hence, where tax
treaties provide for LOB clause and the LOB
conditions are fulfilled by a tax resident of aforeign country, the provisions of GAAR should not
be invoked.
With the endeavour to augment and instil
confidence in market participants, the GAAR
guidelines state that the provisions of the GAAR
would not in any case be invoked in the case of
non-resident investors of the FII. Whilst this isclearly a wise decision that all market participants
will benefit from, it should be further elucidated
that GAAR should not apply to any transaction
between overseas parties whose value isdetermined by reference to FII transactions. What
still needs to be clarified is the specific criteria
which determine the transactions under theapplication of GAAR and also the computation of
tax liability of the FII. We therefore recommendthat in case a FII chooses to take treaty benefits
and in case as a result of GAAR, there is a denial oftreaty benefits, taxes will be assessed at the FIIlevel and any losses of the FII (including pastlosses) will be permitted to be offset against the
FII’s income, as the provisions of the Act itself
states.

the date GAAR came into effect, is deleterious formarket participants, since they made thoseinvestments because they were not subjected totaxation. ASIFMA therefore advises thegovernment to remove the retroactivity of GAAR.
With regard to the indirect transfer tax, FIIs areconcerned about any potential unintended
application of the indirect transfer provisions toportfolio investments. FIIs need clarity about theapplication of the indirect transfer tax provisions
to offshore transactions in order to avoid multiple
layer taxation. As far as the direct investments areconcerned, indirect transfer tax provisions should
not apply to income deriving directly or indirectlyfrom assets on which taxes are payable or havealready been paid in India or are exempted fromtax in India under a treaty or applicable domestic
law provisions. This would also include income
from distributions by the offshore entity to its
shareholders/ unit holders or investors throughdividends, buy backs or other methods. This would
also include a scenario in which an investor isredeemed with cash contributed by anotherinvestor.

As the Minister of Finance indicated earlier thisyear, all the transactions made until August 30,
2010, will be grandfathered. This decision does
provide certainty in respect of all the transactions
that occurred up until August 2010; however, theretroactive application of GAAR to all investments,
which took place between August 30, 2010, andWith regard to synthetic investments, indirecttransfer provisions should not apply to income
arising “in consequence of” or “by means of” or“by reason of” transfer of Indian assets, where thegains have either been subjected to taxes in India
or exempt from tax in India under a treaty or
applicable domestic law provisions. Given thecurrent status, investors are concerned that
offshore transactions may be subjected to taxation
multiple times.

O. Regulatory Process
India’s regulatory and jurisdictional uncertainty is aserious impediment for foreign-invested financial
institutions, effectively serving as a non-tariff tradebarrier. Regulatory transparency and consistency,

marketconsultation
processes,
sufficient
notification of new rules and time for publiccomment are vital to well-functioning financial
markets.

ASIFMA – October 2013

22

5.

Appendix

Topic

General Economy

Capital Markets

Bond Markets

Specific Ask

Recommendation

Rationale

Stabilization of theeconomy through more
steady and less volatileeconomic growth.

This transition can befacilitated and accelerated
through the developmentof robust capital and bondmarkets.

Alleviating poverty among
the population through alarger corporate sector andnew infrastructure needs
will require a more balanced
and stable growth model
fueled by increased
spending.

Indian capital markets
must be further
developed for India tosustain its economic
growth and fund its
social andinfrastructure
initiatives.

Government policies areneeded to encourage thedevelopment of capital
markets in ways that will
support its widespread
economic and social
development initiatives,
including the further
stabilization of its economy,increasing access to credit,
funding municipal
infrastructure projects,
developing social safety
nets and fostering its
sweeping urbanization
program.

The substantial
infrastructure still needed tospread development,
extend social safety nets,
improve productivity andsustain high economic
growth requires the efficientmobilization of private andpublic capital that onlyrobust capital markets canfacilitate.

India must develop
deep, liquid andtransparent bondmarkets.

India can achieve this by:liberalizing interest rates,
enhancing its benchmark
yield curve, establishing asecondary and futures
market for government
bonds, transitioning from apledge repo system to aclassic repo system,
allowing for interest-rate
and currency swaps andsecuritization, ensuringcreditors’ rights,
broadening the investor
base, and increasing
regulatory and legislativetransparency.

The expansion anddeepening of the bondmarket would better serve
the needs of both theprivate and public spheresin India, especially given thetightened capitalrequirements under BaselIII. Further, robust bondmarkets are also particularly
important to the evolutionof the Indian banking
sector, whereby capital is
not available for the
corporate sector.

ASIFMA – October 201323

Interest-Rate
Liberalization

Benchmark Yield
Curve

Secondary Market
Trading

Interest rates must be
further liberalized.

Interest rate liberalization is
the first step toward
creating deeper, more
liquid bond markets andcan only be achieved
through eliminating
restrictions on the all-incost ceiling imposed onExternal Commercial
Borrowing (ECBs) and on
ability to provide security
over assets.

Stronger and more
dependable benchmark
yield curves must be
developed.

The 10-year, 5-year and 2
year government bonds are
currently the most reliant
benchmark yield curves inIndian markets for the mostactively traded bonds
across a range of given
maturities – which arecalled the “on-the-run”
issues. ASIFMA strongly
urges regulators to establish
benchmarks at every levelof the yield curve providing
investors and issuers with atool for better gauging both
long- and short-term
securities.

Indian regulators must
foster the developmentof a secondary market
for government bonds.

A government bondsecondary market relies onseven basic requirements:
1) Disciplined issuance andreissuance programs to
support large benchmark
issues; 2) Liquid “classic”
repo markets that allow
easy short selling ofgovernment bonds; 3)
Active, liquid government
bond futures markets; 4) A
broad range of liquid OTC
derivatives contracts andexchange-tradedderivatives contracts; 5)High-quality, efficient andcost-effective electronic

ASIFMA – October 2013

Further liberalization ofinterest rates and capital
controls will benefit the
Indian corporate sector byallowing issuers to issue atevery level of the yield curve.
Investors, in turn, will be
more likely to buy since theprice and interest rate of thebond will match its real risk.
This will enable the shift froma model overly reliant onbanking lending to one withmore competitiveness,
contributing to an overalllowering of the cost ofcapital.

The existence of a common
benchmark yield curve,
grounded on a liquid
government bond market, iscritical to the financial
sector’s ability to reachefficient capital allocationand for government policy
makers to gauge market
expectations, as much of
the analysis and pricing
activity that takes place inthe bond markets revolvearound the yield curve.

The growth of a secondary
market for government
bonds is integral to theoverall development of the
Indian bond market andprovides several important
benefits to market
participants of all types,
including: the establishmentof “risk free” reference yield
curves and “risk free”
assets, like U.S. Treasury
Bonds; supports thedevelopment of soundcorporate debt and money
markets; and enables thegovernment to borrow for
longer terms at lower
24price discovery, trading,clearing and settlement
platforms; 6) A broad,active domestic and foreign
investor base; and 7)
Market friendly regulatory,
accounting and tax regimes:
no withholding taxes andno transaction taxes.
Additionally, stabilizing theinterest rates, eliminating
the Statutory Liquidity ratio(SLR), extending the bondholding period and allowing
banks to trade government
bonds will increase liquidity
in the secondary market,
drawing a wider pool ofinvestors and freeing up
capital for the corporate
sector. This will create amultiplier effect and help
deepening the depth of thefinancial sector in theeconomyRepo Market

India must develop a
repo market that isaligned withinternational
standards.

ASIFMA – October 2013

India’s current repo market(pledge repo system) mustbe transitioned to a classic
repo market (international
standard).

funding costs – allowing thegovernment to fund large,
country-wide infrastructure
and urbanization programs.

A “classic” bond repo market
allows: (1) market
participants to use the bonds
they hold for additional
purposes, such as further
repos, covering shortpositions, securities lending,and collateral (a pledge repo
system does not allow that as
the bond title is nottransferred); (2) allows
market makers, who are
critical for developing
liquidity in any market, to ‘goshort,’ which enhances
liquidity in the cash market
and thereby serves as a key
prerequisite for thedevelopment of the bondfutures market and the OTC
derivatives market, which
requires a sufficiently liquidcash market; (3)allow primary
dealers to hedge risk with awider array of hedging
strategies.; and (4) broaden
funding markets and serve asa critical link between money
markets, bond markets,
futures markets and OTC
derivatives markets.

25

Futures Market

Interest-Rate &Currency Swaps

Once the cash markets
are sufficiently liquid,
India should further
develop its government
bond futures market.

It is imperative thatIndia develops aninterest-rate andcurrency swap market.

ASIFMA – October 2013

In shaping the government
bond futures contract
ASIFMA recommends to not
fix or put a cap on the parcoupon and to create anadequate delivery
mechanism, whereby theshort is able to decide when
to execute the delivery. The
future contracts ought tocomply with theinternational standards inorder to render the market
safer and more transparent
for investors. However,examining how China andKorea shaped their futurescontracts may be a helpful
guideline, although not fullycomplying withinternational standards.

An active, liquid, and closely
supervised government
bond futures market would
allow participants to hedge
large-value positions quickly
and reduce risk more
effectively, while at thesame time deepening theunderlying bond andderivative markets. The
experience of othercountries shows that bondfutures enhance theliquidity of the underlying
cash markets as market
participants are able tomanage the risk of theirbond inventories more
effectively. Additionally,bond futures markets are
particularly beneficial tomarket-makers because
futures enable them tohedge their positions, thus
reducing risk and allowing
them to offer tighter bid-ask
spreads.

Interest rate liberalizationand deeper, moreaccessible financial markets
will create the conditions
necessary for an interestrate swap market todevelop in India.

Interest-rate and currency
swaps are an integral part of
the fixed-income market.
These derivative contracts
are an essential tool forinvestors who typically use
them to hedge, speculate,and manage risk, andgenerate greater liquidity in
fixed-income markets.
Importantly, interest-rate
and currency swaps allow
companies to keep undercontrol and revise theiroutstanding debt by
adjusting the interest rateaccording to current or
future market conditions.

26

Close-Out Netting

Corporate &Quasi-Sovereign
Bond Market

The rules governing
creditors’ rights, more
specifically close-out
netting, and an
efficient recovery
mechanism must be
strengthened andclarified in order toensure confidence inthe enforceability oftransactions andcontracts.

India must develop a
more well-rounded
corporate debt market.

ASIFMA – October 2013

A clear change to Indian law
is required to recognize
close-out netting, anestablished practice in alladvanced financial markets,and to establish an efficient
recovery mechanism.

Allowing institutional
investors to invest in
securities that carry a grade
lower than double A,
creating attractive lowgraded investment
opportunities and lettingbanks guarantee
companies’ high yieldbonds will foster more highyield corporate bonds
issuances, luring a larger
pool of investors.

Close-out netting reduces
credit risk by allowing aparty to calculate its
exposure to a particularcounterparty on a net basis.
Close-out netting will also
result in cost reduction,
allowing parties to use
credit lines more efficiently
and to maintain lower
reserves to cover exposure.
Because of uncertainty
regarding the enforceabilityof close-out netting in India,
a company’s exposure to an
Indian counterparty will betreated on a gross basis forregulatory capital purposes.
With the increased cost ofcapital under Basel III, theimpact on risk-weighted
assets is much greater forsuch non-netted trades,
driving up costs
considerably. This also
makes it extremely difficult
for India to develop liquid
derivatives and repo
markets, both of which arerequired if their capital
markets are to become
deep, liquid and opened toforeigners.
In India, a well-developed
corporate bond market
would serve several
functions: (1) it would enable
companies to raise funds
even if they are not favoredcustomers of the large,
domestic commercial banks;(2) it would allow companies
to match the durations of
their assets with the maturityof their liabilities; (3) with therise of pension funds, social
security funds, and insurance
funds, the combination of agovernment and corporatebond market is key toensuring that these funds canmatch their future payment
obligations; and (4) promote
greater transparency andimproved corporate
governance throughincreased disclosure.

27

Municipal & Local
Authority Bond
MarketSecuritization

India must develop arobust municipal bondmarket.

India needs to expand
and increase access to
its existing
securitization markets.

ASIFMA – October 2013

India’s planned
urbanization initiative will
require local governments
to quickly enhance theirinfrastructure. In order toovercome the financing
challenges of rapid
urbanization and allay
concerns about shadowbanking in local
government lending,
ASIFMA encourages India todevelop a municipal bondmarket, which will require
Indian authorities to create
the necessary financial
infrastructure and to
remove restrictions on
infrastructure financing
through bond issuance.

Securitization requires astable and predictable
operating environment.
India must establish clear
legislative, legal andregulatory guidelines formarket participants,
incentivize thedevelopment of highquality data for proper risk
assessment, and increase
foreign participation.

The creation of a municipal
bond market would allow a
combination of domestic
and foreign private capital
to finance municipal
infrastructure projects,
significantly easing local
municipal dependence on
Indian central government,
and significantly increasing
the amount of longer-term
capital available for largescale infrastructuredevelopment.

Securitization allows banks
to move illiquid assets, likelong-term loans, off theirbalance sheets, reducing thebuild-up of risky assets andproviding banks with theability to continue lending.
In India, securitization will
increase banks’ flexibility to
tap additional sources ofcash and liquidity,
significantly broadening
their ability to support
economic growth.
Additionally, it will provide
companies with a cheapersource of capital, lowering
the excessive reliance onbanks for lending. It will also
provide government andlocal municipalities withcheaper capital to financethemselves.
Importantly, securitization
also allocates risk withcapital, avoiding middlemaninefficiencies and canenable companies to access
capital markets directly, inmost cases at lower costthan the cost of issuing
direct debt (such as bonds
or commercial paper), as it
is collateralized, decreasing
investor risk.

28

Rates & Credit
Marketinfrastructure

Broadening theInvestor Base

Taxation

There is a clear need toestablish a credit rating
industry in India,
creating an accessible
and attractive market
for investors.

India must foster abroad investor base,which allows foreignand domestic financial
institutions (ranging
from commercial banks
to insurancecompanies, pension
funds, hedge funds, aswell as individual
investors) to compete
on an equal playing
field.

Market participants
need more clarity on
the implementation of
the withholding tax,
GAAR and indirecttransfer tax.

ASIFMA – October 2013

In a system with stableinterest rates, banks may
recognize mark-to-market
losses, trading securities
and investing in corporatebond sector. By so doing,banks will develop theirown risk management
department, better
assessing credit exposure.

In India, the investor base isextremely narrow andthere is no diversification of
products, prompting
mutual, hedge and pension
provident funds to be very
constrained in size.
Fostering institutional
investors to tap the market
and spurring asset
managers to invest in
corporate bonds will help
deepen the financial
markets going forward.

Indian regulators must be
more transparent regarding
the grandfathering of thetransactions that occur
between 30 August 2010
and the exact date GAAR
will come into force in2015, otherwise causing
harmful distortions in themarket.
Indian authorities should aswell clarify which
participants and which
products the indirect

A well-supervised andestablished credit rating
industry will provide
investors with a guaranteeof the type of securities they
are trading, ensuring amatch of bond price,
coupon and risk.
Establishing a sound credit
rating industry, based oninternational standards, will
attract more domestic andforeign investors. Allowing
the participation of both
domestic and foreign credit
rating agencies would
provide healthy competition
for domestic rating agencies
and help improve overall
standards of analysis andtransparency.
A broad investor base withdifferent time horizons, risk
preferences and trading
motives is vital for
stimulating active tradingand high liquidity, enabling
the government, corporates
or financial institutions to
execute their funding
strategies under a wide
range of market conditions.
More specifically, a broad
investor base provides animportant source of stability
and liquidity to financial
markets, aids in theefficiency of price discovery,
reduces market volatility,
and stimulates economic
growth.
Clarifying the retroactivityof the GAAR is advisable toincrease transparency in themarket and to draw moreinvestors.
Further keeping thewithholding tax low at 5%
will enhance investors’
expectations and spur themto invest in the market.
Grandfathering purchasesof longer tenor bonds willthen incentivize investors tocommit their capital for the29

transfer tax will apply to.
ASIFMA also advises tokeep the 5% of withholding
tax for a longer period oftime and to clarify what isgoing to happen next.
Purchases of longer tenor
bonds in infrastructure
could then be
grandfathered.

Regulation of
Financial Markets

India’s financial
regulatory authorities
must become moretransparent whendrafting andimplementing new
regulations.

ASIFMA – October 2013

Indian regulators
implement bylaws that
foster greater regulatorytransparency andconsistency, genuine
market consultation
processes, ample
notification of new
regulations and sufficient
time for public comment.

development of theinfrastructure sector.

Regulatory transparency
and consistency, market
consultation processes,
sufficient notification of
new rules and time forpublic comment are vital towell-functioning financial
markets.

30