For the last two decades or so, every finance minister in his budget spe­e­ch has mentioned the need to ha­ve a developed and liquid bond market. But the pace at which corporate debt has increased, the development of corporate bond markets leaves much to be desired. With the IL&FS drama unfolding last mo­nth, even that slow pace of developm­ent of the bond market has taken several steps backwards. Since the government superseded the IL&FS board, the corpor­a­te bond market has been in a freeze. Pr­o­bably, the transactions taking place are the ones that have companies with a stro­ng balance sheet buying their own bonds to send a signal that ever­y­thing is fine with them. But going beyond the IL&FS crisis, the episode raises the question whet­her India will ever be able to have a developed bond market in the current policy framework.

The bond market is tot­ally dependent on rating agencies. These agencies have time and again fail­ed to do what they are su­p­posed to – and it can be said the development of bond market has not been satisfactory. The sudden downg­r­ade in rating, as happened in the IL&FS case, is not the first of its kind. In the last one-and-a-half years, there have been many firms whose paper had been suddenly downgraded to default. That le­ft many fund houses and banks that had subscribed to debt paper in the lurch. Some of that debt paper was sold at heavy discount and asset management companies had to take a loss on their books. In none of these episodes did the credit rating agencies lose anything. They continue to have robust businesses and are not held to account for the sudden downgr­a­d­es. It is essential that credit rating age­ncy norms should be tightened because a company’s balance sheet cannot deteriorate overnight.

The decline in quality of balance she­et is a process, which happens over time. Credit rating agencies should track cash flows and inform the regulator or general public so that they know what is happeni­ng and corrective measures can be taken. If a company is not co-operating with a rating agency by providing fresh information, the rating agency concerned should make that information public as well bec­a­use it could be indicating trouble ahead.

Meanwhile, as with the equity market, regulators must disclose on a daily basis what is happening in the debt market. Why can’t the daily figure of how much commercial paper has be­en subscribed or redee­m­ed be made public at the end of each day – as is do­ne while providing details of what has been the net buying and selling of FIIs and DIIs. It’s not that this information is hard to coll­ect, it is just that some law has to come which ma­kes the participant act and give information to the regulator for its dissemination. There is a pe­r­ception that because the general public deals with debt instruments on a day-to-day basis, information of what is happening to the debt market is of no interest to them. This is a wrong perception. In fact, free flow of information is the first step towards making a market expand and be more liquid. Our regulator should look at history. Whenever tightening of norms and more disclosure standards are announced, stakeholders of that sector oppose them. Later on, though, that tightening brings about changes that are described as reforms. It is, therefore, time to reform rating agencies.