Behind the Push: Why India’s Bond Bankers Are Urging SEBI for More Funding Flexibility
India’s financial markets have undergone notable transformations over the past two decades, but one segment has consistently lagged behind equity and bank credit in depth and liquidity: the corporate bond market. Recently, a group of financial intermediaries, often described as bond bankers or merchant bankers, have urged the Securities and Exchange Board of India (SEBI) — the country’s capital markets regulator — to revise longstanding limits on how they are funded and how they manage risk when underwriting debt securities.
This appeal may sound technical, but it is rooted in deeper structural challenges in India’s fixed-income markets — challenges that matter for businesses seeking funding, investors seeking returns, and the Indian economy’s ability to finance infrastructure and growth.
This article explains in clear terms what the issue is, why it exists, how it developed, who it affects, and what outcomes might lie ahead.
What Is the Issue?
At the heart of the current debate is a simple question: should merchant bankers be allowed greater funding flexibility when underwriting corporate bonds?
Under current norms, many of these intermediaries are restricted in two key ways:
-
They cannot borrow funds against the very bonds they hold to underwrite corporate debt offerings.
This limits their ability to raise cash when demand for a particular bond issuance is weak. -
Their underwriting capacity is constrained primarily by their own net worth.
In other words, they can only underwrite bonds up to a level tied to how much capital they have, rather than how much liquidity or credit they can access.
Merchant bankers want SEBI to loosen these restrictions. They argue that allowing them to borrow against bonds — or access other funding sources like bank loans or broader capital markets — would make their role more effective, deepen the corporate debt market, and improve liquidity and price discovery. Some also want permission to operate an anonymous trading platform for corporate bonds, akin to what exists in other major markets.
Why Does This Issue Exist?
To understand why such a push has surfaced now, it helps to look at the broader context of India’s bond markets.
A Market That Has Grown But Remains Shallow
India’s overall bond market includes a large government securities segment and a smaller, though growing, corporate bond segment. Over the past decade, total bonds outstanding — combining government and corporate debt — climbed significantly, but India’s bond markets still lag behind major economies in terms of size relative to GDP.
Within this environment:
- Government bonds, issued by the Indian government and state entities, form the bulk of trading activity.
- Corporate bonds, issued by private and public companies to raise long-term capital, account for a much smaller share of market turnover and investment.
This disparity stems from long-standing factors:
- A preference among Indian companies to borrow from banks rather than issue bonds.
- Relatively low institutional investor participation outside large insurers and mutual funds.
- Limited retail engagement compared with equity markets.
- Historical trade settlement and transparency constraints.
SEBI’s Regulatory Mandate
SEBI, established in 1992, regulates India’s securities markets with a dual mandate to protect investor interests and develop efficient, transparent markets.
Over the years, SEBI has taken steps to deepen bond markets — for example:
- Introducing electronic trading mechanisms such as the Request for Quote (RFQ) platforms.
- Strengthening disclosure requirements.
- Enhancing settlement systems.
Yet, many analysts and market participants argue that structural liquidity gaps persist, especially in corporate bond trading. This includes thin secondary market activity and reluctance among intermediaries to provide continuous bid-ask spreads.
How Underwriting Works — and Why Funding Matters
To grasp the bankers’ arguments, it helps to understand what underwriting corporate bonds means:
Underwriting Explained
When a company wants to raise money by issuing bonds, it often hires financial intermediaries — merchant banks or brokers — to underwrite the issuance. That means these intermediaries commit to:
- Buying the bonds from the issuer if market demand is weak.
- Selling them to investors, ideally at attractive prices.
In efficient markets, underwriters can mitigate risks by hedging positions or borrowing funds against securities they hold.
The Liquidity Challenge
In India’s current structure:
- Merchant bankers are not permitted to borrow against bonds they hold, restricting their ability to finance inventory during weak demand.
- Instead, their underwriting limit is tied to their net worth, limiting how much risk they can take on.
This can create a catch-22 situation: when bond demand is low — often due to a lack of liquidity or investor interest — intermediaries may not have the funding capacity to support the issuance, potentially leading to fewer corporate bond deals.
Who Is Affected — and How?
The issue has implications not only for bankers themselves but for multiple stakeholders:
1. Corporate Issuers
Companies seeking long-term financing rely increasingly on bond markets to fund expansion, refinance existing debt, or support infrastructure projects. If underwriting capacity is limited, some issuers may struggle to place bonds at desirable terms.
2. Investors
A deeper, more liquid bond market would offer investors a wider range of fixed-income investment options beyond bank deposits and equity. But limited trading activity and price discovery can deter both institutional and retail investors.
3. Intermediaries and Brokers
Merchant bankers argue that more funding flexibility would allow them to compete more effectively with primary dealers and other global market players. That could improve their business models and risk management.
4. The Broader Economy
Corporate bonds are a vital source of long-term capital, especially for sectors like infrastructure, manufacturing, and renewable energy. Barriers in underwriting capacity and liquidity may indirectly slow corporate investment.
The Broader Impact on Markets and Growth
Market Liquidity and Price Discovery
One major complaint is the lack of liquidity in India’s corporate bond market. In markets like the United States or Europe, anonymous trading platforms and sophisticated market-making practices help ensure continuous trading and transparent pricing.
In contrast, much of India’s corporate bond trading is done through negotiated deals, often with limited real-time price visibility. This affects price discovery — the market’s ability to set fair prices based on supply and demand.
Bankers argue that allowing an anonymous trading platform — where buyers and sellers can transact without revealing identities — could substantially improve liquidity and transparency.
Risks and Market Stability
Critics of expanded funding flexibility caution that greater borrowing against bonds could increase leverage among intermediaries. In downturns, this could exacerbate losses if bond prices fall sharply. The 2007–08 global financial crisis famously showed how unsecured leverage in fixed-income markets can magnify systemic risks.
SEBI’s caution reflects the balancing act it must perform: promoting market development while safeguarding investor interests and financial stability.
What Led to the Current Push?
The bankers’ request to SEBI did not emerge in a vacuum. It reflects several long-running trends:
1. Slow Corporate Bond Growth Relative to Needs
Although corporate bond issuances in India have risen in recent years, they still account for a low share of total finance relative to bank lending. This has prompted ongoing efforts by regulators and market participants to make bond markets more attractive and liquid.
2. Global Comparisons and Competitive Pressure
In mature markets, intermediaries have access to a variety of funding tools — including repurchase agreements (repos) and trading against inventory — to manage risk and liquidity. Indian intermediaries want parity with these global practices.
3. SEBI’s Reform Agenda
SEBI has signaled a desire to deepen debt markets. It has introduced reforms to improve trading infrastructure and broaden participation. But full liberalization of funding tools has not yet occurred, partly due to risk considerations.
4. Investor Demand and Risk Appetite
Volatility in interest rates and macroeconomic uncertainty sometimes lead investors to prefer government securities over corporate bonds. This makes underwriting more challenging and heightens the need for intermediaries to manage inventory risk effectively.
What Might Happen Next?
Several outcomes are possible as SEBI considers the bankers’ proposals:
1. Partial Approval
SEBI might allow limited borrowing against certain high-rated bonds or under strict collateral rules, expanding funding options without undermining stability.
2. Infrastructure Reforms
The regulator could greenlight an anonymous trading platform for corporate bonds, which could be a major step toward improved liquidity and price discovery.
3. Stronger Risk Controls
If SEBI approves additional funding flexibility, it is likely to impose robust safeguards — such as margin requirements or restrictions on leverage — to prevent systemic risks.
4. Sectoral Impact
Broader underwriting capacity could encourage more corporates to tap bond markets, potentially reducing reliance on bank credit, stimulating long-term investment, and aligning India more closely with global fixed-income practices.
Balancing Risk and Opportunity
The debate highlights a core tension in financial market development: how to modernize and deepen markets without compromising stability.
On one side, expanded funding tools and trading mechanisms can invigorate India’s corporate bond market, providing companies with more financing options and investors with better opportunities. On the other, unguarded leverage or lax trading standards can introduce vulnerabilities.
SEBI’s decision — expected after consultations and perhaps new regulatory frameworks — will signal how India’s capital markets evolve in the coming years.
Conclusion: A Market at a Crossroads
India’s bond market stands at an important juncture. The push by bond bankers for greater funding flexibility reflects broader ambitions to make India’s corporate debt markets more vibrant, efficient, and globally competitive. At the same time, regulators remain cautious about preserving market integrity and protecting investors.
For businesses, investors, and financial intermediaries alike, the next steps in this story will influence where and how capital flows in India’s economy. Whether through policy reform, infrastructure enhancement, or a combination of measures, the evolution of India’s bond markets will remain a topic of keen interest for anyone invested in the country’s financial future.