Corporate debt market in India: Lessons from the South African experience

Abstract

Development of long-term debt markets is critical for the mobilization of the huge magnitude of funding required to finance potential businesses as well as infrastructure expansion. India has been distinctly lagging behind other emerging economies in developing its long-term corporate debt market. Traditionally, bank finance, coupled with equity markets and external borrowings have been the preferred funding sources. The domestic corporate debt market suffers from deficiencies in products, participants and institutional framework. Large fiscal deficit, high interest rates, inadequate market infrastructure, lack of transparency, excessive regulatory restrictions on the investment mandate of financial institutions, and distortionary tax and stamp duty regime are some of the key issues that may potentially hamper the development of a well-functioning corporate debt market in an emerging economy. Several of these issues need the political will to bring about legislative, regulatory and fiscal reforms. In order to gain insight into the required reforms, it may be useful to look at an economy that implemented not only the regulatory but also the policy level reforms in debt markets. South Africa is one such economy where the long term debt market reforms lasted nearly two decades starting from early 1980s. In this paper, we study the development of the South African corporate debt market, which underwent a significant transformation from being moribund into one that is vibrant and large. We also draw lessons for the Indian corporate debt market from the South African experiences.