The High-Level Expert Committee on Corporate Bonds and Securitization, chaired by R. H. Patil, UTI Asset Management Company, was formed by the Securities and Exchange Board of India following the FY 2005/06 budget announcement to address the underdevelopment of India’s corporate bond market. Members included Usha Thorat (RBI); M. S. Kherewala (SEBI); M. H. Kherewala (Member, Legislation, CBDT); U. K. Sinha (JS(CM)); C. B. Bhave (Managing Director, NSDL); Chitra Ramakrishna (Deputy Managing Director, NSE); K. Unnikrishnan (Senior Vice President); S. V. Mony (Secretary General, Life Insurance Council); C. E. S. Azariah (Chief Executive Officer, FIMMDA); Rajeev Lall (Managing Director, IDFC); and Prithvi Haldea (Managing Director, Prime Database).

The market, characterized by low liquidity and minimal participation from manufacturing and service industries, lagged behind foreign counterparts. The primary issuance market was dominated by nonbanking finance companies, while the secondary market remained largely illiquid. The committee noted that the corporate sector’s reliance on bank financing, supported historically by development financial institutions, had stunted the growth of a robust bond market. After the economic reforms initiated in 1991, many such institutions transitioned into commercial banks, further limiting long-term project-financing options. The committee found that regulatory challenges, such as stringent disclosure requirements for public debt issuance and limited transparency in secondary market trading, had led corporations to prefer private placements over public debt issuance, thus limiting the market’s growth.

The committee thoroughly analyzed global corporate bond markets, focusing on the United States, Japan, and South Korea, to derive insights applicable to India. The US market, the largest globally, demonstrated high liquidity with an average daily trading volume of $37 billion in 2005. Additionally, there was significant foreign investor participation as they held about 25 percent of corporate bonds (valued at $1,775.5 billion). In contrast, the Indian market remained primarily institutional, with negligible retail participation and a nontransparent secondary market. The committee also examined the nascent asset-based securities market in India, noting a 13 percent growth in mortgage-backed securities in 2004–5, with primary issuance worth Rs. 33.4 billion. However, legal and regulatory barriers, including issues related to the stamp duty and tax treatment, had hindered the development of a secondary market for these instruments.

The committee recommended several actions. It urged the development of a robust market infrastructure, including a trading platform, clearing and settlement system, and risk-management framework, to support corporate bond trading. The committee also called for legislative reforms to remove regulatory hurdles, particularly concerning tax treatment and disclosure requirements, to encourage both issuance and trading of corporate bonds. To enhance market liquidity, the committee emphasized the need for market makers and proposed measures to attract retail investors, such as improved information dissemination and the introduction of bond insurance. Additionally, the committee highlighted the importance of learning from global markets, particularly those in the US, Japan, and South Korea, to implement best practices tailored to the Indian market. Finally, the committee stressed the need for promoting the development of a secondary market for asset-backed securities, recognizing the potential of mortgage-backed securities and other asset-backed securities as critical components of a diversified and resilient debt market.

The committee’s key recommendations, such as establishing a dedicated trading platform for corporate bonds, rationalizing the stamp duty on securitization, and improving trade transparency, were largely accepted. These led to significant policy changes, including the launch of BSE’s Debt Segment and amendments to the Indian Stamp Act of 1899, which governs how stamp duty is charged on transactions. These reforms aimed to enhance market infrastructure, encourage the growth of asset-backed securities, and improve transparency in corporate bond trading.