Over the past 30-40 years that I have been in the markets there have been many scams. The first one which became famous was the Harshad scam. This scam, the Ketan scam, Home Trade scam, ….are ALL scams related to only one thing. Guess what?

The fact that the debt market is a WHOLESALE DEBT MARKET – and the lot size is Rs. 5 crores. Sure the rupee has lost value, but Rs. 5 crores is not exactly what a retail investor can invest in one single instrument.

So if the banking regulator had allowed the secondary market to develop in bonds what would have happened?

Good companies would have raised money in the open market. Suppose we had Tata Steel borrowing for 30 years, 20 years, 10 years, 5 years, 2 years, and 18 months. We would have had a beautiful “Tata Steel Yield curve”. Similarly we would have yield curves for LnT, TaMo, Hdfc bank, …and many other infra companies.

The government could have compelled National savings certificates, Kvp, etc to be issued only in demat mode. The risk control is very easy, and there would have been no credit risk in the portfolio. Slowly we could have issued 5 and 10 year corporate paper and say 30 year Gsec, and 20 year AAA top corporate paper. If I wanted money in 5 years time I would have just bought some 5 year zero coupon bond! Today I am forced to keep that money in bond funds with the attendant risk.

However, there are vested interest in this happening. The banking regulator will lose control over the banks – and banks themselves will become irrelevant faster than expected.

So suddenly you will have 30 year, 29 year, ….bonds of various risk profiles. Today if you want to buy Mindtree you go and buy in the market, so does the seller wanting to sell….SO IT IS A MARKET DISCOVERED PRICE. We don’t have a market discovered price in bond markets. So a Zee subsidiary will use its underlying assets and raise a bond. As the underlying asset changes value, the market will start start re pricing…and there will be no PANIC.

There would be no EMOTION pricing. Take the DHFL bonds – some people would have wanted more risk for a higher yield.

WE WOULD HAVE KNOWN the yields of the underlying paper in bond funds, ….at leaNost we would have known about the quality of bond funds.

Sumaria Abidi and Latha Venkatesh did a program where I think S.A. said “there should be more disclosure”. Honestly disclosure makes no sense to a great investment community that does not read. Latha then said “there should be more financial education” honestly that does not help either.

Nothing like price. When the market gives you information, you understand it better. If people had been invested in short term of medium term bond funds, such problems would not have been impacted the investment. Whether debt or equity, I do not like products which put a “time” restriction on the fund manager. So I do not like a FMP nor do I like a close-ended fund with a 3 year duration. It does not give the fund manager any time to handle a delay. I do not like such restrictions which cramp style.

In a big fund a small problem of delay or even a fall in value does not impact so much. Also it is stupid that somebody would do a FMP with a liquidity risk AND CONCENTRATION risk. I see only one fund manager in the whole industry who does not make such mistakes. Well, to each his own.

Another problem is that debt investors think that they should get A- rates and AAA kinda risk. Sounds stupid? welcome to the world of debt funds. Nothing can be done.

The regulator – Sebi and Rbi have to create a Price discovery market – for wholesale and retail debt markets.

This will help companies raise money for the long term. Yes it might require some tax sops – say 80C – while increasing the limit of 80C to Rs. 5L.




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  1. Well Subra, buying a 5 year bond and keeping it to maturity is fine, but what if the company doesnt repay? Imagine if ILFS borrowed all their 90,000 crores from the debt market, they would still be borrowing you know without a risk of default. Same with Zee promoters because their don’t have an underlying business for their bonds and hence no chance of a crash. Just roll over and over and over in to the abyss.

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