Over the past 30-40 years that I have been in the markets, there have been many scams. The first one that became famous was the Harshad scam. The Harshad scam, 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 crore! Sure the rupee has lost value, but Rs 5 crore is not exactly what a retail investor can invest in one single instrument. So, between reporting periods, scamsters had a field day. Now imagine that the debt market was also like the equity market – huge retail participation with daily settlement.
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, five years, two years and 18 months. We would have had a beautiful ‘Tata Steel yield curve’. Similarly, we would have yield curves for L&T, Tata Motors, HDFC Bank... and many other infra companies.
The government could have compelled National Savings Certificates, Kisan Vikas Patra, 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 papers and say 30-year GSec, and 20-year AAA top corporate paper. If I wanted money in five years, I would have just bought some five-year zero coupon bond! Today, I am forced to keep that money in bond funds with the attendant risk.
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; and so does the seller wanting to sell. Therefore, it is a market discovered price. We don’t have a market-discovered price in bond markets. A Zee subsidiary will use its underlying assets and raise a bond. As the underlying asset changes value, the market will 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 least we would have known about the quality of bond funds. Improving investor education is not going to help the guy who refuses to read. The best way is to let the market pricing teach him about the quality of the instrument. When the market gives you info, 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 that put a “time” restriction on the fund manager. So, I do not like an FMP, nor do I like a close-ended fund with three-year duration. It doesn’t give the fund manager any time to handle a delay.
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 an FMP with a liquidity risk and concentration risk. I see only one fund manager in the whole industry, who does not make such mistakes.
Another problem is that debt investors think they should get A-rates and AAA kinda risk. Sounds stupid? Welcome to the world of debt funds. Nothing can be done. The regulators, 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.