NEW DELHI: India needs tax reforms, stronger secondary-market liquidity and a broader investor and issuer base to deepen its corporate bond market, which remains small relative to the country’s financing needs and heavily dependent on a narrow set of participants, according to a report by CareEdge Ratings.
The report said adverse taxation on debt products, low liquidity in secondary markets and limited participation by foreign and retail investors continue to constrain the development of the corporate bond market, even as outstanding issuances have risen to nearly Rs 59 trillion in FY26 from Rs 18 trillion in FY15.
Among its key recommendations, the rating agency called for rationalising the tax treatment of debt products. “Adverse taxation on debt investments has restricted investor participation. Hence, the tax structure for debt products needs to be rationalised to align with other asset classes,” it said.
The report also sought a reduction in tax deducted at source (TDS) requirements for debt investors, arguing that the current framework was designed for the paper-trading era and imposes operational burdens on small and medium investors despite the availability of digital systems that can track transactions efficiently.
CareEdge’s recommendations come at a time when India’s corporate bond market remains underdeveloped compared with major economies. Corporate bonds account for only about 21 per cent of the country’s debt market and around 16 per cent of gross domestic product (GDP), significantly lower than China, where the market is equivalent to 36 per cent of GDP, and the United States, where it stands at about 40 per cent.
The report noted that India’s debt market continues to be dominated by government securities, which account for nearly three-fourths of outstanding debt, while companies remain reliant on bank financing.
Liquidity remains another structural challenge. Average daily turnover in government securities is around 10 times that of corporate bonds, while India’s corporate bond trading-to-outstanding stock ratio is just 0.2 per cent, compared with 0.5 per cent in China, 2.4 per cent in the UK and 4.7 per cent in the US.
To address this, the rating agency has recommended measures to encourage market-making in corporate bonds by reducing inventory-carrying costs and enabling greater use of bond derivatives and swaps to hedge risks.
The rating agency also called for steps to widen the investor base. Foreign portfolio investors account for only 5.4 per cent of outstanding corporate bonds despite a regulatory limit of 15 per cent. To attract greater overseas participation, it recommended simplifying regulations, easing compliance requirements and offering tax incentives similar to those available for government securities.
Domestic institutional participation also remains concentrated in highly rated instruments. More than 85 per cent of bond issuances are in AAA- and AA-rated categories, partly because insurance companies and pension funds are allowed to invest only in AA-rated and above securities.
The report suggested allowing retirement funds and insurance companies to allocate a small portion of their portfolios to A-rated bonds, arguing that this could help improve market depth and liquidity.
On the issuer side, the report recommended strengthening the market-borrowing framework for large corporates, encouraging greater use of bond markets over bank loans, facilitating access for infrastructure entities through mechanisms such as partial credit enhancement, and conducting outreach programmes aimed at bringing more small and medium enterprises into listed debt markets.
Source: Business Standard
