Why debt instruments are few in number

B. Venkatesh

AS A retail investor wanting to invest in debt instruments, you have very little to choose from. If it is not a fixed-deposit with your neighbourhood bank, it is probably no more than the bonds offered by ICICI and IDBI. Of course, debt mutual funds have sprung up of late.

A careful observation will, however, tell us that one debt mutual fund is not very different from the other; for, mutual funds also face the problem of non-availability of many debt instruments to invest in.

What is the reason for lack of debt instruments in the market? The two most important reasons are the indifferent attitude of banks and companies' lack of objective to enhance shareholder value.

Consider first the companies' attitude towards enhancing shareholder value. Now, enhancing shareholder value means operating the company in a way that would benefit the shareholders at large.

Unfortunately, that has not been the case in India. For a large part, this was because corporate India was dominated by family-run companies.

Since minority shareholders were rarely rewarded by the company, outside equity was actually considered cheap! This notion led most companies to fund their new projects with equity.

And when companies did fund their projects with debt, they borrowed from banks. This was because banks rarely brought to task companies for defaulting on their loan obligations.

But all this may change for the better in the future. With investors now demanding a high risk-premium to compensate for poor quality of management, companies are realising that equity is not cheap after all.

Moreover, easy access to bank loans now seem difficult; for, banks are now under increasing pressure to reduce losses from bad loans. This means companies cannot easily get away with payment defaults.

Finally, the need to stay competitive in the market will force companies to resort to low-cost borrowing. All these factors may prompt companies to offer structured debt instruments in the future. That is when retail investors will have an array of debt products to choose from.