Allow trading in bonds from stressed businesses: CEA Krishnamurthy Subramanian


Regulators must consider permitting the trading of bonds issued by distressed businesses in the corporate bond market, mooted Chief Economic Advisor (CEA) Krishnamurthy Subramanian, adding that with the COVID-19 pandemic set to ‘inevitably’ add to the distress in corporates’ and lenders’ balance-sheets, the country needed a price discovery mechanism for stressed assets.

Asserting that the country’s evolving insolvency and bankruptcy process still had scope to become more efficient, he said, “We also need a market for price discovery of stressed assets, without which the process of taking a haircut becomes difficult”.

“Similarly, a corporate bond market that enables bonds of distressed companies to be traded becomes important.

“In India, it’s primarily just the [firms with] top few ratings that get traded. The U.S. benefits a lot in the creative destruction process by having that market for price discovery. So, we need to look at our incentives and the market for price discovery,” Mr. Subramanian added.

‘Incentive problem’

Investigations against bankers for judgments they may exercise to resolve stressed loan accounts also cramped their ability to take ‘economically efficient’ decisions, he opined. Flagging an ‘incentive’ problem affecting public sector bankers in particular, he said that judgment is involved when a company goes into distress and its debt needs to be restructured or written down to turn it around or attract other investors.

“A significant amount of judgment is used to price the value of that debt with a necessary haircut [and] take that hit in the profit and loss account… This is where because of the involvement of judgment, there is always this possibility of a hindsight bias that can create enormous risk aversion,” Mr. Subramanian said. “If a decision made after exercising judgment, can be viewed with a malafide intent, that can make bankers very skittish in making those judgments,” he added.

“Investigations that do not take into account some of these very important nuances, really make it very difficult for bankers to do what is economically efficient,” the CEA said, stressing that such judgment was critical for alleviating the distressed assets problem.

Business barons also needed to snap out of a ‘Heads I win, tails you lose’ approach, Mr. Subramanian contended at a session on stressed assets hosted by industry body FICCI.

“Corporate India needs to recognise and respect that the equity contract entails — if things go well, even if due to luck, you retain control; but if things go bad, possibly also due to luck or exogenous circumstances, ceding control is part of the equity contract,” he said.

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