‘Allow trading in bonds from stressed businesses’

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Regulators should take into account allowing the buying and selling of bonds issued by distressed companies within the company bond market, mooted Chief Economic Advisor (CEA) Krishnamurthy Subramanian, including that with the COVID-19 pandemic set to ‘inevitably’ add to the misery in corporates’ and lenders’ balance-sheets, the nation wanted a value discovery mechanism for pressured belongings.

Asserting that the nation’s evolving insolvency and chapter course of nonetheless had scope to turn into extra environment friendly, he mentioned, “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 towards bankers for judgments they might train to resolve pressured mortgage accounts additionally cramped their potential to take ‘economically efficient’ choices, he opined. Flagging an ‘incentive’ drawback affecting public sector bankers particularly, he mentioned that judgment is concerned when an organization goes into misery and its debt must be restructured or written down to show it round or appeal to different traders.

“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 mentioned. “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 mentioned, stressing that such judgment was important for assuaging the distressed belongings drawback.

Business barons additionally wanted to snap out of a ‘Heads I win, tails you lose’ method, Mr. Subramanian contended at a session on pressured belongings hosted by trade physique 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 mentioned.

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