HR Khan Committee, Objectives, Recommendations, Importance

HR Khan Committee was constituted by the Reserve Bank of India (RBI) to examine issues related to the development of the corporate bond market in India. The committee focused on improving the functioning of the bond market, increasing investor participation, and making it easier for companies to raise long-term funds.

Why was the HR Khan Committee Formed?

HR Khan Committee was formed to identify the key problems in India’s corporate bond market and suggest measures to make it deeper, more liquid, transparent and accessible.

• Low market liquidity: Many corporate bonds were not actively traded in the secondary market, making it difficult for investors to buy or sell them easily.
• Limited investor participation: The corporate bond market had a relatively narrow investor base, with greater participation needed from institutional as well as retail investors.
• High dependence on banks: Companies relied heavily on bank loans for raising funds. A stronger bond market could provide an alternative source of finance.
• Need for long-term finance: Infrastructure and other large projects require long-term funds, which can be raised more effectively through a well-developed corporate bond market.
• Weak secondary market: Limited trading and price discovery reduced the attractiveness of corporate bonds as an investment option.
• Need for better market infrastructure: The committee examined ways to improve trading, clearing, settlement and information systems related to corporate bonds.
• Regulatory challenges: Differences and complexities in regulations could discourage participation. The committee therefore looked at ways to create a more supportive regulatory framework.

Major Recommendations of the HR Khan Committee

HR Khan Committee suggested several measures to strengthen India’s corporate bond market, improve liquidity, increase investor participation and make the market more efficient.

• Improve Secondary Market Liquidity: The committee recommended measures to increase trading in corporate bonds and make it easier for investors to buy and sell them.
• Develop the Corporate Bond Repo Market: It suggested developing the repo market for corporate bonds to improve short-term liquidity and provide financial institutions with better funding options.
• Strengthen Market-Making: The committee recommended encouraging market makers to provide regular buy and sell quotes, helping improve liquidity and price discovery.
• Widen the Investor Base: It proposed increasing participation from banks, insurance companies, mutual funds, pension funds, foreign investors and retail investors.
• Improve Market Infrastructure: The committee recommended strengthening systems for trading, clearing, settlement and reporting of corporate bonds.
• Improve Transparency: Better availability of information on bond prices, trades, issuers and outstanding securities was recommended to help investors make informed decisions.
• Promote Credit Enhancement: The committee supported mechanisms that could improve the credit quality of bonds and make them more attractive to a wider range of investors.
• Simplify Regulatory Framework: It recommended reducing regulatory difficulties and creating a more coordinated framework for the development of the corporate bond market.
• Encourage Electronic Trading: Greater use of electronic platforms was suggested to improve transparency, efficiency and price discovery in corporate bond transactions.

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Corporate Bond Market in India

Corporate Bond Market in India is a market where companies raise money by issuing debt securities to investors. It provides an alternative to bank loans and is an important source of long-term finance for businesses and infrastructure projects.

• Meaning: A corporate bond is a debt instrument through which a company borrows money from investors and promises to repay the principal, generally with interest.
• Primary Market: Companies issue new bonds to raise funds for purposes such as business expansion, infrastructure development and refinancing existing debt.
• Secondary Market: Investors can buy and sell already-issued corporate bonds. An active secondary market improves liquidity and price discovery.
• Major Participants: Banks, mutual funds, insurance companies, pension funds, financial institutions, foreign investors and other eligible investors participate in the market.
• Regulatory Framework: The Securities and Exchange Board of India (SEBI) regulates the listed corporate bond market, while the RBI plays an important role in areas related to banks, financial institutions and the broader debt market.
• Importance: A strong corporate bond market helps companies access long-term funds, reduces dependence on bank credit and provides investors with additional investment opportunities.
• Key Challenge: Despite reforms, the market continues to face issues such as limited liquidity, concentrated investor participation, credit risk and relatively low retail participation.