India’s Bond Bankers Push SEBI for Greater Funding Flexibility to Strengthen Corporate Debt Market
Indian Capital Markets Report
Published: February 26, 2026 | Research by FX Rate Live Analysis Team
Core Executive Takeaways
- Funding Flexibility: Merchant bankers have asked SEBI for permission to borrow against the bonds they underwrite to handle larger deals.
- Capacity Constraints: Current underwriting limits are tied strictly to net worth, creating inventory financing bottlenecks.
- Institutional Parity: Intermediaries seek treatment similar to primary dealers in government securities (G-Secs).
- Market Depth: India's corporate bond market stands at ₹58 trillion, but remains illiquid beyond top-rated issuers.
- Currency Link: A deeper debt market supports yield stability and reduces pressure on the Indian Rupee (INR).
When a big Indian company lines up to raise money through bonds, the merchant banker is the one who makes the deal happen. They design the issue, drum up buyers, and promise to buy whatever investors don’t take. For years these professionals have done the job with one major handicap: strict rules that limit how much they can underwrite and make it hard to fund any bonds that stay on their books. That could be about to change.
In recent closed-door meetings with the Securities and Exchange Board of India (SEBI), a group of merchant bankers has quietly pushed for more funding flexibility. The core idea is straightforward — let them pledge the corporate bonds they underwrite as collateral to borrow money. If SEBI says yes, these intermediaries would suddenly be able to take on bigger mandates and hold inventory longer without freezing their balance sheets when demand softens.
Why the Rules Started Feeling Too Tight
SEBI’s current framework ties a merchant banker’s underwriting limit directly to its net worth. That worked reasonably well when bond issues were smaller and less frequent. But the market has moved on. Corporate bond outstanding has climbed from around ₹17.5 lakh crore in FY15 to roughly ₹53–58 trillion today, and individual deals have grown larger too.
When sentiment turns — maybe because global yields spike or domestic liquidity tightens — buyers can pull back at the last minute. The banker is then stuck holding paper it cannot easily finance. Primary dealers in the government securities market enjoy standing repo facilities with the RBI and can roll over holdings smoothly. Corporate-bond merchant bankers have no equivalent backstop.
This gap has become more noticeable as regulators repeatedly say they want companies to borrow more from the bond market and less from banks. A deeper corporate bond market would ease pressure on the banking system and give infrastructure projects a more stable funding source. Yet the intermediaries who are supposed to make that market work still operate under constraints that were designed for a much smaller ecosystem.
What the Bankers Are Actually Asking For
The proposal has a few clear parts. First, explicit permission to borrow by pledging the corporate bonds they underwrite — essentially a tailored repo facility. Second, the ability to raise money from banks, non-banking financial companies and even through the capital markets without hitting leverage red lines. Third, treating these borrowings as ordinary business activity rather than something that automatically triggers extra regulatory scrutiny.
Senior bankers involved in the discussions argue this would let them behave more like market makers: hold bonds temporarily when appetite is weak, then sell them gradually as conditions improve. One person familiar with the talks described it as simply “bringing debt intermediation on the same footing as sovereign debt market-making.”
Official Data: To review the existing regulatory framework for intermediaries, visit the SEBI Official Website.
A Market That Has Grown Fast but Still Has Room to Run
At ₹58 trillion, India’s corporate bond market is already substantial by emerging-market standards. Yet it still accounts for only about 15–16% of GDP, far below levels seen in China or South Korea. Trading remains patchy, bid-ask spreads can be wide, and most issuance stays with AAA and AA names. Smaller companies often find the market inaccessible.
If the regulator agrees, companies could issue larger tranches with greater confidence. Over time, that could attract more foreign portfolio money that has so far stayed on the sidelines because of structural frictions.
Impact on the Indian Rupee
A deeper bond market anchors long-term yields and supports INR stability during global stress.
Check Live USD/INR Rates →Potential Hurdles and the Road Ahead
SEBI is unlikely to green-light the request without safeguards. Regulators will want clear rules on haircuts for pledged bonds, limits on how much lower-rated paper can be used as collateral, and strong mechanisms to prevent excessive leverage. Coordination with the RBI on repo infrastructure will also be needed.
Still, the broader policy mood is supportive. SEBI Chairman Tuhin Kanta Pandey has repeatedly spoken about the need for coordinated action to take the corporate bond market to the next level. Industry associations are expected to submit detailed representations with data from Asian peers that already allow similar facilities.
Why This Matters Beyond the Banking Halls
For students and young professionals watching India’s financial markets evolve, this is a textbook example of how small regulatory tweaks can unlock much larger flows of capital. For ordinary investors, it eventually translates into more bond options, better liquidity, and a healthier alternative to bank deposits.
The request from merchant bankers is not about special favours. It is about removing an artificial bottleneck that no longer matches the size and ambition of India’s corporate bond market. If SEBI moves forward, the benefits will flow to infrastructure builders, manufacturing companies, and ultimately to the stability of the rupee.
Frequently Asked Questions
What exactly do merchant bankers do in the bond market?
They structure deals, market bonds to investors, and commit to buying unsold portions (underwriting) to provide certainty to issuers.
How does this connect to forex and the rupee?
Deeper domestic bond markets reduce reliance on short-term foreign flows and help stabilise yields, acting as a buffer during global risk-off episodes.
Disclaimer: This article is based on public reports and industry discussions as of February 26, 2026. Regulatory proposals are subject to change. This content is for informational purposes only and does not constitute financial advice. For official updates, refer to Bloomberg's financial coverage.
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