The high-level banking committee announced in Budget 2026 will focus on expanding the secondary market for financing small and medium enterprises, two government officials told Moneycontrol.
The government is looking at ways to increase SME participation in the corporate bond market, the officials said, requesting anonymity. “At the current moment, more than 95 percent of bond issuances are done through top-rated companies. SMEs are largely excluded,” one of the two officials said.
Tweaking the taxation structure for capital gains on corporate bonds, improving the credit profile for SMEs, and securitising SME bond issuances are among the key ideas under consideration by the government, the officials said.
According to Niti Aayog, India’s corporate bond market has expanded significantly, with outstanding issuances rising from Rs 17.5 trillion in FY15 to Rs 53.6 trillion in FY25, recording an annual growth rate of nearly 12 percent. The market now accounts for around 15-16 percent of India’s GDP.
“The attempt is to increase credit facilities for the SMEs, as banks can only help in a limited way,” the official said. For perspective, the total outstanding bank credit to MSMEs, as of March 2024, accounted for around 19 percent of the total credit, as per official data.
Key ideas explained
Officials said India now needs to move beyond a purely bank-led credit architecture. “A deeper bond market for SMEs can become an important supplementary channel, especially for firms that are viable but struggle to access affordable long-term financing,” the second official said.
The committee may examine the idea of a dedicated SME bond platform with lower Electronic Book Provider thresholds so that smaller issuances can also come to market. “Right now, the existing framework is better suited for larger issuers,” the second person said.
Another area under discussion is stronger credit enhancement support through institutions such as the Credit Guarantee Fund Trust for Micro and Small Enterprises, the National Credit Guarantee Trustee Company, and SIDBI. The idea is to improve the credit profile of SME paper and make it investible for a wider set of institutional investors.
Pooling structures and pass-through certificate-based securitisation may also become important because individual SME bond issuances are often too small to attract large investors on a standalone basis. Aggregation can help create scale and improve liquidity, the officials said.
Moreover, “there is also a view that long-term domestic investors like insurers, pension funds and retirement funds will eventually need a broader investment universe beyond only highly rated AA paper, especially if proper guarantees, underwriting standards and disclosure frameworks are in place,” one official said.
‘Tax structure to be examined’
Officials have received industry representation to re-examine the capital gains tax structure for bonds. “It’s being examined, and the high-level banking committee will see if they have to make any recommendations on this front to CBDT. But this falls into their domain,” the first official noted.
Under the current structure, listed bonds sold before 12 months will be taxed at the individual’s income tax slab rate.
If it’s held for more than 12 months, a 12.5 percent tax will be levied, without indexation.
Unlisted bonds, on the other hand, are taxed at an individual’s slab rate.
“Taxation provisions influence investor interest. Bond investments lost their attractiveness after the budget of July 2024, where any income arising from the transfer, redemption, or maturity of such unlisted debentures or bonds has been deemed to be short-term capital gains and taxed at the marginal rate, irrespective of the holding period,” an tax expert said.
“Further, for FPIs too, the withdrawal of the concessional tax rate of 5 percent on rupee-denominated corporate bonds with effect from July 2025 has reduced the attractiveness,” he added.
