India’s planned bond-lending facility stalls as tax rules cloud rollout

Indian authorities have halted progress on a proposed bond-lending platform after tax and regulatory ambiguities created legal and operational risks for participants. The scheme, intended to allow holders of government and corporate bonds to lend securities to short sellers and other market makers, was meant to alleviate episodic liquidity shortages and support smoother price discovery. Officials encountered uncertainty over how the lending transactions would be taxed, whether GST or other levies apply, and how withholding and reporting obligations should be implemented for intermediaries. Those open questions have raised concerns among custodians and overseas investors about unexpected tax liabilities and compliance burdens, prompting calls for definitive guidance before the platform can be launched. Market infrastructure providers and regulators have been discussing possible exemptions, clear invoicing rules, and liability allocations, but no firm timetable for resolution has been agreed. In the absence of a formal lending mechanism, dealers and asset managers will likely keep relying on bilateral arrangements and internal inventory, approaches that tend to be less transparent and more costly. That continued reliance could sustain wider bid-ask spreads in certain tenor segments and keep short-selling activity constrained, particularly in less liquid onshore bond lines. The pause also risks dampening institutional interest from foreign participants that seek predictable tax treatment as a condition of expanded market access. Policymakers face a trade-off between crafting robust tax safeguards and moving rapidly to restore functionality that market participants say is necessary for a modern sovereign bond market. The impasse underscores the interaction between tax policy and market infrastructure: technical fiscal rules can materially influence whether a liquidity-enhancing tool is adopted and used at scale. For now, bond market participants will monitor consultations and draft rulings closely, since the final treatment will determine both operational design and commercial appetite to engage in lending activity.