Analysis of the Indian Securities Industry: Market for Debt

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Analysis of the Indian Securities Industry:Market for Debt

Samir K Barua, V Raghunathan, Jayanth R Varma, and N Venkiteswaran

Introduction

In the current liberalized environment, theIndian debt market appears to be all set to

take off. With the commencement of tradingof debt instruments by the National StockExchange this year, the secondary market ofthe Indian debt market is expected to achievea significant level of activity. In this context,a closer understanding of the Indian debtmarket in terms of the private corporatesector, public sector, government sector, andthe housing finance sector assumes increasedimportance.

In this paper, the authors provide themuch needed perspective on the Indian debtmarket as a whole and makerecommendations for its developmentwherever necessary.

Samir K Barua, V Raghunathan, Jayanth RVarma, and N Venkiteswaran are all members of

the faculty at the Indian Institute ofManagement, Ahmedabad.

The authors gratefully acknowledge the sponsorship of thisstudy by the Centre for Analysis Information and Studies,New Delhi, on behalf of USAID.

Vol. 19, No. 3, July-September 1994

A major indicator of the level of development of aneconomy is the sophistication of its capital market. Awell functioning capital market which has breadth toaccommodate wide variety of investor preferences anddepth to absorb large volumes of transaction would

ensure that capital is allocated efficiently in theeconomy. Though the first stock exchange in India wasestablished more than one hundred years ago, the capi-tal market in India continues to be narrow, segmented,and subject to stifling regulations. While the equitymarket has shown some encouraging growth in the lastdecade, fuelled by dilution of foreign ownership in themultinational corporations operating in India in the late70s, the market for long-term debt has shown only asluggish growth.

The situation prevailing in the Indian capitalmarket is sharply different from that prevailing in the

other capital markets in the world. The bond markets inmost countries tend to be larger than or at least com-parable to equity markets in terms of size and activity.One of the main reasons for the phenomenal growth inbond markets is the increasing globalization of investorportfolios. Since governments are less wary of allowingforeign investment in bonds as compared to equity ofdomestic companies, there has been an increasingsupply of bonds for international investors. In fact, oneof the largest securities markets in the world is a bondmarket, the Eurobond market, which has an averagemonthly turnover of between $300-500 billion. India

can hardly choose to ignore this trend.

Since 1991, India has embarked on a large scaleeconomic liberalization arid structural adjustmentprogramme which includes modernization and inter-nationalization of the financial sector. The governmentis making concerted efforts to attract foreign direct andportfolio investments. In such a scenario, it is impera-

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tive that India offers a complete and efficient capitalmarket to attract foreign investment. With this objectivein view, we critically examine the market for long-termdebt in India in this paper and also recommendmeasures to develop an active long-term debt market.

Savings of Household Sector

The flow of savings of the household sector to financialassets would be a good starting point to develop anunderstanding about the context in which we woulddiscuss market for long-term debt. While the propor-tion of savings in any financial asset does vary from yearto year, the overall pattern of investment has been fairlystable in the last several years. A representative patternof proportions invested in various financial assets ispresented in Table 1.

Table 1: Pattern of Investment in Financial Assets

From Table 2 it is clear that banks invested about50 per cent and other financial institutions about 55 percent of their funds in assets which are securitized andhave a market. Thus, overall, about one half of thesavings flows into securitized assets. The features of themarkets in which these securitized assets are createdand traded are examined next.

Debt-Securities Market

The market capitalization of the equity of companieslisted in the stock markets at the current BSE SensitiveIndex (SENSEX) level of 2200 is estimated at Rs 200,000crore"' . The corporate debt market, in terms of facevalue, as at end of March 1992, was only about Rs 30,000crore. The outstanding market borrowings of thecentral and state governments was about Rs 100,000crore. The securitized debt market, in terms of facevalue, as at end of March 1992, was, therefore, about Rs130,000 crore. This is elaborated as follows:

Rs crore

Corporate Bonds:Private sector companies5 10,000

Public sector companies6 20,000

Subtotal 30,000

Government Securities7 100,000

Total 130,000

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It would appear that the debt market is not muchsmaller than the equity market. However, the debtmarket is segmented, with each of the above threecategories of securities attracting interest from arestricted set of investors. While private corporatebonds are mostly taken up by investment institutionssuch as the UTI and the individual investor, govern-

ment securities are forced on the banks to fulfil theirSLR/CRR obligations.

The recent events in the debt market would beinstructive for subsequent policy making for improvingits functioning.

The market for PSU bonds and governmentsecurities became very active in the year 1991-92, in thewake of liberalization of the economy. The cash richPSUs were pumping the funds borrowed abroad intothe banking sector under the Portfolio ManagementScheme (PMS). This money was being invested in PSU

bonds and government securities. These transactionswere being done on a "ready forward" basis through useof Bank Receipts (BRs). It appeared for a while that thedebt market was indeed picking up in India. Themarket, however, collapsed after the discovery of thescam in April 1992. Subsequent investigations revealedthat behind the facade of doing transactions in bondsand government securities, the funds were, in fact,being diverted to the booming share market. It couldalso be seen that a significant part of increased transac-tions in government securities was based on specula-tion (and perhaps inside information) about the timingand the quantum of change in the coupon rate of new

issue of government securities.

The scam dealt a big blow to the capital market,particularly to the bond market. The free pricing of newissues, which is being allowed since May 1992, and thehigh interest rates that prevailed during the second halfof 1992, added to the woes of the primary market forbonds as increasingly larger number of companiesstarted opting for financing their investments throughequity rather than bonds. They are now in far worse ashape than they were before the scam.

Private Corporate Debt Market

Composition, Size, and Growth of theCorporate Debt Market

Most of the borrowing requirements of the private cor-porate sector in India have been traditionally met byintermediaries like commercial banks and financial in-stitutions, which are predominantly owned or control-


led by the government. The principal sources of debtfinance to the corporate sector are as follows:

Long-and Medium-term Debt:

Term loans from financial and investment institutionsTerm loans from commercial banks Debentures and

bonds Deposits from public

Short-term Debt:

Working capital financing from banksShort-term deposits from institutionsInter-corporate deposits and loansDeposits from public CommercialPaper (CP)

Of the various sources listed above, the only debt instru-ments that are securitized are debentures/bonds andcommercial paper and the latter was introduced in

India only recently. Direct investment by public is onlythrough public deposits and debenture/bond routes,while other sources are essentially institutional in na-ture.

Borrowings through the issue of transferable debtsecurities like bonds and debentures were negligibleuntil the 80s but in recent times, issuance of debenturesby the corporate sector has increased sharply reversingthis pattern. Total debentures outstanding rose from Rs550 crore in March 1982 to Rs 7,500 crore in March 19918.(As stated earlier, this figure is estimated to be about Rs10,000 crore in March 1992). The above trend is con-firmed by the detailed data on the IDBI sample of 401companies. Table 3 gives a break-up of corporate bor-rowings in terms of various sources for this sample overa 10-year period ending March 1991.

As can be seen, debentures constituted 6.7 per centof total borrowings at the end of 1981-82, while by theend of 1990-91, the share of debentures had increasedto 28.2 per cent. Some of the factors which have led tothis growth are as follows:

Corporate managements reassessed the desirabi

lity of institutional term loans following the "unfriendly" role played by the financial institutions inthe case of DCM Ltd. and Escorts Ltd. duringSwaraj Paul's hostile takeover bids.

The government insisted that MRTP and other es-tablished and financially sound companies should

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take recourse to capital markets to finance theirexpansion or diversification programmes.

Despite the interest rate cap fixed by the govern-ment continuing at artificially lower levels (at 14%-15% p.a), institutional investors with their strongbargaining power managed to extract front-enddiscounts from issuing companies leading to muchhigher yields to maturity of 18-20 per cent. Even inthe case of Partly Convertible Debentures (PCDs)and Non-convertible Debentures (NCDs) with war-rants attached, the non-convertible portions knownas Khokhas are being purchased from the in-dividual investors by banks and institutions at adiscount (to the face value) that would give themyields upwards of 20 per cent.

This trend masks several important problems in thedebenture marketthe preponderance of equity linkedinstruments over pure debt securities, the dominance of

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investment institutions, and the absence of a welldeveloped secondary marketas discussed later.

The principal debt instruments used by the privatecorporate sector are non-convertible debentures(NCDs) and convertible debentures (CDs). The lattercan be further classified into fully convertible deben-tures (FCDs) and partly convertible debentures (PCDs).A brief description of these instruments is as follows:

NCDs: NCDs are secured on the assets of the issuing

company. Till recently, the coupon rates were subject toa ceiling (Table 4) specified by the Controller of CapitalIssues (CCI) and the redemption periods of the NCDswere between 7 to 10 years from issue dates. All theissuing companies, irrespective of their financialprofile, were issuing their NCDs at the ceiling rates.After the abolition of the office of the CCI, practically allrestrictions on the terms at which NCDs can be issued

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have been removed. In the brief period since then, the

market has witnessed a wide range of coupon rates,reflecting the quality of earnings potential of the issuers.

CDs: While FCDs are fully convertible into equityshares in stages, PCDs are only partly convertible andthe non-convertible part assumes the character ofNCDs. Like the NCDs, the coupon rate on CDs also hada ceiling (Table 4) specified by the CCI. In general, theterms of conversion of either a part or the entire paid-upamount into shares was kept in abeyance at the time ofissue and was decided only at the time of conversion bythe CCI. The uncertainty about the conversion termsmade it practically impossible to price the CDs ration-

ally. This problem in the regulation does not exist anymore since under the new guidelines, the terms have tobe announced at the time of issue itself.

It is evident, that the interest rate differential be-tween NCDs and CDs is only marginal, given the sig-nificant potential for gains at the time of conversion of

CDs. The coupon rates on the NCDs are comparable tothe interest rates on company deposits (Table 5). WhileNCDs have the advantage of being secured, companydeposits have lower maturity and are, perhaps, moreliquid as the companies often permit premature encash-ment. It is perhaps for these reasons of better liquidityand comparable returns that company deposits have

emerged as a more attractive investment opportunityfor individual investors than NCDs.

A summary of the capital issues by public limitedcompanies in the private sector through prospectus andrights for a 10-year period is presented in Table 6. It isclear from the table that pure NCDs account for only asmall part of the funds raised by the private corporatesector. A large part of the debt has been raised throughissue of CDs, which are basically pure debt instruments,sweetened by returns earned through conversion of apart of the debt into equity at lower than market prices.

Primary Market for Corporate DebenturesThe relatively low share of debt securities in the fundsraised from the market by companies is in sharp con-trast to the trend in the developed countries. The mainreasons as to why the market for corporate debtsecurities did not develop are as follows:

Till recently, the long-term debt requirements ofthe industry were met by the governmentowned/ sponsored specialized developmentbanking institutions like the IDBI, ICICI, andIFCI and state level agencies and investmentinstitutions like the LIC, GIC, and the UTI on

very favourable terms. The loans from theseinstitutions were available at low interest rateswith long repayment periods of 5 to 7 years after aninitial moratorium of 2 to 3 years. In addition,concessional terms were provided for variouscategories of investments such as backward areaprojects and export-oriented projects.


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Commercial banks were also supplementing theinstitutional term financing in a limited way, atinterest rates which were lower than their rates forshort-term (working capital) lending.

Issuing debentures not only involved issue coststhat could exceed 5 to 6 per cent of the issue amountbut also servicing and administrative costs relating

to registration and transfer, payment of interest, etc. The tight government regulations which required

CCI approval for issues of even moderate sizemeant that there was no scope for designing innovative instruments that were unfamiliar to thebureaucrats manning the CCI's office. Therefore,while the markets in the developed countries witnessed introduction of a plethora of innovative debtinstruments in the 80s structured to meet thespecific needs of varied investor profile, hardly anyinnovations were introduced in the Indian market.

Thus, there was no incentive for issuing companies

to issue debentures when the same funding require-ments could be more efficiently met through institu-tional loans. In addition, the demand for corporate debtsecurities was affected by the following:

While interest income on bank deposits, public sector bonds, dividend income on shares, and UTIunitsall qualify for tax exemption up to certain

limits under Section 80 L of the Income Tax Act,debenture interest is fully taxable. In addition, thereare a large number of tax savings instruments suchas NSC, PF, and PPF where the annual investmentreceives generous up front tax benefits along withtax-free interest earnings. Even investments in newequity issues received limited tax breaks withpotential for tax exempt dividends and effectivelower tax rates on capital gains. Thus, on (after tax)return-risk criteria, debentures with interest raterestrictions were no match for other investmentavenues. The redemption period of 7-10 years toowas dauntingly long given the ever present threatof inflation rising to and remaining at double digitfigures, which would lead to negative real returns.There was, therefore, little incentive for thehousehold sector to invest in corporate debentures.

Absence of a credit rating mechanism until recentlyand inverted interest structure and interest rateceiling ensured that potential investors had no op

portunities for risk return trade-offs along a rationalyield curve based on reliable information. This discouraged individual investors from investing inthese securities.

The institutional investors such as provident fundsand trusts were kept out by the government restricting their investments only to government securities


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and government administered deposits. Conse-quently, the institutional investor base became con-fined to UTI, LIC, and GIC, which any wayparticipated in the consortium financing anchoredby the development banking institutions.

With the government crowding out the fixed income securities market through mandated invest

ments by banks (CRR and SLR investments) and theLife and General Insurance Companies, the investment in fixed income corporate securities necessarily received only limited institutional interest.The government's permission to the public sectorunits (PSUs) to issue bonds in the mid-80s added tothe woes of corporate debentures. The issue of tax-free PSU bonds became a major investment attraction for high-tax bracket foreign banks, companies,and in a limited way, high net-worth individuals.

Secondary Market for Debentures

Given the reasons for a poorly developed primarymarket for corporate debt security, it is hardly surpris-ing that there is practically no secondary market forthese securities. The reasons for a dormant secondarymarket are as follows:

As the primary market itself is quite small, adequate stock of securities does not exist for a secondary market to evolve and develop. As a result ofthis, a vicious circle has developed: absence of liquidity affects the primary market and that limitsthe stock of outstanding securities, which hindersdevelopment of a secondary market.

Individual investors have, for reasons detailed earlier, kept out of the corporate debt market. This isin sharp contrast to the share market where individual investors are active operators.

The narrow base with only a limited number ofinstitutions (such as the UTI, LIC, and GIC) holdingcorporate debt securities implies that sufficientlylarge number of traders are not present for evolution of an active market. As provident funds andtrusts are not allowed to invest in corporatesecurities, these traditionally major players indeveloped countries are absent.

For a variety of reasons, most of the institutionshold the debt securities to their maturities and donot actively shuffle their portfolio. Aggressive trading of the kind witnessed in other markets like theUTI units and the tax- free PSU bonds is not seen.

Absence of market makers has also impeded thedevelopment of the secondary market.


Absence of information disseminating mechanismsuch as credit rating, until recently, is also a constraint against trading in the secondary market.

The corporate debentures issued in India are thetype that require registration with the issuing companies. The transfer and registration procedures arecumbersome and involve registration charges,

thereby dissuading a would be investor.

For these reasons, the trading of debentures in thesecondary markets has been extremely narrow and thindespite their being listed in several stock exchanges.

Recent Institutional Developments

The securities industry witnessed the emergence of ahost of new institutions, instruments, and regulatoryreforms in the recent past both in the larger context ofthe structural reforms implemented from June 1991 andin some cases even prior to this period. While the criticalfinancial sector reforms in the light of the Narasimham

Committee (1991) recommendations are yet to be car-ried out, the developments that have already takenplace have major implications for the corporate debtsecurities markets. These are listed below.

Deregulation of Interest Rates

In a significant move, the government has partiallyderegulated interest rates in the country; as a result, theinterest on corporate debentures can be fixed by thecompany management based on the market's risk-return expectations. As a prelude to eventually allow-ing free play of market forces, the government has also

been progressively increasing the coupon rate on itsown borrowings. These measures have to some extentcorrected the distortions in the economy wide yieldcurves. Thus, the long-term corporate bond yields arecurrently above the short-term bank rates and unlike inthe past, companies are free to fix coupons to meet themarket's yield requirements. This should in due courseimprove new issues.

Abolition of the Office of CCl

With the abolition of the office of the CCI in 1992, it isrelatively easier for companies to make new issues. The

resulting freedom in issue pricing has sharply increasedthe primary market volumes during 1992-93 for alltypes of securities. This trend is likely to continue.

Establishment of Credit Rating Agencies

Two credit rating agencies are operational currently:CRISIL (Credit Rating and Information Services India

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Limited) and ICRA (Information and Credit RatingAgency). As of March 1993, the older of these ratingagencies, CRISIL, had rated 306 debenture issuesamounting to Rs 18,555 crore of various issuers out ofwhich the ratings of 220 issues amounting to Rs 11,848crore have been used by the issuers. Credit rating hasremoved a major lacuna in the availability of informa-

tion in the market. This coupled with interest deregula-tion permits the yields in corporate bonds to be linkedto the underlying risk represented by the ratings.

Emergence of the Mutual Funds Industry

The institutional investor base that was largely confinedto the UTI, LIC, and the GIC (and its subsidiaries) untilthe late 80s has been widened with the emergence of anumber of mutual funds sponsored by various nation-alized banks. These funds, especially the income funds,have emerged as active investors in corporate bonds.

SEBI has also granted about 10 approvals for estab-

lishing mutual funds in the private sector. When theprivate sector mutual funds take off in a big way, thecorporate debt markets could become more active.

Establishment of the Over the Counter Exchange of India

(OTCEI)

The OTCEI, promoted by the investment institutionssuch as the UTI and the LIC, has become operational in1992. Though started mainly for trading in shares ofsmall sized companies, the OTCEI has also started trad-ing in corporate debentures since June 1993. The OTCEIis operating with the concept of market makers with

two way quotes. As of July 1993, trading in both theshares and the debentures listed was thin.

Establishment of the Stock Holding Corporation of India Ltd(SHCIL)

The SHCIL, promoted by the IDBI,IFCI, ICICI, UTI, LICand others, became operational in 1988. It is to performthe depository and custodial services in respect of theinvestments of its promoter institutions (to begin with)such as share transfer and registration through bookentries, safe custody of securities, collection of dividendand interest, etc. Its experience should go a long way in

simplifying the transfer procedures.

Entry of Foreign Investment Institutions (FIIs)

Following a series of policy initiatives involving taxa-tion, exchange control, and other areas, nearly 50 FIIshave been granted permission to undertake portfolioinvestments in Indian company equities. Some of them

have also started operations in a limited way. Though,currently, FII investments are permitted only in equi-ties, there is a case to allow them to invest in debenturesalso.

The Proposed National Stock Exclwnge of India (NSE)

The NSE, being promoted by the IDBI and other institu-

tions, is expected to play an active role in developing anactive market for debt securities. This is likely to beoperational by early 1994 with screen based trading andpaperless settlement system.

Reforms Needed

The important changes discussed above have set thestage for the development of an active market for debtinstruments. In this context, the following policy initia-tives are called for:

Provident funds should be allowed to invest a por

tion, say, up to 20 per cent of their investible fundsin high grade corporate securities. Until recently,they were allowed to invest only in governmentsecurities and special deposits; this has now beenrelaxed to allow investment up to 15 per cent in thebonds of the financial institutions. Similarly,charitable trusts should also be allowed to invest aportion of their funds in investment grade corporate bonds.

Financing facilities should be allowed against thesecurity of the bonds, both for traders and individual investors. This will provide liquidity in the

short run and enable the emergence of marketmakers in the longer run.

Foreign Institutional Investors (FIIs) should be allowed to invest in corporate bonds with appropriate limits.

Since individual investors are active investors incompany deposits that are not transferablesecurities, it would be desirable to wean them awayfrom deposits into debentures. To facilitate this, thefollowing incentives may be granted:

Harmonizing the tax treatment accorded under

Section SOL of the Income Tax Act to bankdeposits and debenture interest.

Abolition/reduction of transfer fees.

Provision of a safety net (until secondarymarket develops actively) to provide instantliquidity like company deposits.

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PSU Bonds Market

The government allowed the Public Sector Undertak-ings (PSUs) to raise money directly from the capitalmarkets through issue of bonds from 1985-86 onwards.As of June 1992, the outstanding amount of bonds wasabout Rs 20,500 crore. These bonds have been issued by19 PSUs and about 55 per cent of these are tax-freebonds, a majority of which carry a coupon rate of 9 percent (a few carry a rate of 10 per cent). The taxable bondscarry a coupon rate of 13 per cent or 14 per cent, thougha few do carry a coupon rate of 17 per cent or 18 per cent.The bonds in general have a seven year maturity. Sincethese bonds are not guaranteed by the government,they do not qualify for Statutory Liquidity Ratio (SLR)investment.

The coupon rates on these bonds over the lastseveral years are presented in Table 7. Since the couponrates on the taxable bonds were not competitive fromthe investors' perspective, no attempt was made to sell

these bonds to the public at large. Instead, they weresold to bulk buyers, such as banks, mutual funds, cor-porations, and other cash rich PSUs. The effective yieldson the bonds were adjusted upward, either throughgiving a discount or allowing the investors to retain thefunds for a period as a deposit or investment under thePortfolio Management Scheme (PMS). Initially, thesebonds could be transferred through endorsement anddelivery, though registration with the company becamenecessary subsequently, because of the different basesfor tax deduction at source.

Table 7: Ceiling on Coupon Rate on PSU Bonds14

(% per annum)

They do not have a true market and there is nomarket maker for these bonds. The bonds are quite

illiquid, since the PSUs do not offer any buy back facilityto investors. In most cases trading is difficult because asingle certificate may be issued for a very large numberof bonds, making it difficult to sell a part of the holding.All these factors have affected the market for PSUbonds, and most of the bonds are held by institutionswho are able to derive higher than stated returnsthrough non-transparent methods mentioned earlier.

From Table 8 it is further evident that investors canderive the same returns from PSU deposits, but withlower maturity periods.

Table 8: Ceiling on PSU Company Deposit Rates15

(% per annum)

Reforms Needed

It is clear that in the emerging economic scenario, thePSUs would have to increasingly raise resources direct-ly from the market than depend on budgetary supportfrom the government. It would therefore be necessaryfor them to make their bonds attractive to a wider set ofinvestors. The following measures are required todevelop the market for PSU bonds:

The terms of PSU bonds should be market based, inline with the terms of private corporate bonds. Thisis necessary to ensure that individual investors alsobecome interested in these bonds. Since all restrictions on terms that can be offered have beenremoved for private corporate bonds, the restric

tion on terms of PSU bonds should be removed.

These bonds should be compulsorily rated beforethey are issued in the primary market, and adequate disclosure should be made in the prospectus.

The bonds should be listed in regular stock exchanges, the NSE or the OTCEI so that it becomes easyfor individual investors to transact in these bonds.

The bond certificates should be in standard tradingunit so that all transactions can take place in multiples of the trading unit. The trading unit should beof a convenient size so that even individual inves

tors can invest in these bonds. The PSUs should have some buy back arrangement

for the bonds to improve their liquidity. They couldalso set aside some part of the funds raised tosupport market makers in these bonds.

Since the existing stock of these bonds is fairly large,the above measures should be made applicableretrospectively, with all associated costs beingborne by the PSUs that have issued these bonds.

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As recommended by the Nadkarni Committee, allbulk investors become members of a CentralizedAgency which will operate an electronic book-entryand clearance system and would also act as aDepository (as a National Clearing and DepositorySystem or NCOS) and their transactions in PSUbonds be cleared and settled through the NCOS

within the SHCIL as is already being envisaged.

Government Securities

Just like an individual or a corporation, the governmenttoo often needs to borrow to finance its operations. Thesecurities issued or guaranteed by either the centralgovernment or the state governments to create thispublic debt are known as government securities. Sincegovernment guarantees repayment, the risk of defaultfor these securities is quite low. Therefore, these are alsoknown as gilt-edged securities. The risk being low,these securities usually have low coupon rates andyields.

The saga of public debt began when the Govern-ment of India took over the operations of the East IndiaCompany way back in 1834. Since the liabilities of thecompany were assumed by the government, the debt ofthe company became public debt. The modern era ofpublic debt however began with the establishment ofthe Reserve Bank of India (RBI) on April 1, 1935. ThePublic Debt Act 1944 specifies that RBI is responsible foradministration of public debt of both the central and thestate governments. Within the RBI, the management ofpublic debt is done by the Public Debt Offices (PDOs)located in about a dozen cities in India. Each office

operates independently and is responsible for manag-ing all transactions that take place in governmentsecurities within its jurisdiction.

Types of Government Securities

There are three different types of instruments used forborrowing by the government.

The first kind of instrument is similar to a corporatesecurity, where the certificate carries the names ofthe holders which are also registered with the PDO.These securities can be transferred from the sellerto the buyer by sending the certificate to the PDO

along with a transfer deed executed in favour of thebuyer. The interest on these is paid by the PDO tothe holders registered with it on the specified dateof payment.

The second kind of instrument is a promissory noteissued to the original holder which contains apromise by the President of India or the' Governor

of a State to pay according to a specified scheduleprinted on the note. The note can be transferred tothe buyer through endorsement by the seller in thecages printed on the back of the note. The interestand other payments require that the note bepresented to the Government Treasury or to otherdesignated authorized agency by the current

holder of the note. The third kind of instrument is a bearer security,

where the payment is made to whoever holds thesecurity on the scheduled day of payment.

The PDO also acts as the custodian of the govern-ment securities held by the banks and other institutions.These holdings are not evidenced by physical securitiesbut by book entries in the Subsidiary General Ledger(SGL) maintained in the PDO. Transfers are then carriedout by using an SGL transfer form which instructs thePDO to transfer the securities from the account of onebank to another. Thus, a form of scrip less trading exists

in the inter-bank market. The securities scam high-lighted several deficiencies in the functioning of thissystem and these are being corrected.

Size, Growth, and Ownership of the Public Debt

Over the years, because of consistent deficit financing,there has been an explosive growth in borrowing by thegovernment. As on March 31,1991, the central and stategovernment securities outstanding stood at Rs 85,815crore (Table 9).

The maturity pattern of securities (Table 10) indi-cates that the proportion of long dated securities(maturing after more than 10 years) has steadily in-creased over the years.

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Since the government needs to raise resources atlow rates for developmental work, commercial banks,

insurance companies, and provident funds arestatutorily required to keep a specified part of their totalinvestment in certain specified assets which includegovernment securities. Though the stated objective is toensure that these agencies and funds have a certainminimum percentage of their investment in low riskliquid assets, the covert objective is to finance the bur-geoning needs of the government to support itsprogrammes. This is clearly seen in the evolution of theSLR for banks. The original stipulation in the BankingRegulation Act was that the banks must hold 20 per centof their Demand and Time Liabilities (DTL) in liquid

assets (cash and balances with RBI) and approved(government) securities. Subsequently, in 1962, cashand RBI balances were removed from this ratio and therequirement of a minimum Cash Reserve Ratio (CRR)

became an additional burden over and above the SLR.Simultaneously, the SLR was raised to 25 per cent.Throughout the 70s, the SLR continued to go up reach-ing a level of 35 per cent in 1981. In early 1992, the SLRstood at 38.5 per cent and the CRR at 15 per centimplying a total preemption of 53.5 per cent of the DTLof the banks. Since then, the government has an-

nounced its intention to reduce the SLR to 25 per centand the CRR to below 10 per cent over a period of 3-4years and has cut the incremental SLR to 30 per cent.Even after the phased reduction is complete, the com-bined SLR and CRR requirement would be about 35 percent compared to 20 per cent before 1962.

The ownership pattern of government securitiesover the years is presented in Table 11.

As mentioned earlier, the RBI exclusively managesthe government securities market. The amount ofresources needed by the government determines the

supply of government securities. Taking this require-ment and the investible resources of the major sub-scribers to government securities, the RBI can and doesalter the proportion of investment that these subscribersmust statutorily invest in government securities, to en-sure requisite demand. The terms of issue are decidedby the RBI in consultation with the government, keep-ing in view the yield structure prevailing in the market.Thus, the RBI has monopoly control on the primarymarket for government securities and the buyers ofthese securities have no option but to invest a specifiedpart of their funds in these securities.

Secondary Market in Government Securities

The secondary market in government securities tillrecently was dominated by the RBI and a few large


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Indian commercial banks. The RBI intervenes in thesecondary market through open market operations andswitch deals to ensure that the trading banks are able toearn a decent return on their holdings. It plays the roleof a market maker in government securities by givingtwo way quotes for all the securities. The market under-went a sea change in the year preceding the discovery

of securities scam. Some of the foreign banks startedtrading aggressively in the market based on forecast ofchanges in the terms of offers of new issues of govern-ment securities. The volume of transactions rose torecord levels in the year 1991-92, fuelled by speculationson coupon rate changes. The clamp down on the "readyforward" transactions has ensured that they revert tothe earlier days when the yield structure prevailing inthe market would be almost entirely influenced byRBI's market operations.

Coupon Rates and Yield

The nominal interest (coupon) rate on governmentsecurities has more than doubled in the last 20 years.From a rate of 5.75 per cent in the early 70s, it hasreached 13.5 per cent today. Through the 70s, thecoupon rate inched upward typically by 0.25 per cent ata time. Sharp changes in the coupon rate took place inthe 80s particularly in the first half. These changes in thehighest coupon rate are summarized in Table 12.

Table 12: Coupon Rate Changes in the 80s20

(Government of India Securities)

Throughout the second latter of 80s, the maximum

coupon rate remained fixed at 11.5 per cent, but this ratebecame applicable to 20 year maturities also in 1986-87.After a gap of five years, the coupon rates rose sharplyagain in the 90s. In 1991-92, the coupon rate on govern-ment securities was raised to 12.5 per cent, in 1992-93 to13 per cent and in 1993-94 to 13.5 per cent (the last hikebeing in respect of state government securities).

The yields on government securities observed overthe last two decades are presented in Table 13. The yield

curves have tended to be mildly upward sloping, in-dicating that investors require compensation for therisk of longer maturity periods. However, of late, theyield rates have shown large fluctuations and the curveitself has become flatter with little premium being avail-able for longer maturity securities. One reason for thiscould be that increasingly the market may be believing

the government propaganda that India has entered anera of low, single digit inflation.

Reforms Needed*

The preceding discussion clearly brings out that thegovernment securities market is of the RBI, by the RBI,and for the government. The major players in themarket are banks and institutions who are forced to be

in the market through regulations on the compositionof their investment portfolios. The structural adjust-ment programme India is going through requires thatthe government must reduce budgetary deficit. Thiswould imply that the government borrowing wouldhave to reduce. In addition, the programme requires thegovernment to deregulate the financial markets. In lightof this, the reforms needed in the government securitiesmarket are as follows:

The coupon rates on government securities shouldbecome market based, so that they become attractive to individual investors and mutual funds.

While large institutional investors may continue tomaintain SGL accounts with the PDO to cater to thesmaller investors, the securities must be securitizedin convenient, standard denominations.

The government should allow brokers to par-ticipate in the government securities market asmarket makers.

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Housing Finance and Securitization

The housing stock in India is valued at about Rs 300,000crore and is one of the largest components of thecountry's capital stock. Though real estate is an excel-lent collateral for debt, the mortgage finance market inIndia is very poorly developed for a variety of reasons.

First of all, the formal sector (banks, insurance com-panies, housing finance institutions, and other financialinstitutions) has concentrated on lending for new hous-ing construction. But even in financing new housing,the role of the formal sector is very small. A study groupof the Planning Commission found that only 16 per centof the financing need was met by the formal sector andthe remaining 84 per cent came from the householdsthemselves or their employers .

Some of the institutions that are active in housingfinance are the National Housing Bank (NHB), theHousing Development Finance Corporation (HDFC),

and the Life Insurance Corporation (LIC). NHB acts asa refinancing institution and till the end of November1992, the cumulative refinance extended by itamounted to about Rs 1,370 crore . LIC's cumulativelending to the housing sector up to 31st March, 1992,amounted to Rs 5,550 crore of which individualmortgage loans amounted to Rs 1,390 crore . Cumula-tive loan approvals and disbursements by HDFCamounted to Rs 3,615 crore and Rs 2,875 crore respec-tively.

The National Housing Policy has recognized the

need to integrate housing finance into the rest of thecapital markets. This requires several major changes inthe way that housing finance is organized currently :

Subsidized interest rates on housing finance wouldhave to be gradually eliminated.

Housing finance institutions should have access tofunds on a competitive basis with other financialinstitutions.

A secondary mortgage market must be created toattract funds from a wide range of investors.

The key step in the creation of a secondarymortgage market is the securitization of mortgage debt.Since mortgages are very safe and secure assets, theyare the ideal candidate for securitization. The ad-vantages of securitization of mortgages are:

By tapping a wider investor base, it will reduce thefunds constraint in housing finance.

By making mortgages more easily tradeable, it willimprove the tradability of encumbered real estate.Thus, the real estate market will be better integratedwith the rest of the financial system.

It will enable the vast banking network to providehousing finance without committing its ownresources on a large scale. This will complement the

intended objective of NHB to refinance housingloans.

It will provide investors with a new fixed incomesecurity as a channel for investment.

There is a great deal of international experienceavailable on how mortgage backed securities can besuccessfully created and traded. The major problems indoing that in India are of a legal nature dealing withland ceiling laws, stamp duties, and foreclosures. Thereis a general agreement that changes need to be made inthis area, but progress on the actual legislation has beenrather slow. Meanwhile, it may be possible to circum-vent some of the legal constraints by resorting to theexisting laws on trusts and cooperatives.

Initiatives Needed

In the US, securitization of mortgages has taken severalforms of which the most important are Pass-throughCertificates, Mortgage-backed Bonds, and Collateral-ized Mortgage Obligations. In the Indian context,Mortgage-backed Bonds and Collateralized MortgageObligations are more sophisticated instruments whichcan evolve later in response to investor needs. Mortgagesecuritization in India should begin with pass-

throughs. Mortgage pass-throughs are created by an"originator" who has to perform the following impor-tant functions:

The originator pools together several housingmortgages of similar maturity and issues Pass-through Certificates which represent an undividedinterest in this pool.

The mortgages which are being pooled would havearisen from housing loans given by the banks,housing finance institutions or other lenders. Theoriginator would buy these loans from the lenderswho would continue to service the loans; theywould collect the installments from the house-owners and pass them on to the originator for a fee.

The originator performs credit enhancement byguaranteeing the timely repayment of interest andprincipal. The originator would charge a fee forthis. A separate agency (for example, an insurancecompany) could perform this credit enhancement.



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The originator would pass on the interest andprincipal repayment to the investors who havebought the Pass-through Certificates.

In our view, the NHB (through a separate sub-sidiary if necessary) will be the best agency to take upthe function of the originator of Pass-through Certifi-

cates. Since the mandate of the NHB is to refinancehousing loans, securitization can be regarded as anobvious extension of this role. The NHB also has ade-quate capital resources to perform the functions of anoriginator. If necessary, the credit enhancementprovided by the NHB could be backed by a governmentguarantee in the initial stages .

Securitization of Other Debt

It is our view that securitization should be first at-tempted in the field of housing finance as this is the areain which the need is greatest, the volume is large, and

the chances of success are also high. In later phases,securitization can, however, be extended to severalother forms of debt:

Non-residential mortgages can also be securitizedon the same lines as residential mortgages exceptthat each piece of commercial property is uriqueand the benefits of pooling which are available inhousing loans are not available to the same extentin the case of commercial buildings.

Term loans of the development financial institu-tions can be securitized very easily by converting

them into debentures. The advantage is that theDFIs would generate resources at a time when theirtraditional sources of funds are drying up. Thepre-requisite for this is the creating of an activemarket for these debentures, and the DFIs maythemselves have to become market makers. Thesecond problem is that the term loans have convertibility options; either the interest rate has to berenegotiated to eliminate the conversion clause, ora mechanism has to be found to pass this option onto the debenture holders after securitization loans.

Car loans and other consumer loans can be

securitized easily as there is a historical default rateavailable to price the securities. The problem is thatthe volume is not high enough today. In the comingyears, these loans are likely to become much largeras banks 'move more aggressively into theseprofitable lines of business, and there may be asecuritization possibility 3-5 years in the future.

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Innovative Debt Securities

Recent Innovations

The Indian debt market has remained static for quitelong and innovations in the market are just beginningto appear. Most of these innovations have been in theprimary market rather than in the secondary.

New Plain Debt Instruments

Certificates of Deposit, Deep Discount Bonds or DDBs(or Zero Coupon Bonds or ZCBs), and Special PremiumNotes or SPNs (linking debts with warrants) have beensome of the nascent entrants to the Indian debt market.In yet another recent debt instrument, the entire interestwas paid up front! Unfortunately, the secondary marketfor even these instruments continues to be restricted forvarious reasons. The Certificates of Deposit at Rs 25 lakha deposit are primarily restrk ted to the corporate x>rinstitutional investor. The DDBs and SPNs continue to

be dogged with the uncertainty of the tax treatment ofthe accrued interest. We recommend that unambiguousposition on the tax treatment on all new instruments bebrought about speedily, so that the market is able toprice these instruments appropriately in the secondarymarket.

Hybrid Debt Instruments

.A hybrid typically incorporates the characteristics oftwo different securities in a single security. A convert-ible debenture (CD) has been a well known hybrid inIndia over the years.

Some of the innovative hybrids have come in theform of "ZCBs" where the "ZCBs" at maturity wereredeemed not in cash at a prespecified terminal valuebut in the form of shares, whose value is variable. Otherinnovations have been in the form of converting theinterest rather than the principal of a debenture intoequity. Yet other debentures have had warrants at-tached as sweeteners. In fact, there is no dearth ofpossibilities even with the warrants, which can rangefrom simple equity warrants to bullion or index linkedwarrants.

Most of the observed innovations have helped inpromoting the debt instruments in the primary market,though the secondary market has remained more or lesslacklustre. One reason for this may be that the taximplications of such instruments (including ordinaryZCBs and DDBs) have continued to remain ambiguous.As a result, the pricing of such instruments in the

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market has suffered, resulting in the relative sluggish-ness of such instruments in the secondary market.

Asset Backed Instruments

Asset-based securities are essentially securitized debt.In the short-term money market, such instruments havebeen in existence for long in the form of bill discounting.

The typically Indian variation of bill discounting in theform of Hundis, for example, has been around for cen-turies. Newer forms such as factoring have also begunto appear. However, securitization of long-term debt isa vast undeveloped market which is beginning to at-tract attention, especially in relation to housing finance.Securitization of housing mortgages has been recom-mended elsewhere in the report.

Proposals for New Instruments

We recommend that there be virtually no bar on finan-cial innovations in the securities market in general and

the debt market in particular. Further, we recommendactive encouragement of certain specific forms of newinstruments in the categories briefly enumerated below.While the private sector should be the best vehicle toassume initiative with respect to these instruments, it isimportant that correct signals are provided by thegovernment in ensuring that unnecessary delays anddithering do not kill such initiatives in the foetal stage.It may be equally desirable if the government itselftakes the necessary initiatives in issuing these newerforms of debt instruments in its effort of mobilizingpublic debt.

Floating Interest Rate Bands

With the interest rate being allowed to be market deter-mined, we recommend that bonds with floating interestrates be introduced at the earliest. Such a bond, both inthe corporate sector and the government, will enablethe investors to benefit from the interest rate hikes andprotect the issuers in case of decrease in interest rates.

Interest Rate Swaps

Once floating interest rate bonds are in place along withthe fixed interest rate bonds, we recommend that inter-

est rate swaps are also introduced simultaneously tobring about an active secondary market for both. Thiscan be done by enabling the exploitation of the spreadacross the two securities. Such an instrument will beindispensable to the large mutual funds, pension funds,gratuity funds, and other investors for the managementof their interest rate risk.

Allowing such swaps would aid the primarymarket in debt by allowing the corporate sector to struc-ture their debt in accordance with their preferences ofinterest payments and enable the corporate sector aswell as the investors to manage their sensitivity tointerest rate changes better. Since the mechanism invol-ves only interest rate adjustments, it would aid in bring-

ing about an active secondary market in debt.

Dual Currency Bonds

Dual currency bonds are essentially debt offered in onecurrency while the interest payments and redemptionare determined in another. With the freeing up of theIndian rupee and globalization of funds mobilizationafoot, we recommend introduction of dual currencybonds in three or four limited hard currencies. Such aninstrument will help bring about the much neededintegration between the Indian forex market and itscapital market.

Of course, such an instrument will imply indirectallowance of free convertibility of rupee on capital ac-count as well. In fact, the bonds could be used preciselyfor that purpose as a precursor to the eventual fullconvertibility on revenue as well as capital account. Inthe meanwhile, to avoid anxieties concerning the out-flow of interest in hard currency, a beginning could hemade with dual currency DDEs.

Indexed Bonds

An indexed bond is essentially meant to be a hedgeagainst a certain benchmark; the benchmark being the

inflation index, a certain currency index, stock marketindex, the bullion index or even the commodity indices.We recommend the introduction of such bonds on theground that such an instrument will help integrate thecapital market with the rest of the economy more effec-tively.

Bull/Bear Bonds

There is strong opposition to the creation of stock indexfutures in India at this stage in the light of theworldwide experience with such futures. The bull andbear market is a very useful Instrument in the absence

of stock index futures. The redemption of a bull/bearbond is linked to the stock market index typically, thebond is issued in two tranchesthe buh tranche'sredemption value rises as the index rises above a pre-specified level and the bear tranche's redemption risesas the index falls below a possibly different prespecifiedlevel. Such a bond is likely to be a reasonable surrogate



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to an index futures without their inherent speculativefeatures.

Derivative Instruments

We recommend a limited introduction of options andfutures on debt instruments with a view to aiding theactivity in the secondary market. This recommendation

has also been dealt with elsewhere in the report.

Comprehensive Recommendations

Integration between the Regulated Market and the

Free Market

The yield curve in the Indian debt market (see Figure 1)consists of two disjoint curvesan upward slopingyield curve for the regulated market (bank deposits andgovernment securities) and a flat curve at a much higherlevel for the free market (high-grade corporate deben-tures and intercorporate deposits). Integration between

these two markets is necessary for the healthy develop-ment of the debt market. A small part of the differencebetween the two yield curves can be attributed to riskas corporate debt (even of AAA companies) is subjectto a higher degree of default risk than bank deposits andgovernment securities. However, adjusting for riskwould still leave a large disparity between the two yieldcurves. At present, there are three major reasons for thisdisparity:

There appears to be a divergence of views regarding inflationary expectations. The rates in the regulated market are reasonable given the current

inflationary levels of 6-7 per cent, but the rates inthe free market are more appropriate on the basisof historical inflationary expectations of 12 per centor more. At the lower spectrum, this divergence ofexpectations can be traced to political uncertaintyabout whether the current fiscal adjustmentprogramme will continue in future.

Quantitative restrictions of various kinds on corporate borrowings from the banking system lead toa situation where highly creditworthy companiesare often unable to obtain bank finance to the extentthat they would like. They are then forced to borrow

in the free market at higher rates of interest. Certain tax incentives are available to investors in

the regulated market which are not available in thefree market.

However, the integration of the two markets iseasier today than it has been in the last several years. If

the government sticks to its fiscal adjustment policy andholds inflation down to current levels, it would not benecessary to raise interest rates any further in the regu-lated market; it may even be possible to bring themdown. In other words, there would be no further strainson the public finances or on the banking system in termsof a higher interest cost. For the first time in severalyears, it is possible to visualize an integration of the twomarkets not by raising rates in the regulated market butby bringing down the interest rates in the free market.Given the reasons for the divergence between the

markets stated above, it follows that the process ofintegration involves the following major steps.

Breaking the vicious cycle of high inflationary expectations by continuing the programme of fiscaladjustment that is now in progress.

Reform of the commercial banking system wherebyquantitative controls on bank credit are abolishedfairly rapidly. Corporate business is one of the principal foundations of a sound and profitable banking system, but Indian banking policy has tendedto drive the corporate sector away from the bankingsystem. This policy should be reversed and top

notch companies should be given freer access tobank funds.

This reform involves several closely intertwinedmeasures:

the government debt market becomes more broadbased and reaches corporate and individual investors directly

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The creation of floating rate instruments (recom-mended elsewhere in this report) would eventuallylead to the development of a large interest rate swapmarket. This market may intially be an inter-bankmarket and the government need play only a facili-tating role.

Tax Reforms

A number of tax shelter instruments exist in the Indiandebt market.

Provident Funds

Employees can invest in their provident fund accountsover and above the mandatory contribution which theyhave to make. They can also invest in the Public Provi-dent fund (PPF) scheme of the central governmentwhich is open to all individuals. Provident funds pro-vide a tax free return of 12 per cent to salaried and selfemployed individuals in addition to a one time taxbreak subject to certain limits and conditions. This cantranslate into a pretax risk free return of about 27 percent at the 45 per cent bracket. Despite the advantage oflow liquidity, the provident fund is an instrumentwhich dominates other savings avenues as far as themiddle class households are concerned.

Tax Free Bands

Tax free bonds issued by the PSUs have been discussedelsewhere in this report. Typically, they provide 9 percent tax free return which is very attractive in pretaxterms to foreign banks and other companies whose

marginal tax rate is very high.

Tax Concession on Interest and Dividends (Section SOL)

Another tax concession which is of great importance tothe debt market is the tax exemption on interest anddividend income from certain sources up to a limit ofRs 10,000 per annum. This exemption is available oninterest on bank deposits but not on corporate depositsand debentures. It is also available on income frommutual funds with the result that it is more attractivefor individuals to invest in a mutual fund which investsheavily in corporate debentures than to invest directlyin these debentures.

Need for Rationalization of Tax Incentives

Tax shelter instruments have several undesirable effects

on the debt market. They distort the true cost of fundsto the borrower. A PSU which has been allowed to issuetax free bonds gets funds at 9 per cent which is far belowthe normal market rate. These instruments also tend to

20

segment the market into different clienteles as thepretax return is a function of the marginal tax rate. Boththese factors impede the integration of the debt market.

The government is committed to rationalizing anreducing tax concessions and the Raja Chellaiah Committee has made detailed recommendations in thi

regard. We would recommend speedy phasing out otax concessions relating to investments thereby helpingintegrate markets for different debt securities.

New Instruments

New debt instruments have been discussed in detaiearlier in this report, and the principal categories oinstruments that we have identified for introduction inthe near future are:

Floating rate instruments

Indexed bonds

Securitized debt primarily in housing finance Bull and bear bonds

Dual currency bonds.

While in most cases, the innovation would comfrom issuers of securities, the government and financiaintermediaries would have an important role in certaiinstruments. Worldwide, the initiative for floating ratinstruments has come from the lendersmainly thbanks. In India also, we think that the banks would havto take the lead pc\ introducing floating rate lendingSome banks have* already started lending on call-plu

basis on a limited scale.

Bond Market Services

The financial services industry needs to upgrade thservices relating to the debt market. Credit rating ialready available but more competition is desirable ithis field especially from the private sector. We alsrecommend multiple ratings of the same instrumentsunsolicited ratings, more active monitoring of existinratings, and greater transparency and objectivity in thrating process.

Information dissemination needs to be improvesignificantly. For example, there is virtually no organized information available on historical defaurates in any segment of the debt market. It is alsdesirable to develop a comprehensive bond indewhich apart from being an important analytical tool fomanagement of bond portfolios, would also enable thcreation of a bond index future in due course.

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Computerized custodial and clearing services are

beginning to take shape in the capital market. In many

ways, it may be easier to develop these services first in

the debt market. The proposal of the National Stock

Exchange (NSE) to focus on the debt market in the initial

stage is, therefore, in the right direction.

Other Recommendations

Our recommendations pertaining to different segments

of the debt market are summarized below:

Corporate Debt Market

Provident funds and charitable trusts should be

allowed to invest a portion, say, up to 20 per cent of

their investible funds in high grade corporate

securities.

Financing facilities should be allowed against the

security of the bonds, both for traders and in

dividual investors.

Foreign institutional investors should be allowed to

invest in corporate bonds with appropriate limits.

Individual investors should be encouraged

through appropriate incentives to shift from com

pany deposits to debentures.

PSU Bonds

The terms of PSU bonds should be market-based,

in line with the terms of private corporate bonds.

These bonds should be compulsorily rated before

they are issued in the primary market, and ade

quate disclosure should be made in the prospectus.

The bonds should be listed in regular stock exchan

ges, the NSE or the OTCEI so that it becomes easy

for individual investors to transact in these bonds.

The bond certificates should be in standard trading

unit so that all transactions can take place in multi

ples of the trading unit.

The PSUs should have some buy back arrangement

for the bonds to improve their liquidity.

Since the existing stock of these bonds is fairly large,

the above measures should be made applicable

.retrospective!) with all associated costs being

borne by the PSUs that have issued these bonds.

An Electronic Clearing Settlement and Depositary

system must be set up as recommended by the

Nadkarni Committee.


Government Securities

The coupon rates on government securities shouldbecome market-based, so that they become attractive to individual investors and mutual funds.

While large institutional investors may continue tomaintain SGL accounts with the PDO, to cater to the

smaller investors, the securities must be securitizedin convenient, standard denominations.

The government should allow brokers to participate in the government securities market asmarket makers.

Housing Finance and Securitization

Securitization should be first attempted in the fieldof housing finance.

Mortgage Securitization in India should begin with

Pass- through Certificates.

The NHB (through a separate subsidiary if neces

sary) should take up the function of the originatorof Pass-through Certificates. If necessary, the creditenhancement provided by the NHB could be backed by a government guarantee in the initial stages.

In later phases, Securitization can, however, be extended to several other forms of debt: non-residential mortgages, term loans of the developmentfinancial institutions, car loans, and other consumer loans.

Notes

1. The pattern presented is the one observed for the

year 1990- 91, as reported in theReport on Currencyand Finance 1990- 93, published by the Reserve Bankof India.

2. The pattern presented in Table 2 was observed forthe year 1989-90, as reported in the Report on Currency and Finance.

3. 100 crore = 1 billion.

4. Capital Market, June 6,1993.

5. Based on the figures in theReport on Currency andFinance 1990-91, and several 1992-93 issues of theReserve Bank of India Bulletin.

6. Based on the report of the Nadkarni Committeeappointed by the Reserve Bank of India in 1992 toexamine the functioning of the ready forwardmarket.

7. Based on theReport on Currency and Finance for thefigure as at March 31, 1991 and Economic Survey1992-93 for the fresh issues in 1991-92.

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8. Report on Currency and Finance, various issues.

9. Source: Financial Performance of lDBI Assisted Companies in the Private Corporate Sector, various years,published by IDBI, Bombay.

10. Source:Report on Currency and Finance, 1990-91.


12. Sources: i)Report on Currency and Finance, various

years; ii)Reserve Bank of India Bulletins, October 1992

and January 1993; iii) Bhole, L M (1992). Financial

Institutions and Markets: Structure, Growth and In

novation,New Delhi: Tata McGraw-Hill.

13. The Narasimham Committee Report on the FinancialSystem (1991). New Delhi: Standard Book Com

pany.



16. See Structure and Management of the Guilt-edgedSecurities Market in India. New Delhi: Circon Bureau,

1983.




20. Source:Report on Curreticy and Finance, various is

sues.


22. According to theNational Account Statistics, 1992

the capital stock in dwellings and related activities

in 1989-90 is Rs 94,112 crore at 1980-81 prices (state

ment 20, item 8.2) and the price index for construc

tion in 1989-90 (base 1980-81) is 298.6 (statement 3

item 4.1). This implies that the capital stock wasabout Rs 300,000 at 1989-90 prices.

23. Eighth Five Year Plan, 1992-97, Government of India

Planning Commission, New Delhi, 1992, para 14.

2.6.

24. Economic Survey, 1992-93, para 9.48.

25. Life Insurance Corporation: Annual Report, 31-3-92

p 15.

26. Eighth Five Year Plan, 1992-97, Government of India

Planning Commission, New Delhi, 1992, para

14.4.7.27. We believe that this may not be really necessary as

most investors would be confident that the govern-

ment would not allow a subsidiary of the Reserve

Bank of India to default. The only concern that may

be present is regarding the huge contingent liability

that may arise out of NHB's settlement with the

State Bank of India in respect of transactions in

government securities during the securities scam.

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