Debt Market Fair Pro

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Smt. C.H.M COLLEGE SECOND YEAR FINANCIAL MARKETS NAME : BHATIA DINESH M 1

Transcript of Debt Market Fair Pro

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Smt. C.H.MCOLLEGE

SECOND YEAR FINANCIAL MARKETS

NAME : BHATIA DINESH M

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ROLL NO : 09

SUBJECT : DEBT MARKET

PROJECT ON : PLAYERS OF DEBT MARKET

SUBMITTED TO : DR. MANJU PATHAK 

CONTENTS PAGE NO.

I HISTORY, DEFINITION,INTRODUCTION 04

II PERFORMING OF DEBT MARKET 05

III IMPORTANCE 06

IV EFFICIENCY 07

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V TWO SEGMENTS IN DEBT MARKET 08

VI MARKET STRUCTURE 09

VII (PLAYERS) ISSUER, INSTRUMENTS, INVESTORS 10

VIII MAIN INVESTORS 12

IX MAIN INSTRUMENTS 13

X CONCLUSION 14

XI BIBLIOGRAGRAPHY 15

HISTORY OF DEBT MARKET IN INDIA

Historically, India debt market has suffered a severe neglect of policymakers in spite of the the fact that India has a fairly strong debtpreference among households for their financial investment portfolio. The over-reliance on the financial intermediation of the public sector islargely responsible for hindering growth of the debt market in Indiawhich is the basic source of corporate financing in India.

Definition- INDIAN DEBT MARKET

 The market for trading debt instruments.

Introduction

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For a developing economy like India, debt markets are a crucialsource of funds. The debt market in India is amongst the largest inAsia. It includes government securities – the largest component - andbonds issued by public sector undertakings, other government bodies,

financial institutions, banks and companies. Debt markets are nowconsidered an alternative route to banking channels for finance.

Debt Instruments are obligations of issuer of such instrumentsas regards certain future cash flows representing Interest & Principal,which the issuer would pay to the legal owner of the Instruments.Generally debt instruments represent agreements to receive certaincash flows as per the terms contained within the agreement. They canalso be said to be tradable form of loans.

Debt Instruments are of various types like Bonds, Debentures,

Commercial Papers, Certificates of Deposit, Government Securities (Gsecs) etc. A brief detail about some of these investment options aregiven below.

How is Indian Debt market performing?

 The Indian debt market is poised on the verge of significant change to anefficient, transparent and vivacious market with momentous retail participation. The

quickly expanding volumes in the wholesale debt market over the past few years offer the

 promise of an immense and attractive financial market with a strong potential for retail participation. By the efforts of the Exchanges and the market participants and the strong

leadership and guidance by SEBI, RBI and the Govt. of India the retail debt market in

India is being created.

The debt market provides returns commensurate to the risk, avariety of instruments to match the risk and liquidity preferences of 

investors, greater safety and lower volatility. It has a lot of potential togrow by leaps and bounds in the near future. The debt market is vitalfor a developing country like India. The economy has accelerated to ahigher growth path with annual GDP growth averaging nearly 9% sincelast few years.

India has a chance to capitalize on a favorable domestic andexternal environment to promote the domestic debt capital market.

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With the government reforms in place and ahead, according to arecent analysis, India’s total debt market could grow roughly four-fold,from about $400 billion or 45% of the GDP in 2006, to about $1.5trillion, or some 55% of the GDP, by 2016. It is expected that the non-government segment could grow nearly six-fold, from $100 billion

today to $575 billion in 2016.

The Reserve Bank of India regulates the governmentsecurities market and money market while the corporate debt marketcomes under the purview of the Securities Exchange and Board of India (SEBI). SEBI has taken steps to revive the Indian debt market withnew regulations and processes. New regulations for debt securitiesissued should boost the country's debt market.

What is the importance of the Debt Market to

the economy?

 The key role of the debt markets in the Indian Economy stems from thefollowing reasons:

• Efficient mobilization and allocation of resources in the economy• Financing the development activities of the Government•  Transmitting signals for implementation of the monetary policy• Facilitating liquidity management in tune with overall short term

and long term objectives.

Since the Government Securities are issued to meet the short termand long term financial needs of the government, they are not onlyused as instruments for raising debt, but have emerged as keyinstruments for internal debt management, monetary managementand short term liquidity management.

The returns earned on the government securities are normally

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taken as the benchmark rates of returns and are referred to as the riskfree return in financial theory. The Risk Free rate obtained from the G-sec rates are often used to price the other non-govt. securities in thefinancial markets.

What are the benefits of an efficient DebtMarket to the financial system and theeconomy?

• Reduction in the borrowing cost of the Government and enablemobilization of resources at a reasonable cost.

• Provide greater funding avenues to public-sector and private

sector projects and reduce the pressure on institutionalfinancing.

• Enhanced mobilization of resources by unlocking illiquid retailinvestments like gold.

• Development of heterogeneity of market participants• Assist in development of a reliable yield curve and the term

structure of interest rates.

Debt Market is divided into two segments:a) Wholesale debt marketb) Retail debt market

What is Wholesale debt market?

  The Wholesale Debt Market segment deals in fixed income

securities and is fast gaining importance in an environment that has

high focus on equities.

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Debt Market

Wholesale debt market Retail debt market

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The Wholesale Debt Market (WDM) segment of the Exchange

began its operations from June 30, 1994. This provided the first formal

screen-based trading facility for the debt market in the country.

The segment provides trading facilities for a variety of debt

instruments including Government Securities, Treasury Bills and Bondsissued by Public Sector Undertakings or Corporate or Banks like

Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers,

Certificate of Deposits, Corporate Debentures, State Government

loans, SLR and Non-SLR Bonds issued by Financial Institutions, Units of 

Mutual Funds and Securitized debt by banks, financial institutions,

corporate bodies, trusts and others.

Who are the most prominent investors in theWholesale Debt Market in India?

  The Commercial Banks and the Financial Institutions are themost prominent participants in the Wholesale Debt Market in India.During the past few years, the investor base has been widened toinclude Co-operative Banks, Investment Institutions, cash richcorporates, Non-Banking Finance companies, Mutual Funds and highnet-worth individuals. FIIs have also been permitted to invest 100% of their funds in the debt market, which is a significant increase from theearlier limit of 30%. The government also allowed in 1998-99 the FIIsto invest in T-bills with a view towards broadbasing the invest.

Who are the participants in the Retail DebtMarket?

 The following are the main investor segments who couldparticipate in the Retail Debt Market:• Mutual Funds• Provident Funds• Pension Funds• Private Trusts.

• Religious Trusts and charitable organizations having large investiblecorpus• State Level and District Level Co-operative Banks• Housing Finance Companies• NBFCs and RNBCs• Corporate Treasuries• Hindu-Undivided Families (HUFs)• Individual Investors

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Market Micro Structure

It is necessary to understand microstructure of any market toidentifyprocesses, products and issues governing its structure anddevelopment. Inthis section a schematic presentation is attempted on the micro-structure of 

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Indian Debt Market has almost all possible variety of issuers as isthe case in many developed markets. It has large private sectorcorporate, public sectorundertakings (union as well as state), financial institutions, banks andmedium

and small companies: Thus the spectrum appears to be complete.Figure 1,delineates details on various classes of issuers. Two main classesinclude privatesector corporates and banks.

Instruments

Figure 1 provides names of some of the more popularinstruments that have been issued. Till recently Indian debt market

was predominantly dominated by plain vanilla bonds. Over a period of time, many other instruments have been issued.They include partlyconvertible debentures (PCDs), fully convertible debentures (FCDs),deep discount bonds (DDBs), zero coupon bonds (ZCBs), bonds withwarrants, floating rate notes (FRNs) / bonds and secured premiumnotes (SPNs).The coupon rates mostly depend on tenure and creditrating. However, these may not be strictly correlated in all cases. Thematurities of bonds generally vary between one year to ten years.However, the median could be around four to five years. The maturityperiod by and large depends on outlook on interest rates. Inexpectation of falling interest rates environment, corporate, it is

observed, mostly go to shorter term instruments while the opposite istrue in case of possible hike in interest rates. For the past few yearsinterest rates have been falling and short end issues are on the rise. This is one of the reasons that many corporate are reluctant to go forpublic issue route and listing of their securities.

Investors

For the development of Corporate Debt Market / Fixed IncomeSecurities Market, it is necessary and sufficient to have a large as well

as diverse number of sophisticated / institutional investors. Figure 1 lists some of the classesof investors that have been investing in the debt market. InstitutionalInvestors inIndia are few in number and the variety also is limited. We have only37 mutual

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funds, hardly five insurance companies till recently and there are nopensionfunds. Banks and financial institutions, by and large, do not take activeinterestin Corporate Debt Market. Investors with diverse expectations are a

preconditionfor the development of corporate debt market. Diversity could be interms of maturity needs as well as expectations on interest rates. The mostimportantstructural weakness in India is lack of large and diverse institutionalinvestors.India has large number of retail investors; however, their expectationsare quitecontrary to market principles - risk and return. Most investors think andperceive

that investments in bonds should provide them guarantee, repaymentof principal and regular payment of coupons. Any delay/default causesworries intheir minds. And sometimes these investors complain to regulators orto thegovernment for non receipt of coupons or non-repayment of principal. This typeof behaviour implies lack of understanding of the principles of thecapital marketon the part of the investors.

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Following are some of main investors:

RBI:

 The Reserve Bank of India is the main regulator for the moneymarket. It controls and regulates the G-Secs market. Apart from its roleas a regulator, it has to simultaneously fulfill several other importantobjectives, such as managing the borrowing programme for theGovernment of India, controlling inflation, ensuring adequate credit atreasonable costs to various sectors of the economy, managing theforeign exchange reserves of the country and ensuring a stablecurrency environment.

FIIS:

FIIs are among the major sources of liquidity for the Indianmarkets. If FIIs are investing huge amounts in the Indian stockexchanges then it reflects their high confidence and a healthy investor sentiment for our markets. But with the current global financial turmoiland a liquidity and credit freeze in the international markets, FIIs have

become net sellers (on a day to day basis). The entry of FIIs in Indiahas brought mixed consequences for our markets, on one hand theyhave improved the breadth and depth of Indian markets and on theother hand they have also become the major sources of speculation intesting times like these.

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DFIs:

Recent evaluations and studies of DFI programs have found thatin some developing countries, DFI Programs have helped expand thesupply of long- and short-term credit to the private sector, thusstimulating growth in that sector.

Following are some of main instruments:

Zero coupon bonds:

Bond issued at discount & repaid at face value. No periodicalinterest is paid in case of zero coupon bonds. The difference betweenissue price & redemption price represent the return to the holder. Thebuyers of these bonds receives payment only at maturity period.

Convertible bonds:

A bond giving investor the option to convert the bond intoequity is at fixed conversion price.

Debentures:

Bonds issued by a company at a fixed rate of interest payablehalf yearly on specific dates & principal amount repayable onparticulars dates on redemption of the papers or securities are knownas debentures.

Treasury bills:

 Treasury bill market deals in treasury bill. They are issued bycentral bank of India. These are also called government securities.  They are useful in managing short term liquidity. At present

government of India issues three types of bills namely: 91days,182days, 364days. Treasury bills offers short term opportunitygenerally upto 1 year. Such bills are issued for covering temporarydeficits. Treasury bill is very underdeveloped in India. Rate of intereston all types of treasury bills is determined by market forces.

Commercial papers:

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 This was introduce in India in 1990. The commercial papers canbe issued by authorized or listed company which has working capital of not less than Rs. 50000000.The maturity period ranges from 15daysto1year.

Conclusion:

From the whole above content I conclude that the Indian debtmarket had not come in light till the present though it has better futurescenario in compare to equity market where risk factor is utmost. Themarket has many benefits & can grow in to six folds through betterinvestment prospects.

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BIBLIOGRAPHY 

GOOGLE.COM

information.com

Wikipedia.com

bseindia.com

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