Debt Markets In India

SIESCOMS

PGDM – B

Batch

2014-16PGDM - B

Group

Members :

Khyati Cheda

– 66

Ashish

Sharma -85

Rahul Nayak

Introduction to Debt Markets

• Debt can be defined as an obligation to pay an amount

owed/borrowed.

• Debt markets refers to the financial market where

investors buy and sell debt securities mostly in the form

of Bonds.

• These Markets are important source of funds, especially

in a developing economy like India.

• Like all other countries, Debt Markets in India is

considered as a useful substitute to banking channel for

finance.

• A debt security is a tradeable form of loan.

• It is usually an obligation of the issuer of such

instrument as regards certain cash flows representing

principal and interest, where the issuer would have to

pay to the legal owner of the instrument at pre-

Indian Debt Markets• The debt market in India comprises of two main

segments, viz., the Government securities market and the corporate securities market, besides the emerging market for interest rate derivatives.

• The market for government securities is the most dominant part of the debt market in terms of the outstanding securities, market capitalization, trading volume and number of participants.

• It sets the benchmark for the rest of the market.

• The corporate debt segment includes private corporate debt, bonds issued by public sector units (PSUs) and the bonds issued by the Development financial Institutions (DFIs).

• Some PSU bonds are tax free while most bonds, including Government securities are taxable.

• This segment is not very deep and liquid.

Indian Debt Market Structure

• In order to understand the entirety of the debt

market we will look at it through a framework

based on its main participants. These

participants are as follows:

• Instruments - the instruments are the

certificates issued in tradable form.

• Issuers - are entities, which issue these

instruments and are primarily corporate or the

Government.

• Investors - are entities, which invest in these

instruments or trade in these instruments.

• Regulators - The Debt regulators are RBI,

SEBI and DCA.

Investors in Debt Market

Wholesale Debt Market• Banks,

• financial institutions,

• RBI,

• insurance companies,

• Mutual funds,

• corporates and

• FIIs

Retail Debt Market

• Individuals,

• pension funds,

• private trusts,

• NBFCs and

• other legal entities

Corporate Debt Market

• Whole investors like : Banks,

• Financial Institutions

• Mutual Funds Etc

Calculation of Yield of Bonds• Bond returns can be calculated in various ways

1. Coupon rate

2. Current yield

3. Yield to maturity(YTM)

• Coupon rate is the nominal rate of interest that is fixed and is printed on the bond certificate which is calculated on the face value of the bond.

• Current yield relates the annual interest receivable on a bond to its current market price.

Current Yield = (Annual interest/Current market price) *100

• Current yield > coupon rate, the bond is selling at a discount

• Current yield < coupon rate, the bond is selling at a premium

Yield to maturity (YTM)

• YTM is the internal rate of return earned on a bond

if held till maturity.

• It is the rate of return that an investor is expected to

earn on an annualized basis expressed in % terms

from a bond purchased at the current market price

and held till maturity.

• Approximate YTM may be calculated as

YTM= I+[(RV-MP)/N]

(RV+MP)/2

Where I –Annual interest/ payment

RV -Redemption value

MP-Market value

N -Number of years remaining to maturity

Bond Prices

• Intrinsic value of bond is equal to the present value

of all future cash flows discounted at the required

rate of return.

P0 = I*PVAF(r%,n) + RV*PVF(r%,n)

Where P0 - Present value of the bond

I - Annual interest payments

RV- Redemption value

r - Required rate of return

n - Number of years

Debt Instruments

Government Securities (G-Secs)• RBI issues G-Secs On behalf of the

Government Of India

• These Securities have a maturity period of 1-30

years

• G-Secs offer fixed Interest rates where interest

is payable semi-anually

• For short term, there are T-Bills which are issued

by RBI for 91 days, 184 Days and 364 Days.

Corporate Bonds

• Corporate Bonds or Convertibles are private sector debt instruments

• These bonds come from PSUs and Private Corporations and are offered for an extensive range of tenor up to 15 years

• There are also some perpetual bonds

• As compared to G-Secs, Corporate Bonds carry higher risks which depend upon the corporations, the industry where the corporation is currently operating, the current market conditions and the rating of the corporation.

• However, these bonds also give higher returns.

Certificate of Deposit

• These are short term instruments issued by commercial Banks and Specialized Financial Institutions

• These are negotiable money market instruments

• CDs usually offer higher returns than Bank Term Deposits, are issued in Demat form and also as Usance Promissory Notes

• Banks offer CDs which have maturity between 7 days to 1 Year

• CDs from Financial Institutions have maturity between 1 to 3 years

• Cds are issued in Denomination of 1 Lac and in

Commercial Papers

• These are popular instruments for financing

working capital requirements of Companies

• They are short term securities ranging from 7 to

365 days

• CPs are issued by corporate entities at a

discount to face value

• They are issued in the form of promissory notes

Zero Coupon Bonds• Some bonds, called Zero Coupon Bonds, do

not pay out any interest prior to maturity

• These bonds are sold at a discount because

the value from the bond occurs at maturity

when the principal is returned to the

bondholder along with the interest

• One type of Zero Coupon Bond is a “Strip”

• The interest payment are separated from a

bond and multiple zero coupon securities are

created, one representing the principle

amount and one representing each coupon

payment

RECENT DEVELOPMENTSReduce Concentration of issuers

— FSl sector issuers continue to dominate the market with over 75% of

volumes

— Top 10 issuers account for bulk of the total issuance

Improve liquidity in secondary market

— Introduce market making mechanism for corporate bonds

Revive the securitization market

— Alignment of tax rate to ease the issuance of Pass Through Certificates

(PTCs)

Further liberalize investment norms for PFs and insurance companies

— Boost demand for corporate bonds by allowing higher investments in non-

AAA/non-A1 + paper

— Increasing scope of investment by provident/pension/gratuity funds and

insurance companies

Increase Fll Inflows

— Allow higher degree of capital account convertibility and relaxation of

investment limits

Overview of primary and secondary

bond market

Issuer Amount raised from

Primary Market (in Rs.

bn)

Turnover in Secondary

Market (in Rs. bn)

2010-11 2011-12 2010-11 2011-12

Corporate/Non-

government

2,017 2,871 1,592 1,761

Government 5,834 7,591 70,683 73,431

Total 7,851 10,462 72,274 75,191

Private placements of corporate

bonds

Issues

2010-11 2011-12

Amount of

Issue (Rs.

bn)

% of total

issues

Amt. of

Issue ( Rs.

bn)

% of total

issues

Public Issues 95 4.7 356 12.4

Private Placement 1,922 95.3 2,154 87.6

Total Issues 2,017 100 2,870 100

KEY MESSAGESStrong growth in corporate bond issuances in recent times

— Corporate bond market issuances increased seven-fold over

the last decade

Expanding issuer and investor base

— Increase in issuer base, primarily driven by private sector

issuers

— Significant growth in investments by Flls and Mutual Funds in

corporate bonds

Increasing sophistication

— Several innovations in recent times: Inflation-indexed

debentures. Basel lll bond,

50-year bond, infrastructure debt fund

Enabling regulatory initiatives

— Concerted efforts from all financial market regulators

instrumental in the development

The way Forward

• The issue of Regulatory Overlapping should be

addressed

• Need of Simple Products

• Increase Liquidity in Secondary Market

• Tax Incentives

• Procedural ease for Companies listed on any

exchange in India

• Rationalization of Stamp Duty

• Appointment of Market Makers in Corp Bond

Market

• Trading Platforms