The Corporate Debt Market:
The size of world bonds market is close to USD 47 trillion which is nearly equivalent to the total GDP of all countries in the world. The total size of
- Private corporate debt market
- Public sector undertaking bond market
- Government securities market
Indian Debt Market:
- The debt market in India has been dominated by Government issues and participation by Banks. Majority of this participation has been of a “wholesale” nature i.e. deprived of retail investors.
- The RBI regulates the government securities market and money market while the corporate debt market comes under the purview of SEBI
- Central and state government- the government raises money by issuing treasury bills and dated securities.
- Primary dealers- PDs are market makers appointed by the reserve bank and have emerged as active intermediaries in government issues market
- PSUs- PSUs are allowed to issue
tax freeas well as taxable bonds in the market
- Corporates- corporates act as both issuers as well as investors in the debt market
- Banks- banks are primary investors in government securities market. They also act as borrowers by issuing certificates of deposit and bonds.
- Debt market provides long term capital to the issuer, aiding in economic growth of the country by providing credit to those in need and providing a channel for efficient investment of savers.
Debtmarket is a supplement of the banking system. Thus, it reduces pressure offthe banking system and also makes the financial system deeper.
- Debt is a stable source of finance for the borrower
- Cost of capital from raising debt is less than other sources of finance. Thus, it reduces
costof capital of borrowers.
well developeddebt market enables investors to hold a diversified portfolio Debtmarket is a big provider of funds for infrastructure financing.
- It also enables
developmentof municipalbond market
Risks associated with Debt securities:
- Default risk- the risk of non-payment of interest and
principalamount is called default risk or credit risk.
- Interest rate risk- the risk of an adverse change in market interest rates, which affects
yieldon the existing instruments.
- Reinvestment rate risk- the risk of a fall in market interest rates, which results in
lackof options to invest the interest received from investment at higher rates or at comparable rates in the market.
Problems associated with
- The corporate bond market needs
well capitalizedmarket makers just like the primary dealers in governmentsecurities market. Market making should be encouraged to enhance liquidity.
- Entities like cooperative banks and charitable trusts should be allowed and encouraged to invest in good quality rated papers/ bonds
- Provident funds should be encouraged to invest in private sector bonds by assuring them better returns as well as safety
- An active secondary market for corporate bonds needs to be developed.
- There are not enough underwriters for debt issuances leading to a decline in bond issues.
- Lack of investor awareness about
advantagesof investing in rated debt instruments
- The interest rate ceiling on corporate debt has been removed.
- The ceiling on bank investments in corporate debt has been removed.
- It is now possible for corporate debt to be listed even though the equity may not be listed.
- FIIs have been permitted to participate in the corporate debt market
- All publicly issued debt instruments, irrespective of their maturity, are required to be rated by a credit rating agency.
- Banks have been allowed to raise resources overseas through Masala (rupee) bonds. The issue will qualify for inclusion as Additional tier 1 capital and tier 2 capital.
- Banks can also issue masala bonds for financing infrastructure and affordable housing.
- Listed companies have been allowed to lend money to banks through
- RBI is seeking legal amendments which will allow banks to pledge corporate bonds to borrow money from the RBI. This will make secondary trade in corporate bonds possible.
givenaccess to bond trading platforms for government and corporate debt
- Companies have been allowed to lend money to banks through a market repo mechanism
- Brokers authorized as market makers are now allowed to participate in corporate bond repo market for their funding needs.
- RBI has raised the partial credit enhancement limit to 50% of the bond size from 20% earlier, provided by any single bank not exceeding 20% of the bond issue size.
- RBI is considering corporate bonds as eligible collateral for liquidity operations of banks (LAF)
- Currently, listed companies can lend through
reposin G-sec for a minimum tenor of seven days to banks and PDs, which constrains their participation. It is proposed to allow such companies to lend through the repo market, without any tenor or counterparty restrictions.
Government Securities Market:
- Government securities are of two types- T bills and government dated securities.
- The insurance companies are the second largest investors in government securities as IRDAI has stipulated that 20% of assets of general insurance and pension business and 25% of life insurance business should be invested in government securities.
- Mutual funds dealing exclusively in government securities market are called
asgilt funds. Systemof primary dealers introduced in India in 1996, to promote governmentsecurities market. Primary dealers act as market makers.
- STRIPS- separate trading for registered interest and principal of securities (STRIPS) is a process of stripping
a conventionalsecurity into a number of zero coupon securities which can be traded separately in the market. For example, a government security bearing coupon rate of 10% p.a. and maturity of 5 years can be stripped into principal and interest component. A total of 6 securities can be created by separating 5 interest earnings and 1 principal earning into different securities.