Corporate Debt Market

SECURITY ANALYSIS & PORTFOLIO
MANAGEMENT

TOPIC:- CORPORATE DEBT MARKET

PRESENTED BY:
AMIT KR. GUPTA
ASSAM UNIVERSITY

INTRODUCTION OF DEBT MARKET
Debt market refers to the financial market
where investors buy and sell debt securities,
mostly in the form of bonds. Entire debt
segment is generally consists of 2/3 of primary
market and 4/5 of secondary market.
The Indian debt market is today one of the
largest in Asia and includes securities issued by
the Government (Central & State
Governments), public sector undertakings,
other government bodies, financial institutions,
banks and corporates.

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DEBT MARKET CAN BE BROADLY CLASSIFIED
INTO :-
1) Govt. securities market
2) Corporate debt market

The government debt market is the market for
bonds and securities issued by the central govt.
,state govt. , and the semi govt. authorities which
includes local govt. authorities like city corporations,
metropolitan authorities public sector corporations
and other govt. agencies such as IDBI ,IFCI ,SFCs .

In broader terms Corporate bonds are fixed income
securities issued by corporates i.e. entities other
than Government.

Corporate debt market can be classified into:-
• Primary market
• Secondary market
Primary market for corporate debt:-
The corporate sector can raise debt funds either
through prospectus or private placement. It is a
market wherein debt securities of corporates i.e,
debentures, bonds , commercial papers ,
certificate of deposits, etc . of private &public
sectors are issued for the first time.

Secondary market for corporate debt:-
It is a market where the corporate debt
securities of both private sector & public
sector undertakings are traded. These
securities are traded on Wholesale Debt
Segment(WDM) segment of NSE , OTCEI &
BSE.


Corporate bonds can be issued in two ways:-
Public issue
In public issue, corporations issue bonds to the
market as a whole. Institutions as well as retail
investors can participate in this issue. The cost of
borrowing is little high in case of public issue.

Private placement
In private placement corporate, generally park
the bond issuance with few institutions. In India,
more than 90% of the corporate bonds are
issued through private placement. It is an easiest
and cheapest way of borrowing corporate bonds.


Structure of corporate debt market in India
The primary market for corporate debt is mainly
dominated by private placements (93 per cent of
total issuance in 2011-12) as corporates prefer this
route to public issues because of operational ease,
i.e., minimum disclosures, low cost, tailor made
structures and speed of raising funds. Banks/FIs
(42.3 per cent of total issuances) followed by finance
companies (26.4 per cent) were the major issuers in
2011-12. India lacks a long-term debt market for
pure project finance. Corporate bonds issued in India
usually carry a rating of AAA indicating lack of
interest in bonds of lower rated borrowers in the debt
market. Institutional participants, such as, banks,
primary dealers, mutual funds, insurance companies,
pension funds, corporates, etc. are the major players
in this market.


According to SEBI, the total trading volume
in the secondary corporate bond market has
increased from Rs. 961 bn in FY2008 to Rs.
2,207 bn in FY2010
CAGR of over 50% over the last two years.
• Se
FY2008 16,547 967
FY2009 21,651 1,487
Fy2010 20,933 2,207


Resource mobilization by the Corporate Sector
Public
YEAR Equity Pub. Pri. Total Res. Share of debt in
issues mob total res. mob.
.

1999-00 30 47 547 594 624 95.23

2000-01 25 41 524 566 591 95.80

2001-02 11 53 462 516 526 97.94

2002-03 10 47 484 531 542 98.08

2003-04 178 43 484 528 706 74.75

2004-05 214 41 552 593 807 73.45

2005-06 237 0 818 818 1055 77.56

2006-07 250 0 924 924 1173 78.70

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1153 1163 1685 69.01 10

Components of corporate bonds:-
Issue Price :- It is the price at which the Corporate
Bonds are issued to the investors. Issue price is
mostly same as Face Value in case of coupon
bearing bond.
Face Value :-It is also known as the par value or
principal value. Coupon (interest) is calculated on
the face value of bond. FV is the price of the bond,
which is agreed by the issuer to pay to the investor,
excluding the interest amount, on the maturity date.


Coupon :- It is the cash flow that are offered by a
particular security at fixed intervals. The coupon
expressed as a percentage of the face value of the
security gives the coupon rate.
Coupon Frequency :-It means how regularly an
issuer pays the coupon to holder. Bonds pay
interest monthly, quarterly, semi-annually or
annually.
Maturity date :-It is a date in the future on which
the investor's principal will be repaid.

Call / Put option:- It is an option on which issuer
or investor can exercise their rights to redeem the
security.
Maturity / Redemption Value:-It is the amount
paid by issuer other than coupon payment is
called redemption value.


Issuers of Corporate Bonds can be broadly
classified in following classes:
• Bonds issued by Public Sector Units
• Bonds issued by Financial Institutions
• Bonds issued by Banks
• Bonds issued by Corporates


TYPES OF CORPORATE BONDS

1) Based on Maturity Period
• Short Term Maturity: - Security with maturity
period less than one year.
• Medium Term: - Security with maturity period
between 1year and 5 year.
• Long Term Maturity: -Such securities have
maturity period more than 5 years
• Perpetual: - Security with no maturity.
Currently, in India Banks issue perpetual bond.


2) Based on Coupon
• Fixed Rate Bonds:-Have a coupon that remains
constant throughout the life of the bond.
• Floating Rate Bonds: - Coupon rates are reset
periodically based on benchmark rate.
• Zero-coupon Bonds : -No coupons are paid.
The bond is issued at a discount to its face
value, at which it will be redeemed. There are
no intermittent payments of interest.


3)Based on Option
• Bond with call option: - This feature gives a
bond issuer the right, but not the obligation, to
redeem his issue of bonds before the bond's
maturity at predetermined price and date.
• Bond with put option: - This feature gives
bondholders the right but not the obligation to
sell their bonds back to the issuer at a
predetermined price and date.These bonds
generally protect investors from interest rate
risk.


4)Based on redemption
• Bonds with single redemption: - In this case
principal amount of bond is paid at thetime of
maturity only.
• Amortising Bonds: - A bond, in which
payment made by the borrower over the life of
the bond, includes both interest and principal,
is called an amortizing bond.


Growth of Indian debt market

The growth of corporate bond market in India has been aided by existence
of a well-developed G-sec market which provides a benchmark yield curve
for bond pricing, a well-functioning depository system, credible system of
rating agencies and adequate legal framework. Measures, such as,
rationalising the listing norms, standardisation of market conventions,
reduction in the shut period, setting up of reporting platforms, and
implementation of DvP settlement of corporate bond trades have had an
encouraging impact on the market resulting in considerable increase in
issuance as well as secondary market trading of corporate bonds.


Volumes climb to Rs63,782.46 crore in July compared to
Rs54,404 crore in June; further upward momentum expected
due to increased FII activity. According to data released by the
Securities and Exchange Board of India (SEBI), corporate
bond trading volumes have climbed 17% at Rs 63,782.46 crore
in July 2010 compared to Rs54,404 crore the month before.
There were 4,446 combined trades on the National Stock
Exchange (NSE), Bombay Stock Exchange (BSE) and The
Fixed Income Money Market and Derivatives Association of
India (FIMMDA) platforms.


Total issuance has increased from `1,747.81 billion in 2008-09
to `2,968.94 billion in 2011-12. Similarly trade volume has increased
from `1,481.66 billion in 2008-09 to ` 5,937.83 billion in 2011-12. During
the current fiscal year upto September 2012, the trade volumes have
been ` 3261.14 billion. The share of bonds issued through public issues has
increased from 0.86 per cent in 2008-09 to 7.3 per cent in 2011-12. Out of
the four modes of resource mobilisation namely, IPOs, FPOs, bonds and
rights issues, the share of bonds have increased from 9.2 per cent in 2008-
09 to 73.5 per cent in 2011-12 indicating greater reliance of entities on
bonds for resource mobilisation in the recent period.


Share of corporate bonds in total debt

22
United states Japan China India

The problems in India today lie in debt. Banks
accounted for 14.4% of the financing of large firms
in 2000-01, which went up to 17.8% in 2010-11.
The bond market stagnated, with 3.5% in 2000-01
and 3.9% a decade later. Despite considerable
interest in bond market development, the
corporate bond market accounted for only 3.9% of
the sources of funds of large Indian companies.
Finally, foreign borrowing rose sharply, from
roughly nothing in 2000-01 to 3.2% in 2010-11. To
some extent, borrowing abroad has served as a way
for Indian firms to overcome the difficulties of
obtaining debt financing domestically.


TRENDS OF CORPORATE DEBT MARKET IN
2011
In India the long-term debt market largely consists of
government securities. The market for corporate debt
papers in India primarily trades in short term instruments
such as commercial papers and certificate of deposits issued
by Banks and long term instruments such as debentures,
bonds, zero coupon bonds, step up bonds etc. In 2011, the
outstanding issue size of Government securities (Central
and State) was close to Rs. 29 lakh crores (USD 644.31
billion) with a secondary market turnover of around Rs. 53
lakh crores (USD 1.18 trillion). In contrast, the outstanding
issue size of corporate bonds was close to Rs. 9 lakh crores
(USD 200 billion). Moreover, the turnover in corporate debt
in 2011 was roughly Rs. 6 lakh crores (USD 133 billion)

Resource mobilization in the bond
market (Rs. bn)
Year Central Corporate
Govt. Bonds
• FY2004 1,215 484
• FY2005 800 554
• FY2006 1,310 818
• FY2007 1,950 938
• FY2008 1,560 1,154
• FY2009 2,610 1,743
• Fy2010 3,250 1,025


IMPORTANCE OF CORPORATE DEBT MARKET

• Aids in economic growth by providing long-term
capital.
• Reduces the cost of raising capital for
corporates.
• Fosters market discipline & nurtures credit
culture.
• Enables investors to hold a diversified portfolio.
• Promotes financial inclusion for the Small and
Medium Enterprises (SMEs) and the retail
investors.

Issues and challenges in Corporate Bond
Market

While the measures taken so far have generated
the momentum needed to develop the market, the
indicators are suggesting that the market is yet to
develop to its potential in relation to needs of our
macro-economy. The size of the Indian corporate
bond market at 11.8 per cent of GDP is lower
than the average for Emerging East Asia and for
Japan at 17.2 and 19.8 per cent respectively.


• Setting up a suitable framework for market making in corporate
bonds.

• Providing tools to manage credit, market and liquidity risks.

• Introducing a suitable institutional mechanism for credit
enhancement to enable SMEs and other corporates with lower
credit rating to access the corporate bond market.

• Developing a smooth yield curve for the government securities
market for efficient pricing of the corporate bonds;

• Enhancing transparency by setting up of centralised database for
tracking rating migration, issue size, etc.;

• Increase the scope of investment by provident/pension/gratuity
funds and insurance companies in corporate bonds;


• Calibrated opening of the corporate bond market to the foreign
investors;

• Developing safe and sound market infrastructure;

• Establishing a sound bankruptcy regime;

• Rationalization of stamp duty across states;

• Developing the securitization market under the new regulatory
framework;

• Wider participation of retail investors in the market through
stock exchanges and mutual funds.


Measures taken to develop the corporate bond market

• To promote transparency in corporate debt market, a reporting
platform was developed by FIMMDA and it was mandated that all
RBI-regulated entities should report the OTC trades in corporate
bonds on this platform. Other regulators have also prescribed such
reporting requirement in respect of their regulated entities. This
has resulted in building a credible database of all the trades in
corporate bond market providing useful information for regulators
and market participants.

• Clearing houses of the exchanges have been permitted to have a
pooling fund account with RBI to facilitate DvP-I based settlement
of trades in corporate bonds.

• Repo in corporate bonds was permitted under a comprehensive
regulatory framework.


• Banks were permitted to classify their investments in non-
SLR bonds issued by companies engaged in infrastructure
activities and having a minimum residual maturity of seven
years under the Held to Maturity (HTM) category;

• The provisioning norms for banks for infrastructure loan
accounts have been relaxed.

• The exposure norms for PDs have been relaxed to enable
them to play a larger role in the corporate bond market.

• Credit Default Swaps (CDS) have been introduced on
corporate bonds since December 01, 2011 to facilitate
hedging of credit risk associated with holding corporate
bonds and encourage investors participation in long term
corporate bonds.


• FII limit for investment in corporate bonds has been raised by
additional US$ five billion on November 18, 2011 taking the total limit
to US$ 20 billion to attract foreign investors into this market. In
addition to the limit of US$ 20 billion, a separate limit of US$ 25
billion has been provided for investment by FIIs in corporate bonds
issued by infrastructure companies. Further, additional US$ one
billion has been provided to the Qualified Financial Institutions (QFI).

• The terms and conditions for the scheme for FII investment in
infrastructure debt and the scheme for non-resident investment in
Infrastructure Development Funds (IDFs) have been further
rationalised in terms of lock-in period and residual maturity; and

• Further, as a measure of relaxation, QFIs have been now allowed to
invest in those MF schemes that hold at least 25 per cent of their
assets (either in debt or equity or both) in the infrastructure sector
under the current US$ three billion sub-limit for investment in mutual
funds related to infrastructure.


• Revised guidelines have been issued for securitisation of
standard assets so as to promote this market. The
guidelines focus on twin objectives of development of bond
market as well as provide investors a safe financial product.
The interest of the originator has been aligned with the
investor and suitable safeguards have been designed.

• Banks have been given flexibility to invest in unrated bonds
of companies engaged in infrastructure activities within the
overall ceiling of 10 per cent;

• Bank has issued detailed guidelines on setting up of IDFs by
banks and NBFCs. It is expected that IDFs will accelerate
and enhance the flow of long-term debt for funding the
ambitious programme of infrastructure development in our
country.


CONCLUSION
The criticality of corporate bond market in the economy as
it allocates resources efficiently and enables long-term
resource raising to sectors, such as, infrastructure. A
vibrant corporate bond market provides an alternative to
conventional bank finances and also mitigates the
vulnerability of foreign currency sources of funds. From
the perspective of financial stability, there is a need to
strengthen the corporate bond market. Limited investor
base, limited number of issuers and preference for bank
finance over bond finance are some of the other obstacles
faced in development of a deep and liquid corporate bond
market. Some of the issues and challenges faced by this
market and the approach to be adopted to address them
in order to enable the market to reach its potential.

BIBLIOGRAPHY

SOURCE:
INTERNET:
• www.rbi.org.in/scripts/BS_ViewBulletinaspx?Id=1374
4retrieved on 22/11/12 at 10:43

• www.nseindia.com/us/ismr2011ch5.pdf, retrieved
on 28/10/12 at 7:04pm.

Book:
Chandra prasanna,3rd edition, publisher-Tata Mcgraw Hill.

Kevin.s , publisher- Asoke k. Ghosh , PHILearning Private ltd.

Pathak.V. Bharati publisher – Dorling Kindersley pvt. Ltd.


Corporate Debt Market

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