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Indian debt market analysis
 

Indian debt market analysis

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Mohit Garg, Undergraduate, IIT Kanpur

Mohit Garg, Undergraduate, IIT Kanpur

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    Indian debt market analysis Indian debt market analysis Presentation Transcript

    • INDIAN DEBT MARKET ANALYSIS
      Business Club, IIT Kanpur
    • OBJECTIVES
      To study characteristics of Indian Bond Market and account the same.
      To study Bond Distribution data and develop the statistics of the same.
      To study challenges and suggest various reforms that would help the corporate bond market to prosper in India.
    • WHY AN INCLINATION TO THIS PROJECT?
      Underdevelopment of Indian Bond Market
      The corporate bond market has not yet flourished as compared to government bond market.
    • BONDS : CONCEPTUALIZATION
      Indian debt Market mainly comprises trading of bonds.
      In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to pay interest(the coupon) to use and/or to repay the principal at a later date, termed maturity.
    • COMPARISON
      While India has a government (public) bond issuance
      which is not much out of line with the rest of the world, its corporate bond
      issuance is very much lower than the norm.
      (Source: World Bank Reports)
    • INDIA DOMESTIC FINANCIAL ASSETS : NOW & THEN
    • INDIA DOMESTIC FINANCIAL ASSETS : NOW & THEN
      There has been a gradual, but consistent, reduction in the relative importance of bank deposits from 44% in 1990 at the start of the reform program to 28% in the 2005.
      Over the whole period, government bonds have declined from 31% to 22% of domestic financial assets.
      Corporate bonds briefly became visible on the graph in the mid to late 90s but almost disappeared in 2004-05.
    • PLACEMENTS OF BONDS
      There are almost no public issues in India.
      That is, where they are offered to a wide range of investors and conform to the regulatory standards required of public issues of bonds.
    • PLACEMENTS OF BONDS
      Almost all corporate bond issues are made as private placements.
      Offered only to qualified Institutional Buyers (professional investors)
      Limited disclosure requirements.
      Lower regulatory hurdles.
    • Dominancy of Private Placements
    • Growth in Indian Bond Market
      DATA SOURCE: APPENDIX I
    • Effect of crisis on Indian Debt Market
      Expansion in the net issuance by the corporates.
      Issuance of more government bonds to support financial restructuring and economic recovery.
      Cumulative debt investment limit for FIIs(Foreign Institutional Investors) in corporate bonds was raised from $3 billion to $15 billion between October 2008 and February 2009.
    • ISSUER PROFILE: Sector Wise DISTRIBUTION
      2005
    • ISSUER PROFILE: Sector Wise DISTRIBUTION
      2006
    • ISSUER PROFILE: Sector Wise DISTRIBUTION
      2007
    • ISSUER PROFILE: Sector Wise DISTRIBUTION
      2008
    • ISSUER PROFILE: Sector Wise DISTRIBUTION
      2009
    • ISSUER PROFILE: Sector Wise DISTRIBUTION
      2010
    • ISSUER PROFILE:BROADER CLASSIFICATION
      2010
    • ISSUER PROFILE : CONCLUSION
      MAJOR ISSUERS:
      Public Financial Institutes
      Energy & Power Industries(G-Sec)
      Ministry of Power, Government of India projects to invest $100 billion in the near future. (Source: Plenary Session 4, Ministry of Power, New Delhi)
    • MATURITY WISE ANALYSIS
    • MATURITY WISE ANALYSIS
    • MATURITY WISE ANALYSIS
    • MATURITY ANALYSIS : CONCLUSION
      Maximum no. of bonds are issued for a period of 10 years.
      Rest of the bonds are predominantly issued for maturity period of less than or equal to 5 years.
      The short maturity periods in India debt market can be attributed to lesser risks in G-sec bonds and high creditor quality.
    • Indian Debt Market:Understanding Investor Profile
      Traditionally, the Banks have been the largest category of investors in G-secs.
      More than 60% of the transaction in the Wholesale Debt Market.
      Required to maintain 25% of their net time and demand liabilities as SLR.
      Invest 10% to 15% more than the normal requirement.
      Risk Free nature of the Government Securities.
      Greater returns in G-Secs as compared to other investments of comparable nature
    • Indian Debt Market:Understanding Investor Profile
      Investor profile in IDM can be understood by studying major markets for bonds trading:
      Wholesale Debt Market (WDM)- Major Investors: Banks, Financial Institutions, the RBI, Insurance companies, Provident Funds, MFs, Corporates and FIIs.
      Retail Debt Market(RDM)- Major Investors:individual investors, Small trusts and wholesale investors.
    • Understanding Investor Profile:Wholesale Debt Market
      Large investors and a high average trade value.
      Informal market with most of the trades directly negotiated and struck between various participants.
      The commencement of WDM by NSE(1994) and BSE(2001) has brought greater transparency.
    • Understanding Investor Profile:Retail Debt Market
      Introduction of trading in government securities for retail investors by the Government, RBI and SEBI.
      Wider participation of all classes of investors across the country.
      High potential because of presence of powerful investors.
      Investors same as that of equity market.
    • BOND MARKET : MAIN ROADBLOCKS
      Reasons for not getting Developed :-
      • Regulatory Issues
      • Issues regarding Placement of Bonds.
      • FII related Issues.
      • Limited Demand for Corporate Bonds.
      • Cumbersome Trading Practices.
    • Regulatory Issues
      • Most Issues are not Corporate Bonds but Private Placements.
      • Prospectuses for bond issues are reported to be several hundred pages long.
      • There is no provision for shelf registration.
    • Regulatory Issues
      Expensive Public Issues
      • Issuing process is reportedly slow, at times taking Several Months.
      • High marketing and other costs.
    • Corporate Bonds : Major Issues
    • Corporate Bonds : Major Issues
      Most of the Corporate Bonds are much like “Syndicated Loans”.
      • As most of the Bonds are purchased by a single entity (which in most of the cases is Financial Institution like Banks).
    • Corporate Bonds : Major Issues
      Demand for Corporate Finance is limited.
      Mostly needed at the time of Corporate Restructuring.
      Corporates prefer borrowing from banks.
    • Issues Regarding Trading of Bonds
      Wholesale Trading is Over-the-Counter
      Trading process is cumbersome
      Only with some Major Banks acting as unofficial Market Makers.
      The exchange-trading platforms provided by BSE are mainly used by a small number of retail participants.
    • Foreign Investors
      Typically seen as a source of funds but they are also catalysts for overall development of the Financial Market.
      • But various governing regulations have made their operations difficult.
    • Foreign Investors
      For Trading in Indian Market, Investors need to gain an Official Certificate from SEBI.
      With a validity of only 3 years.
      Typically not suitable for trading in Bond market.
      FII status is not open to individuals, hedge funds, corporates, or to fund managers.
    • FII Reforms
      FIIs can now undertake short-selling and stock borrowing/lending on par with domestic Investors.
      FII status has been opened to non-resident Indians (NRIs).
      FIIs are allowed to invest in equities without any upper ceiling.
    • FII Reforms
      As a result of the Improvisations made by SEBI and RBI
      • As of 2008, foreign investors owned 15% of the shares of the companies in the BSE 500.
      • FII domestic debt holdings increased to USD 3.87 billion from USD 2.29 billonin the Financial year 2008 only.
    • Corporate Bond Market: Reforms
      Removal of TDS (Tax During Source) on corporate bonds
      Government securities already exempted
      No TDS for Insurance and Mutual Funds Company
      Rationalization of Stamp Duty :
      Current Stamp Duty is 0.375%
      Countries like Malaysia and Singapore have no stamp duties.
    • Corporate Bond Market: Reforms
      Giving flexibility to investors:
      Financial Institutions(provident and pension funds) are not allowed to hold anything below top rated bonds.
      Debt Based Mutual Funds are also based on government securities.
    • Corporate Bond Market: Reforms
      Companies with High Credit Ratings Dominate Corporate Issuance
    • Corporate Bond Market: Reforms
      Making corporate bonds more liquid.
      Corporate Bonds so far can not be used as a collateral to carry out repo transitions.
      Need for securitization in India.
    • Securitization: Conceptualization
      It the process of creation and transfer of securities backed by a pool of usually non-tradable assets.
      Bank loans of various kinds, mortgages and receivables are the typical asset classes that are securitized.
    • Securitization : Encouraging Retail Investors
      The process creates liquidity by enabling smaller investors to purchase shares in a larger asset pool.
      It enables individual retail investor to purchase portions of a mortgage as a type of bond.
      Without the securitization of mortgages, retail investors may not be able to afford to buy into a large pool of mortgages.
    • Securitization : Encouraging Retail Investors
      “ The development of various Bond Markets across the world are attributed to their well developed RBMS.”
    • QUESTIONS