Corporate Debt Market


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Corporate Debt Market

  2. 2. INTRODUCTION OF DEBT MARKETDebt market refers to the financial marketwhere investors buy and sell debt securities,mostly in the form of bonds. Entire debtsegment is generally consists of 2/3 of primarymarket and 4/5 of secondary market. The Indian debt market is today one of thelargest in Asia and includes securities issued bythe Government (Central & StateGovernments), public sector undertakings,other government bodies, financial institutions,banks and corporates.11/28/2012 2
  3. 3. DEBT MARKET CAN BE BROADLY CLASSIFIEDINTO :-1) Govt. securities market2) 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. 11/28/2012 3
  4. 4. Corporate debt market can be classified into:-• Primary market• Secondary marketPrimary market for corporate debt:-The corporate sector can raise debt funds eitherthrough prospectus or private placement. It is amarket wherein debt securities of corporates i.e,debentures, bonds , commercial papers ,certificate of deposits, etc . of private &publicsectors are issued for the first time.11/28/2012 5
  5. 5. Secondary market for corporate debt:-It is a market where the corporate debtsecurities of both private sector & publicsector undertakings are traded. Thesesecurities are traded on Wholesale DebtSegment(WDM) segment of NSE , OTCEI &BSE.11/28/2012 6
  6. 6. Corporate bonds can be issued in two ways:-Public issueIn public issue, corporations issue bonds to themarket as a whole. Institutions as well as retailinvestors can participate in this issue. The cost ofborrowing is little high in case of public issue.Private placementIn private placement corporate, generally parkthe bond issuance with few institutions. In India,more than 90% of the corporate bonds areissued through private placement. It is an easiestand cheapest way of borrowing corporate bonds.11/28/2012 7
  7. 7. Structure of corporate debt market in India The primary market for corporate debt is mainlydominated by private placements (93 per cent oftotal issuance in 2011-12) as corporates prefer thisroute to public issues because of operational ease,i.e., minimum disclosures, low cost, tailor madestructures and speed of raising funds. Banks/FIs(42.3 per cent of total issuances) followed by financecompanies (26.4 per cent) were the major issuers in2011-12. India lacks a long-term debt market forpure project finance. Corporate bonds issued in Indiausually carry a rating of AAA indicating lack ofinterest in bonds of lower rated borrowers in the debtmarket. Institutional participants, such as, banks,primary dealers, mutual funds, insurance companies,pension funds, corporates, etc. are the major playersin this market.11/28/2012 8
  8. 8. According to SEBI, the total trading volumein the secondary corporate bond market hasincreased from Rs. 961 bn in FY2008 to Rs.2,207 bn in FY2010CAGR of over 50% over the last two years.• SeFY2008 16,547 967FY2009 21,651 1,487Fy2010 20,933 2,20711/28/2012 9
  9. 9. 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 95.232000-01 25 41 524 566 591 95.802001-02 11 53 462 516 526 97.942002-03 10 47 484 531 542 98.082003-04 178 43 484 528 706 74.752004-05 214 41 552 593 807 73.452005-06 237 0 818 818 1055 77.562006-07 250 0 924 924 1173 78.7011/28/20122007-08 522 1153 1163 1685 69.01 10
  10. 10. Components of corporate bonds:-Issue Price :- It is the price at which the CorporateBonds are issued to the investors. Issue price ismostly same as Face Value in case of couponbearing bond.Face Value :-It is also known as the par value orprincipal value. Coupon (interest) is calculated onthe 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. 11/28/2012 11
  11. 11. Coupon :- It is the cash flow that are offered by aparticular security at fixed intervals. The couponexpressed as a percentage of the face value of thesecurity gives the coupon rate.Coupon Frequency :-It means how regularly anissuer pays the coupon to holder. Bonds payinterest monthly, quarterly, semi-annually orannually.Maturity date :-It is a date in the future on whichthe investors principal will be repaid.11/28/2012 12
  12. 12. Call / Put option:- It is an option on which issueror investor can exercise their rights to redeem thesecurity.Maturity / Redemption Value:-It is the amountpaid by issuer other than coupon payment iscalled redemption value.11/28/2012 13
  13. 13. Issuers of Corporate Bonds can be broadlyclassified in following classes:• Bonds issued by Public Sector Units• Bonds issued by Financial Institutions• Bonds issued by Banks• Bonds issued by Corporates11/28/2012 14
  14. 14. TYPES OF CORPORATE BONDS1) 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.11/28/2012 15
  15. 15. 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.11/28/2012 16
  16. 16. 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 bonds 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.11/28/2012 17
  17. 17. 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.11/28/2012 18
  18. 18. Growth of Indian debt marketThe growth of corporate bond market in India has been aided by existenceof a well-developed G-sec market which provides a benchmark yield curvefor bond pricing, a well-functioning depository system, credible system ofrating 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, andimplementation of DvP settlement of corporate bond trades have had anencouraging impact on the market resulting in considerable increase inissuance as well as secondary market trading of corporate bonds.11/28/2012 19
  19. 19. Volumes climb to Rs63,782.46 crore in July compared toRs54,404 crore in June; further upward momentum expecteddue to increased FII activity. According to data released by theSecurities and Exchange Board of India (SEBI), corporatebond trading volumes have climbed 17% at Rs 63,782.46 crorein July 2010 compared to Rs54,404 crore the month before.There were 4,446 combined trades on the National StockExchange (NSE), Bombay Stock Exchange (BSE) and TheFixed Income Money Market and Derivatives Association ofIndia (FIMMDA) platforms.11/28/2012 20
  20. 20. Total issuance has increased from `1,747.81 billion in 2008-09to `2,968.94 billion in 2011-12. Similarly trade volume has increasedfrom `1,481.66 billion in 2008-09 to ` 5,937.83 billion in 2011-12. Duringthe current fiscal year upto September 2012, the trade volumes havebeen ` 3261.14 billion. The share of bonds issued through public issues hasincreased from 0.86 per cent in 2008-09 to 7.3 per cent in 2011-12. Out ofthe four modes of resource mobilisation namely, IPOs, FPOs, bonds andrights 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 onbonds for resource mobilisation in the recent period.11/28/2012 21
  21. 21. Share of corporate bonds in total debt 22United states Japan China India
  22. 22. The problems in India today lie in debt. Banksaccounted for 14.4% of the financing of large firmsin 2000-01, which went up to 17.8% in 2010-11.The bond market stagnated, with 3.5% in 2000-01and 3.9% a decade later. Despite considerableinterest in bond market development, thecorporate bond market accounted for only 3.9% ofthe sources of funds of large Indian companies.Finally, foreign borrowing rose sharply, fromroughly nothing in 2000-01 to 3.2% in 2010-11. Tosome extent, borrowing abroad has served as a wayfor Indian firms to overcome the difficulties ofobtaining debt financing domestically.11/28/2012 23
  23. 23. 11/28/2012 24
  24. 24. TRENDS OF CORPORATE DEBT MARKET IN 2011In India the long-term debt market largely consists ofgovernment securities. The market for corporate debtpapers in India primarily trades in short term instrumentssuch as commercial papers and certificate of deposits issuedby Banks and long term instruments such as debentures,bonds, zero coupon bonds, step up bonds etc. In 2011, theoutstanding issue size of Government securities (Centraland State) was close to Rs. 29 lakh crores (USD 644.31billion) with a secondary market turnover of around Rs. 53lakh crores (USD 1.18 trillion). In contrast, the outstandingissue size of corporate bonds was close to Rs. 9 lakh crores(USD 200 billion). Moreover, the turnover in corporate debtin 2011 was roughly Rs. 6 lakh crores (USD 133 billion) 11/28/2012 25
  25. 25. 11/28/2012 26
  26. 26. 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 1,02511/28/2012 27
  27. 27. 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.11/28/2012 28
  28. 28. Issues and challenges in Corporate Bond MarketWhile the measures taken so far have generatedthe momentum needed to develop the market, theindicators are suggesting that the market is yet todevelop to its potential in relation to needs of ourmacro-economy. The size of the Indian corporatebond market at 11.8 per cent of GDP is lowerthan the average for Emerging East Asia and forJapan at 17.2 and 19.8 per cent respectively.11/28/2012 29
  29. 29. • 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;11/28/2012 30
  30. 30. • 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.11/28/2012 31
  31. 31. 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.11/28/2012 32
  32. 32. • 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.11/28/2012 33
  33. 33. • 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. 11/28/2012 34
  34. 34. • 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.11/28/2012 35
  35. 35. CONCLUSION The criticality of corporate bond market in the economy asit allocates resources efficiently and enables long-termresource raising to sectors, such as, infrastructure. Avibrant corporate bond market provides an alternative toconventional bank finances and also mitigates thevulnerability of foreign currency sources of funds. Fromthe perspective of financial stability, there is a need tostrengthen the corporate bond market. Limited investorbase, limited number of issuers and preference for bankfinance over bond finance are some of the other obstaclesfaced in development of a deep and liquid corporate bondmarket. Some of the issues and challenges faced by thismarket and the approach to be adopted to address themin order to enable the market to reach its potential. 11/28/2012 36
  36. 36. BIBLIOGRAPHY SOURCE: INTERNET: • 4retrieved on 22/11/12 at 10:43 •, 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.11/28/2012 37
  37. 37. 11/28/2012 38