Basic idea about debt market in India.

1. LAW OF SECURITIESANDFINANCIALMARKET
ASSIGNMENT
ON
DEBT MARKETIN INDIA
SUBMITTED TO: SUBMITTEDBY:
Dr. RajivBalla JyotishmayDas
Associateprofessor UID:19MLL1013
ChandigarhUniversity(UILS) Chandigarh University(UILS)

2. CONTENTS
1.1 Introduction
1.2 The Debt Market-What is it?
1.3 Features of Debt Market
1.4 Link with money market
1.5 Importance of debt market to the economy.
1.6 Advantages of Debt Market
1.7 Disadvantages of Debt Market
1.8 Debt Instruments
1.9 Participants
1.10 Regulatory bodies of Indian Debt Market
1.11 Different types of risk with regards to debt securities
1.12 Conclusion

3. 1.1 INTRODUCTION:
The Indian debt market, and the government securities market in
particular, is at a turning point in India with significant changes taking
place in the domestic economic environment along with various
proposed legislative changes.1
The Indian debt market is a market meant for trading (i.e. buying or
selling) fixed income instruments.2
A market where fixed income securities are issued and trade is called
Debt market.
The Debt market is any market situation where trading debt
instrument take place. The Indian debt market while composed of
bonds, both government and corporate, is dominated by the
government bonds.3
Examples of debt instruments include mortgage, promissory notes,
bonds, and certificate of deposits. The central and state government
need money to manage their short term and long terms finance and
fund budgetary deficits. Being the largest issuers in the Indian Debt
Market, they raise money by issuing bonds and T-bills of different
maturities.4
1 Availableat:
https://www.researchgate.net/profile/Rakesh_Mohan4/publication/265348375_Recent_Trends_in_the_India
n_Debt_Market_and_Current_Initiatives/links/584df49a08aed95c25032bf6/Recent-Trends-in-the-Indian-
Debt-Market-and-Current-Initiatives.pdf (Last visited on 30/10/2019)
2Availableat:
https://sreibonds.com/advisors/understanding-indian-debt-capital-market (Lastvisited on 30/10/2019)
3 Availableat:
http://cbonds.com/countries/India-bond (Lastvisited on 30/10/2019)
4 Availableat:
http://www.yourinvestmentor.com/transcript/DebtTranscript.aspx?secid=2&vid=3 (Lastvisited on
30/10/2019)

4. 1.2 The Debt Market -What is it?
Debt market refers to the financial market where investors buy and
sell debt securities, mostly in the form of bonds5
.
These markets are important source of funds, especially in a
developing country like India.
The Debt market in India is also considered a useful substitute to
banking channels for finance6
.
1.2 Features of Debt Market:
(a) It is competitive in nature, as number of participants is large.
(b) Strong and safe market, as gov. securities are traded.
(c) Substantially low transaction cost relative to equity & money
market.
(d) Volume of transaction is huge, relative to equity market.
(e) Heterogeneous in nature, as a result of different types of
participants.
Since the Government securities are issued to meet the short term
and long terms financial needs of the government, they are not only
used as instruments for raising debt, but have emerged as key
instruments for internal debt management, monetary management
and short term liquidity management7
.
5 Availableat:
https://business.mapsofindia.com/india-market/debt.html (Last visited on 30/10/2019)
6 Ibid.
7Availableat:
https://www.quora.com/What-are-the-features-of-a-debt-market (Lastvisited on 30/10/2019)

5. 1.3 Link with Money Market:
(a) For a strong debt the prerequisite is a strong money market.
(b) If debt is long term requirement, then money market serves as
short –term requirement.
(c) For liquidity purpose also money market is needed along with
debt market.
Primary Market:
Primary market is that market where the debt instruments are issued
for the first time which can be issued as follows -
a. Public prospectus: invites public to buy.
b. Private placement: Invites few selected individuals, as the cost of
public issuing is quite a large.
c. Rights issue: to the already exciting members, but they can refer
to their beneficiaries in case of unwillingness to buy.
However, the issuer has to inform the exchanges in case of issuing
debts, to notify the investors, about associated risk changes.
Secondary Market:
Secondary market is where the debt instruments can be traded, it
can take place by the following two ways based on the
characteristics of the investors and the structure of the market are:
a. Wholesale debt market segment of NSE & Over the counter of
BSE: Where the investors are mostly Banks, Financial Institutions,
RBI, Primary dealers, Insurance companies, Provident Funds, MFs,
Corporates and FIIs.
b. Retail debt Market: involves participation by individual investors,
small trusts and other legal entities in addition to the wholesale
investors classes.

6. 1.5 Importance of debt market to the economy:
Marvin Goodfriend of Carnegie Mellon University highlighted the
importance of direct debt finance in the course of a country’s
economic development.8
The debt market allows government to raise money to finance the
development activities of the government, Its plays an important
role in efficient mobilisation and allocation of resources in the
economy.
Since the Government securities are used to meet the short term
and long term financial needs of the Government, they are not only
used as instruments for raising debt, but have emerged as key
instruments for internal debt management, monetary management
and short terms liquidity management.
The debt market also provides greater funding avenues to public-
sector and private sector projects and reduce the pressure on
institutional financing. It also enhances mobilisation of resources by
unlocking illiquid retail investment like gold.
The key role of the debt markets in the Indian Economy stems from
the following reasons:
(a)Efficient mobilization and allocation of resources in the economy.
(b) Financing the development activities of the Government.
(c)Transmitting signals for implementation of the monetary policy.
(d) Facilitating liquidity management in tune with overall short term
and long term objectives.9
8 Availableat:
https://poseidon01.ssrn.com/delivery.php?ID=476013072022121114111070109091101095028032023043029
0300230080080881170980651250210700330000211200381251211030980250800060941180100 ( Last
visited on 30/10/2019)
9 Availableat:
https://www.sify.com/finance/what-is-the-importance-of-the-debt-market-to-the-economy-news-fixed-
deposits-je2mDTebgegsi.html(Last visited on 30/10/2019)

7. 1.6 Advantages of Debt Market:
The biggest advantage of investing in Indian debt market is its
assured returns. The returns that the market offer is almost risk-free
(though there is always certain amount of risks, however the trend
says that return is almost assured).10 Safer are the government
securities. On the other hand, there are certain amounts of risks in
the corporate, FI and PSU debt instruments. However, investors can
take help from the credit rating agencies which rate those debt
instruments.
Another advantage of investing in India debt market is its high
liquidity. Banks offer easy loans to the investors against government
securities11
.
1.7 Disadvantages of Debt Market:
As there are several advantages of investing in India debt market,
there are certain disadvantages as well. As the returns here are risk
free, those are not as high as the equities market at the same time.
So, at one hand you are getting assured returns, but on the other
hand, you are getting less return at the same time.
Retail participation is also very less here, though increased recently.
There are also some issues of liquidity and price discovery as the
retail debt market is not yet quite well developed12
.
1.8 DEBT INSTRUMENTS:
A. Government Securities
B. Corporate Bonds
C. Certificate of Deposits
D. Commercial Papers
10 https://business.mapsofindia.com/india-market/debt.html
11 Ibid.
12Ibid.

8. A. Government Securities
It consists of central and state government securities. It means that,
loans are being taken by the central and state government.
It is the RBI that issues Government Securities or G-Secs on behalf of
the Government of India13
.
The Indian experience of developing the government securities
market followed a developmental rather than a regulatory and
supervisory model and attempted to facilitate overall improvement
in the strength of financial and economic system of the country14
.
These securities have a maturity period of 1 to 30 years. G-secs
offers fixed interest rate, where interests payable semi-annually.
For shorter term, there are Treasury Bills or T-Bills, which are issued
by the RBI for 91 days, 182 days and 364 days.
A. BOND MARKET
It consists of Financial Institutions bonds, Corporate bonds,
debentures and Public Sector Units bonds. These bonds are issued to
meet financial requirements at a fixed cost and hence remove
uncertainty in financial costs.
Bonds are the most common form of debt investment.15
B. Certificate of Deposits
Certificate of Deposits which usually offer higher returns than
bank term deposits, are issued in demat form16
.
13 Supra
14Availableat:
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.537.6587&rep=rep1&type=pdf (Last visited on
30/10/2019)
15 Availableat:
https://www.investopedia.com/ask/answers/071415/what-are-differences-between-debt-and-equity-
markets.asp (Last visited on 30/10/2019)
16Availableat:https://business.mapsofindia.com/india-market/debt.html

9. Bank can offer CDs which have maturity between 7 days and 1 years.
CDs from financial institutions have maturity between 1 to 3 years.
A. Commercial Paper
There are short term securities with maturity of 7 to 365 day.
Commercial Papers are issued by corporate entities at a discount to
face value.17
18
Simply understand the debt market instruments by using chart:
Types Issuers Instruments
Government
Securities
Central
Government:
State Government:
1. Zero Coupon bonds
2. Coupon bearing
bonds
3. Treasury bills
4. Floating rate bonds
5. STRIPs
1. Coupon bearing bond
Public sectors
bonds
Government
agencies, statutory
bodies, public
sector
undertakings
1. Debentures
2. Government
guaranteed bonds
3. Commercial papers
4. PSU bonds
Private sector
bonds
Corporates:
Bank:
Financial
Institutions:
1. Debentures
2. Commercial papers
3. Fixed floating rate
4. Zero coupon bonds
5. Inter-corporate
deposits
17 Availableat:https://business.mapsofindia.com/india-market/debt.html
18 Availableat: https://www.bankexamstoday.com/2016/10/debt-market-in-india-pdf.html (Last visited on
29/10/2019)

10. 1. Certificate of
debentures
2. Debentures
3. Bonds
1. Certificate of deposits
2. Bonds
1.9 Participants
(a) Central and State Government.
(b) RBI.
(c) Primary Dealer.
(d) Public Sector Undertaking.
(e) Banks.
(f) Mutual Funds.
(g) Foreign Institutional Investors.
(h) Charitable Institutes and Trusts.
1.10 Regulatory Bodies:
As debt market trade both government and corporate debt
instruments, we have following two regulators
1. RBI: It regulates and also facilitates the government bonds and
other securities on behalf of governments
2. SEBI: It regulates corporate bonds, both PSU (Public sector
undertaking) and private sector.

11. THE STRUCTURE OF INDIAN DEBT MARKET
19
1.11 Different types of risks with regard to debt securities:
The following are the risks associated with debt securities-
(a)Default Risk: This can be defined as the risk that an issuer of a
bond may be unable to make timely payment of interest or principal
19 Availableat:
https://www.bing.com/images/search?view=detailV2&ccid=Wkpro90x&id=674B08C8F5C038B57F5D62D783F
2577578A3227F&thid=OIP.Wkpro90xtdkE5ie6sCegKQHaFj&mediaurl=https%3a%2f%2fim (Lastvisited on
30/10/2019)

12. on a debt security or to otherwise comply with the provisions of a
bond indenture and is also referred to as credit risk.
(b) Interest Rate Risk: can be defined as the risk emerging from an
adverse change in the interest rate prevalent in the market so as to
affect the yield on the existing instruments.
(c) Reinvestment Rate Risk: can be defined as the probability of a fall
in the interest rate resulting in a lack of options to invest the interest
received at regular intervals at higher rates at comparable rates in
the market. The following are the risks associated with trading in
debt securities:
(d)Counter Party Risk: is the normal risk associated with any
transaction and refers to the failure or inability of the opposite party
to the contract to deliver either the promised security or the sale
value at the time of settlement.20
(e) Price Risk: refers to the possibility of not being able to receive the
expected price on any order due to a adverse movement in the
prices.21
1.12 CONCLUSION:
Now a days the trading volume of debt market has increased which
results into low yield of the bond. However, debt market plays a very
crucial role in Indian economy. As a bank-based financial system,
Indian debt market has come a long way since the initiation of
reforms in 1991. While the progress in the government debt has
been impressive, lot needs to be done in case of corporate bond
market. With the prior example of a successful reform in the G-Sec
market, reforming the corporate debt market should not prove to be
difficult. Considering the necessity of infrastructure investment,
20 Availableat:
http://www.rrfinance.com/Reserch/Pdf/Pdf%20Files/Debt%20FAQ.pdf (Last visited on 30/10/2019)
21 Ibid

13. development of corporate debt market is going to be of paramount
importance. Infrastructural constraints need to be tackled.
To conclude, we can do no better but to quote from a recent address
of the Indian Prime Minister, who in commenting on the shape of
things to come in the Indian financial sector, went on say: “We need
to ensure that the financial system can provide the finance needed
for our development, and especially for infrastructure development.
This opens up a broad agenda for reform. We need to develop long-
term debt markets and to deepen corporate bond markets. This in
turn calls for a strong insurance and pension sub-sectors. Some of
the reforms needed, especially in insurance, involve legislative
changes. We have taken initiatives in this area and will strive to build
the political consensus needed for these legislative actions to be
completed. We need to improve futures markets for better price
discovery and regulation. We also need to remove institutional
hurdles to facilitate better intermediation. All these issues will be
addressed through gradual but steady progress in financial sector
reforms to make the sector more competitive while ensuring an
efficient regulatory and oversight system” (Singh, 2009).22
22 Supra note