3. CMYK
Sponsor
FINANCE
Developing Indian Debt Markets
PANEL SPEAKERS
Subhomoy
å Bhattacharjee, Deputy Executive
Editor, The Financial Express
Any pic å
Jasmit Singh Chandhok, Dy. Executive Director,
Learning Arc
å Kaul, CGM Treasury, Punjab National
Mr. Arun
Bank
å Bhalla, Treasurer, GE Capital
Mr. Manoj
å Bhatia, AGM (Finance), NTPC
Sangeeta
available to non-banks as Credit Information
EXPERT OPINION
Bureau India Limited (CIBIL) reports the defaults
The research on the topic 'Development of Indian only for banks. Second is the absence of any
debt markets' was very well appreciated by the stringent laws in India on bankruptcy enforcement
panelists who suggested the presentation should and protection. Unlike the US where Chapter 11
be made to the regulators to set the way forward. and other laws ensure high degree of restitution
The discussion began with a comparison of loans and that too before diminution of asset value, in
against bonds and analyzing whether the present India corporate default does not come in the public
system is sustainable. According to Mr. Arun Kaul, domain for up to 10 years.
banks would prefer to give loans rather than Transparency in disclosures, diversity for issuers
investing in bonds because of the direct contact as well as investors, and liquidity dependent on
with the client in case of loans, as compared to market infrastructure and intent of institutions were
communication through merchant bankers. Mr. identified as major criteria for development of debt
Arun Kaul also threw light on how PNB invests market by the panel. Mr. Jasmit Singh Chandhok
money in bonds, highlighting that it does not invest and Mr. Arun Kaul pointed out that retail investors
in private sector bonds as there is no proper do not have enough incentive to invest in bond
secondary market for trading. Two more problems markets where there is doubt about the pricing of
were identified in case of institutional investment in bonds, legal issues are cumbersome, and it is
corporate bonds. One, data on defaults is not difficult to withdraw money back from market. If at
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all an exposure to bonds is required, much better price discovery is not efficient. Moreover, the
options are available to them in the form of platform established by NSE is more of a reporting
undervalued bank equity who in turn have their platform rather than a trading platform as two way
investments in bonds of corporates. Hence, retail live quotes are not available. The restriction on
investor would have to enter indirectly into this foreign investment is also a major factor in this non-
market, which is in line with the worldwide trend of development if we try to benchmark with the
majorly wholesale investors in bond market. markets abroad. A point noted by the panel was
However, such an entry would be preferred as it is that there is a large contribution of foreign
likely to lower the yields in the market. investment in development of Indian equity
markets.
Thereafter the discussion moved on to the role of
credit rating agencies in development of bond
markets. The panel was unanimous on the view
that these agencies had failed to predict a lot of
troublesome situations in the past and hence
excessive reliance on credit rating agencies should
be avoided. In the panel's view these agencies
have good models for current situation but not the
future, and a more sophisticated analysis is
needed from their side. There was also a debate on
the business model of credit rating agencies, but an
important argument was the need to build
accountability for such bodies by bringing in Next issue discussed was that whether due to its
regulation. high dependence on Government bonds to finance
Other major reasons for non-development of debt budgetary deficit, is it the Government that does
markets were also discussed by the panel. In India, not want the development of corporate bond
size of corporate is relatively smaller and they have market. It was concluded by the panel that the
access to project loans and working capital loans attempt by Government is not deliberate, but it is
such as cash credit from banks which lower their extra cautious to prevent scams. The demand for
costs of borrowing to a large extent. In this regard, Government bonds mainly comes from banks that
banks' operations are actually hindering the growth need it for their SLR requirements.
of bond market in India. Institutional investors like Some subtle issues concerning the corporate bond
EPFO and LIC holding their portfolios to maturity market were also touched upon by the panel. While
leaves the market in an illiquid situation and hence the panel agreed when Mr. Manoj Bhalla pointed
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5. CMYK
Sponsor
FINANCE
Developing Indian Debt Markets
out that the bond, cash, and derivative market are Government securities market and corporate debt
needed together for an integrated development, market. The corporate debt market can be further
there were apprehensions regarding allowing of classified based on the type of issuer being a Public
Credit Default Swaps for this development, Sector Undertaking (PSU) or a private company.
especially after the recent financial turmoil. It was The Indian debt market is dominated by G-Sec
also concluded that for any scope of a market for bonds with market capitalization of Rs. 13,18,419
municipal bonds, these organizations first need to as compared to corporate bond market
put their houses in order. Mr. Arun Kaul pointed out capitalisation of only Rs. 68,074 crore at end
the need to allow short selling in corporate bond December 2007. Hence, within the realm of
market. development of Indian debt markets, our research
The panel was finally able to identify removal of was directed towards the development of
regulatory ambiguity, funding of stakeholders, and corporate bond market.
improvement of corporate governance as
immediate measures in the direction of
development of corporate bond market. At the
same time, the establishment of reporting platform
and the application of uniform TDS for Corporate
and Government bonds were stated as positive
steps from the Government's side.
Overall the discussion was a healthy one which
brought out varied perspectives on what can bring
about a marked change in Indian financial system.
Queries raised by the students were aptly
answered by the panel.
INTRODUCTION Characteristics of developed
Indian Debt market: Overview debt market
For a market to be developed, presence of three
Debt Market is the market where fixed income
characteristics is very crucial:
securities of various coupons, maturity, options
and other features are issued and traded. The Liquidity:
å For the market to be liquid; there is a
Indian debt market has two segments, viz. need for a secondary market. There has to be
enough number and type of instruments and
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number of participants to have sufficient variety, roles was brought by making primary and
inducing fast trades in the market. secondary trading a responsibility of SEBI while
repo and reverse repo of debt being a responsibility
åSafety: Other than enough types of instruments
of RBI. Also, Corporate Bonds and Securitization
with differing characteristics which could be used
Advisory Committee (CoBoSAC) was set up under
to reduce risk exposure, a key requirement for
chairmanship of Dr. R.H. Patil to look into further
safety is the minimization of counterparty risk.
issues.
åPresence of market maker: A market maker is
From the issuer's perspective, the requirements
required to induce trades in the market by quoting
regarding continuous disclosures by the issuers
two-way quotes.
were rationalized; there was a reduction in Shut
Other than these characteristics, other important Period to align corporate bonds with Government
features for a developed market are efficiency of securities, a reduction in requirement of only one
the market, low transaction costs, and availability credit rating agency instead of multiple ones, and
of free public information. the requirement of investment grade rating of debt
instrument removed. Moreover, Structural
Past initiatives to develop Debt restrictions, such as those on maturity, put / call
markets option, conversion etc. were removed, corporate
debt instruments issued in de-mat form (and listed
The Government in February 2006 accepted
on recognised exchanges) were made exempt
recommendations of the high level expert
from TDS, and moderated SEBI Regulations were
committee formed under Dr. R. H. Patil. These
issued for Issue and Listing of Debt Securities in
recommendations were implemented majorly by
2008. These regulations paved the way for one
February 2007. The recommendations were aimed
listing agreement for public and private issue
at improving the market conditions for all
irrespective of listed or unlisted company, and
stakeholders- from issuers to investors, changes
minimal disclosures for companies with listed
were brought so as to improve the market
equity.
infrastructure and regulatory environment as well.
Reporting platforms were set up by NSE, BSE, and
FIMMDA, and trading platforms from BSE and NSE
became operational. The trade settlement started
happening via exchange or bilaterally.
Standardization was brought for the Actual Day
Count convention for new issues. From the
regulatory viewpoint, a clear understanding of
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Sponsor
FINANCE
Developing Indian Debt Markets
To make corporate bonds attractive for the
investors, the reporting of OTC and exchange
transactions was made mandatory, the tradeable
lot was reduced to Rs. 1 lakh for all investors, and
market information on secondary market trades
was made available on SEBI website for price
estimation purpose. Also, press release was made
mandatory for issuers in the case of events like
default of payment, failure to create charge on
assets, or a revision of ratings, other than issuance
of compliance reports in public domain by issuers
being made mandatory. The listing agreements of
debentures were also modified, so that ECS, Direct
After obtaining a basic understanding of the
Credit, NEFT, and RTGS were to be used for
present condition of the debt market and the
interest payments & redemption, and material
associated issues, a benchmarking of Indian
modification in structure of debentures without
corporate bond market with US and European
prior approval of stock exchange where it is listed
corporate bond markets like Eurex was performed.
was restricted.
The relative standing of Indian corporate bond
market and the characteristics lacking in the Indian
RESEARCH APPROACH markets were discovered.
The corporate debt market has several Investors in India prefer to invest in other fixed
stakeholders and the expectations, needs, roles income securities like government bonds,
and opinions of these stakeholders on this market Collateralized borrowing and lending obligation
differ vastly. Hence, through the research an effort (CBLO) ,bank deposits, national savings
was made to look at the corporate bond market certificates, postal savings etc as compared to
from the perspective of all the stakeholders in the bonds. Hence it was imperative to compare these
process and understand their concerns for not instruments as against corporate bonds. After
participating in the corporate bond market. The first plotting the risk-return tradeoff for these
step in the research was the reading of several instruments vis-a-vis corporate bonds, customer
reports on development of Indian corporate bond preferences in fixed income securities and their
market published by companies like Goldman investment needs were also determined.
Sachs etc., other reports by SEBI, RBI etc., in
addition to news and magazine articles. Finally, to obtain the ground-level picture, opinion
was taken from all the stakeholders in the Indian
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corporate bond debt market such as the issuers, At the same time, developed debt market provides
investors, credit rating agencies, regulators and new fund raising avenues to the borrowers, who
exchange. A questionnaire was designed for each otherwise raise capital through loans from banks or
stakeholder, through which the stakeholders were equities generally. Loans in Indian currency and
asked to identify the reasons hindering the equity are expensive sources of capital as
development of the market and their compared to issue of bonds, and hence,
recommendations for removing these barriers. companies can issue bonds to reduce their cost of
They were also requested to do a critique on the capital. Further, interest rate of loans is not
recommendations put forth by the students in the transparent; while bond prices are determined by
research. Through this primary research, gaps in market forces introducing transparency in the
the proposed suggestions by various working borrowing market. Other sources of borrowing like
committees and the need of the market participants ECB's are not accessible to all companies
were uncovered, which provide the justification for especially SME's making corporate bonds even
slow pick-up of bond markets in spite of umpteen more important.
development-focused initiatives and suggest
Regulators prefer a sound debt market as it would
directions for new policy initiatives. The collective
reduce the asset liability mismatch of banks. It
perspectives of different stakeholders presented
would reduce the strain of banking system if
through this research provide a holistic picture and
corporates issue bonds instead of bank loans. This
demarcate the reality from the blame-game being
will also infuse liquidity in the market. Development
played for long between the regulators, the issuers
of credit derivative market is possible only after the
and the investors for failure to develop corporate
development of the underlying instrument i.e bond
bond market.
market.
Payoffs of a developed debt Issues
market The main reason hindering the development of
A developed debt market is preferred by the corporate bond market is the lack of liquidity. It is
investors, the issuers/borrowers and the regulators just like a chicken and egg problem. Issuers do not
of an economy alike. For investors, a developed want to issue bonds because there are not enough
debt markets provides opportunities to diversify buyers in the primary and secondary market. As
their portfolio. During times of bearish equity issuers do not issue bonds, investors do not invest
markets, corporate bonds with assured returns are in the market due to lack of good quality bonds.
a very effective medium to mitigate risk. Another problem faced by issuers is excessive
disclosures for new and successive issues.
At the same time, developed debt market provides
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Sponsor
FINANCE
Developing Indian Debt Markets
Retail Investors are not well educated about bond or the regulator should provide incentives to
pricing and on the corporate bond market market makers. One of the incentives could be
structure. The minimum market lot size for lower transaction cost.
investing in corporate bond market is Rs. 1 lakh.
However,
å due to high bid-ask spread market
This is a huge amount in comparison to minimum
making is very expensive. Hence, repos in
amount in equities or bank deposits. Also, the retail
corporate bond market should be introduced to
investors believe that since everybody is investing
increase secondary market trading.
in equity markets, it must be the best option- a
testimony of a social proof phenomenon. As a The current
å lot size of Rs. 1 lakh deters retail
result, they are hesitant to invest in the debt investors. To tackle this, the market lot size
markets. Information on live trading of corporate should be reduced to as low as Rs. 10000.
bonds is not freely available on the internet. It is difficult
å to get free public information about
Institutional investors have no incentive to trade in bonds. People are not aware about government
exchanges as their needs for corporate bonds is initiatives like indiabondwatch.com. it is
met by the Over the counter (OTC) market. Banks imperative to educate the investors especially
prefer to give loans as they are treated on cost the retail investors.
basis in the balance sheet as compared to bonds There is
å no benchmark to measure the
which are valued on mark-to-market basis. performance of bonds. There should be a
Moreover, the bankruptcy and default laws are not benchmark or a index for corporate bonds similar
very stringent in India. The investor is exposed to to the US and the European market.
credit risk and at the same time the market does not
The main
å investors in the bond market are
have sufficient hedging instruments.
institutional investors. So, a bond market
For the regulators, the main concern is the lack of managed by consortium of institutions like Eurex
development in the market despite the initiatives bond market will give the institutions to design a
taken recently. Also, the investors are not aware of trading and settlement system as per their needs.
the initiatives taken by the regulator or the
exchange.
Recommendations
The corporate
å bond market cannot develop
without increasing liquidity in the market. In every
market, the market makers are sources of
liquidity. To enable market-making, the exchange
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List of companies where executives were contacted
for primary research
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