1. INFS Group Presentation
Presenting in ‘FAVOR OF’ –
Steadily open up investment in the rupee corporate and government
bond markets to foreign investors

2. Background
 The Need
 A view to outlining a comprehensive agenda for the evolution of the financial
sector indicating especially the priorities and sequencing decisions which the
government must keep in mind
 The Enabler - Rajan Committee
 High Level Committee on Financial Sector Reforms
 Mr. Raghuram Rajan and some of the respected names in the industry
 Formed in 2007
 The Result
 The Committee Report – “A Hundred Small Steps”
 35 recommendations addressing the need
 Our Analysis
 In favor of Proposal 2
“Steadily open up investment in the rupee corporate and government bond
markets to foreign investors after a clear monetary policy framework is in place”
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3. Bond Markets – Why do we need them?
 Overall growth of economy driven by two important pillars of
financial sector
 Equity Markets
 Bonds
 Need for efficient bond market from view of different stake holders
 Overall Economy
o Expands range of opportunities to finance large scale projects at centre, state and
corporate level
o Infrastructure projects are backbone for economic growth in emerging economies. Bond
markets reduce financial strain on banking system
 The Corporate Borrower
o Bond markets provide cost efficient source to medium and long term capital
o Extends financial inclusion to SMEs
o An easier way to access loans for less credit-worthy borrowers
 Investors – Institutional and Retail
o Facilitates investors to price borrowings and lending more competitively
o Expands the array of financial assets that are available to institutional investors
o Market determined investments reduce mismatches and facilitate portfolio management
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4. Corporate Bond Market – Current Scenario
 In its infancy stage in terms of the structure
 Presence barely perceptible compared to countries like US, Japan or China
 India has an over-reliance on loans from FI/Banks
Corporate bond market are dominated by
“non-banking finance companies” and a small
portion of funds raised by service or
manufacturing industries
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5. Corporate Bond Market – Barriers to Growth
 Attitude of various participants in the bond market
o Corporates prefer cash credit system of banks
o FII’s present in a limited way due to the ceilings on their investments
o Households absent due to lack of an efficient legal system
 Evolution of the fixed income markets
o Progress difficult if arbitrage opportunity between bonds and loans exists
 Structure of markets
o Issuing and selling bonds costlier and difficult
o Ensuring liquidity and exit is a bigger headache
 Over-arching prescription for instruments that are rated AA and above
o Demand exists only for these instruments and thus the market is shrinking
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6. Corporate Bond Market – Measures
 Improve liquidity
 Enhance transparency
 Create safe and sound market infrastructure
 Enable appropriate institutional structures like robust bankruptcy framework
 Review the investment guidelines of institutional investors
 Existing guidelines do not encourage large investments in bonds
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7. Government Bond Market
Salient Features of Government Bonds
 Issued at face value
 No default risk as the securities carry sovereign guarantee.
 Ample liquidity as the investor can sell the security in the secondary market
 Interest payment on a half yearly basis on face value
 No tax deducted at source
 Rate of interest and tenor of the security is fixed at the time of issuance
 Redeemed at face value on maturity
 Maturity ranges from of 2-30 years
Role of Government Bonds in Financial Markets
 Integrates various segments of the financial market
 Offering virtually credit risk-free highly liquid financial instruments
 Willingness of market participants to transact in government securities imparts liquidity
 Used by dealers as a major hedging tool for interest rate risk and as underlying assets
 Large borrowings by the Government also provide an impetus to the development
 Allows greater application of indirect or market-based instruments of monetary policy
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8. Government Bond Market – Current Scenario
 Indian government bond market has grown exponentially during the last decade
 Growth fueled majorly through structural changes made by government and RBI
 Changes lead to enhanced transparency in market dealing & auctions
 Introduction of new participants like primary dealers helped to deepen the market
Imbalance of the debt market in India
Overpowering dominance of the government bond market
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9. Government Bond Market – Current Scenario
 Government bond market grew at par with Asian countries
 Issue of lack of liquidity of government bond markets
o Liquidity visible in the low level of traded bonds
o Liquidity is concentrated in a few bonds like 10 year issues and 5 year issues
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10. Government Bond Market – Key Issues
 Market still illiquid
o Less than 20% of securities traded on a day in the liquid segment
 Bonds in the government market are traded heavily on their introduction
o Attributed to the process of price searching and duration matching
 After the introduction bonds are rarely traded till their maturity
o Due to inability of market to formulate accurate expectations about interest rates
Challenges
o Government bond markets continue to lack in width
o On any day only 20 government securities are traded in the secondary market
o If we look at two-way quotes, they are available for only 25 securities
o The number of trades per security is low on average
o Domination by only handful of major players
o Mismatch of asset-liability of participating institutions
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11. FII in Indian Bond Market
Share of FII’s in government securities in India is a miniscule 0.9%
o Dominance of domestic investors
o Very limited foreign participation which is largely due to policy structure of Indian debt
o Investment limits for FIIs have been revised
 Increased to US$25 billion in government bonds
 US$ 50 billion in corporate bonds
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12. FII in Indian Bond Market
Measures to boost FII’s
o RBI has been asked to open a US $10 billion window to allow foreign individuals
o Will encourage flow of money as foreign investors will` be eager to invest in Indian
markets
o Possibility of earning higher returns on Indian debt as compared to US/ Europe
o Will result in strengthening of the underdeveloped bond market in India
Problems due to low FII in Indian Bond Market
o Due to absence of foreign investors, markets are deprived of a large and liquid pool
of savings
o India is also being deprived of an active global trading strategy which can contribute
to the liquidity woes
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13. Impediments to Foreign Investment in Debt Market
FEMA Act and Its Implications
o FEMA Act basically provides guidelines for the regulation of foreign exchange in India.
o One of the primary limitations of the FEMA act is that it permits only authorized person
to deal in foreign security i.e. NRIs and SEBI registered FIIs only.
o The FEMA Act also sets up upper ceiling on the volumes of investments in Govt. and
Corporate Bonds along with some additional restrictions.
Measures taken by Finance Ministry to bring in reforms
o In recent times the Finance Ministry has been increasing the upper ceiling on the FIIs in
the Govt. and Corporate Bonds.
o These reforms not only aim to increase FIIs in India but is also targeted to address the
Current account deficit in India which is running out of control.
o Another key incentive to open up FIIs is the keenness shown by the Foreign pension
funds, sovereign funds etc. to invest in Indian debt market since India debt markets give
returns to the tune of 8% vs. returns of 3% to 5% in other emerging countries.
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14. The Raghuram Rajan Committee Proposal Analysis
The Proposal
o Steadily open up investment in the rupee corporate and government bond markets to
foreign investors after a clear monetary policy framework is in place
o Emphasis on clear monetary policy framework as a precursor
What would foreign investors be interested
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15. The Raghuram Rajan Committee Proposal Analysis
What FII/QFIs really want from Govt.?
o Favorable tax regime for international investors
o A fully functional secondary market
o Transparency and Accountability of Policy Makers
o Blend of Rules based plus Incentive based approaches
o Ability to borrow in Local Currency
o Ability to hedge forex risk
o Consistency in Govt. Policy
o Efficient management of fiscal deficit and CAD
o Stable Inflation
o Industry Friendly Labor Laws
o Smooth Bond Settlement infrastructure
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16. The Raghuram Rajan Committee Proposal Analysis
Competition in FDI Markets
o Competition among Asian Countries for foreign capital
o Countries like Singapore and HK run fiscal surpluses, making them more attractive
o Withholding tax on bond interest income waived off in many countries
o India needs to act fast when demand for Indian market is still lucrative
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17. The Raghuram Rajan Committee Proposal Analysis
What the Opponents of this proposal will say?
o Rupee Appreciation a genuine concern for some sectors (And RBI)
o Funding the rising fiscal deficits is the need of the hour
o Small price to pay for creation of market depth and long term monetary stability
o First Step (Yet Again!) towards capital account convertibility and free float of rupee
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18. Conclusion – In support for Proposal 2
Steps to achieve the full benefit of the committee's proposal
Create the necessary policy infrastructure to make investing in bond markets lucrative
SEBI, RBI and Ministry of Finance need to be in congruence about their goals, locus
standi and degree of latitude
Create infrastructure for a robust derivatives market for debt securities on the lines of
equity markets
Enhance Securitization of debt securities. Provide incentives for private players to
compete with ARCIL
At the government level, ensure adherence to FRBM Act and make future borrowings
more rational. This will instill international investor confidence
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19. THE WORD IS NOT ENOUGH FOR BOND
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20. THANK YOU
AASHISH AGARWAL
PRATEEK BHARGAVA
RAJATH HP
RAMNATH SRINIVASAN
SRINIVASAN RAVISHANKAR
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