The document discusses recent changes in the Indian bond market that are expected to positively impact its growth. It outlines three key changes: 1) Mandating the use of an electronic book building mechanism for large bond issuances, improving transparency. 2) Allowing listed unsecured corporate bonds, expanding funding options. 3) Draft rules permitting foreign investors to invest in corporate bonds and securitized debt. Collectively, these regulatory changes aim to streamline the market and facilitate its further development.

1. Several changes in and around the Indian
bond market
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July 1, 2016
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2. Several changes in and around the Indian bond market
Article
Background
The regulators in India seems to be in good mood as they continue to make changes to
streamline the regulatory regime surrounding the Indian bond market. Lately, there has
been a number of changes which is likely to cause a positive impact in the market, which
otherwise has been performing well during the last one year.
In this write up, we intend to discuss about the various changes and analyse its probable
impact on the Indian corporate bond market.
Review of the performance of the Indian bond market
Before we start analyzing the changes, let us first have a recap of the state of the corporate
bond market in India.
The corporate bond market reached an all-time high with fresh issuances worth Rs. 42382
crores in 2013-14, which grew from Rs. 16982 crores from the previous year. This glory
was however very short-lived as the very next year witnessed a sharp decline. The total
volume dropped down to a meagre Rs. 9713 crores in 2014-15. This decline was however
owing to the several restrictions imposed through under the Companies Act, 2013, which
came into effect from 1st April, 2014. The market, however, was again back in track in the
2015-16 almost 2.5 times.
The current financial year has witnessed a very slow start with only Rs. 1900 crores being
raised in the first two months. But, now with the changes in place, which we are just about
discuss, a decent performance can be expected from the market.
The figure below would illustrate the performance of the Indian bond market better.

3. Several changes in and around the Indian bond market
Article
Various changes that are likely to cause an impact
There are three changes, of which two have already come and one is expected to come, that
we are bullish about, first, issue of debt securities through electronic book building
mechanism, second, changes in the deposit rules for the companies to allow issuance of
listed unsecured corporate bonds and third, RBI’s draft notification to allow FPIs to invest
in corporate bonds.
Let us discuss each of the above separately.
Issue of debt securities through electronic book mechanism
Securities and Exchange Board of India (SEBI) vide circular CIR/IMD/DF1/48/2016 dated
on April 21, 2016 had provided a mandatory framework for issue of debt securities by
private placement with an issue size excess of Rs. 500 crores through an electronic book
mechanism (EBM). One such requirement of the circular stated that EBM shall be provided
by the recognized stock exchanges after approval from SEBI. Accordingly, SEBI has granted
its approval to NSE and BSE to act as EBP. By this, all the issuers of debt securities and
market participants shall mandatorily make such private placement offer only through the
EBM for their issuances with effect from July 01, 2016.
The old mechanism through which debt securities were issued on private placement basis
in primary market lacked transparency. However, the EBM will enable efficient price
discovery, reduction in times and cost, transparency among other things.
9451.17
35610.71
16982.05
42382.97
9713.43
33811.92
1899.38
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
ISSUANCE OF CORPORATE BONDS IN INDIA
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Figures in INR Crores

4. Several changes in and around the Indian bond market
Article
Changes in the Deposit Rules
Until recently, the Companies (Acceptance of Deposits) Rules, 2014 barred the corporates
from issuing unsecured debt instruments. However, the Ministry of Corporate Affairs
(‘MCA’) vide notification dated June 29, 2016 issued the Companies (Acceptance of
Deposits) Amendment Rules, 2016 (‘Amendment Rules) thereby providing relaxation with
respect to issuance of corporate bonds.
The Amendment Rules has addressed this issue by excluding listed unsecured NCDs from
the definition of deposits. Earlier, corporates, other than financial entities, were allowed to
issue either secured bonds or bonds compulsorily convertible into equity within a period of
5 years from the date of issuance, anything apart from the said were treated as deposits.
There is however a disconnect with the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 (‘Listing Regulations, 2015’) which requires the
maintenance of 100% asset cover for discharging the principal amount at all the times,
except in case of unsecured debt securities issued by regulated financial sector entities
eligible for meeting capital requirements as specified by respective regulators. Therefore,
unless necessary changes are made in the Listing Regulations, 2015, the non-financial
entities will not be able to take the benefit of this change.
The situation, however, will not be any different for the financial entities, since, they were
allowed issue unsecured bonds in accordance with the directives issued by their regulators.
The guidelines framed by RBI allow the NBFCs to issue unsecured NCDs with a maturity of
more than 1 year and with the minimum subscription amount being Rs. 1 crore per
investor and this is why the bond market in India has been mainly dominated by the NBFCs
during the last few years and the same can be viewed in the figure below.

5. Several changes in and around the Indian bond market
Article
* Figures include issuances by PSUs as well. The volume of issuances by PSUs have been
presented in a tabular form below:
2011-12 2012-13 2013-14 2014-15 2015-16
Volume (In INR Crores) 17648.72 4846.17 19964.29 0 25866
In many of the developed countries bonds are issued without creation of security interest,
subject to certain compliances, so as to enable easy of raising of funds by the corporates.
Most corporates, other than NBFCs, do not have assets to create charge in favour of bond/
debenture holders, as the assets are already charged in favour of banks. It is counter
intuitive to expect a corporate to issue secured bonds; if the corporate had security to offer,
it may be easier to access bank loans. It is when companies exhaust their security interests
that they opt for bonds. Bonds are an incremental, additional source of funding, and not the
first source of borrowing for most companies.
Investments by Foreign Portfolio Investors (FPIs)
Another significant change that is all set to come is that the foreign portfolio investors will
now be allowed to make investments in unsecured corporate bonds and securitized debt
instruments. RBI issued a draft circular on 17th June, 2016 laying down new norms for FPI
investments. The draft circular states that the FPIs will now be able to invest in primary
issues of NCDs or bonds by public companies issued in demat form. However, the funds so
raised cannot be invested for real estate activities, purchase of land, investing in capital
markets or on-lending to other entities.
Once put to effect, this circular can turnout to be a huge boost for the Indian capital
markets.
17925.99
12041.24
22451.14
9601.73
10395.92
17648.72
4940.81
20329.76
111.7
25866
0
5000
10000
15000
20000
25000
30000
2011-12 2012-13 2013-14 2014-15 2015-16
BOND ISSUANCE BY FINANCIAL AND NON FINANCIAL ENTITIES
Financial entities Non financial entities*
Figures in INR Crores

6. Several changes in and around the Indian bond market
Article
Conclusion
Each of the changes that we discussed in this article has come from different regulators and
all of them facilitate is likely to facilitate the growth of the Indian capital markets. There
seems to be a string driving force from the government which is actually pushing all the
regulators towards to common goal, which ofcourse, is highly favourable for the Indian
economy. This entire episode can be summed to say that the heydays of the Indian capital
market are soon to come!!
Other resources on the subject:
1. Our resources on bond markets: Click here
2. Our resources on SEBI regulations: Click here
3. Our resources on Companies Act, 2013: Click here
4. Our resources on foreign investments: Click here