corporate debt market

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

TOPIC:- CORPORATE DEBT MARKET

PRESENTED BY:AMIT KR. GUPTAASSAM UNIVERSITY

08/04/2023 [email protected] 2

INTRODUCTION OF DEBT MARKETDebt market refers to the financial market where investors buy and sell debt securities, mostly in the form of bonds. Entire debt segment is generally consists of 2/3 of primary market and 4/5 of secondary market.

The Indian debt market is today one of the largest in Asia and includes securities issued by the Government (Central & State Governments), public sector undertakings, other government bodies, financial institutions, banks and corporates.


DEBT MARKET CAN BE BROADLY CLASSIFIED INTO :-1) Govt. securities market 2) 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.


Primary market for corporate debt:-The corporate sector can raise debt funds either through prospectus or private placement. It is a market wherein debt securities of corporates i.e, debentures, bonds , commercial papers , certificate of deposits, etc . of private &public sectors are issued for the first time.

Corporate debt market can be classified into:-• Primary market • Secondary market


Secondary market for corporate debt:-It is a market where the corporate debt securities of both private sector & public sector undertakings are traded. These securities are traded on Wholesale Debt Segment(WDM) segment of NSE , OTCEI & BSE.


Corporate bonds can be issued in two ways:-Public issueIn public issue, corporations issue bonds to the market as a whole. Institutions as well as retail investors can participate in this issue. The cost of borrowing is little high in case of public issue.

Private placementIn private placement corporate, generally park the bond issuance with few institutions. In India, more than 90% of the corporate bonds are issued through private placement. It is an easiest and cheapest way of borrowing corporate bonds.


Structure of corporate debt market in India The primary market for corporate debt is mainly dominated by private placements (93 per cent of total issuance in 2011-12) as corporates prefer this route to public issues because of operational ease, i.e., minimum disclosures, low cost, tailor made structures and speed of raising funds. Banks/FIs (42.3 per cent of total issuances) followed by finance companies (26.4 per cent) were the major issuers in 2011-12. India lacks a long-term debt market for pure project finance. Corporate bonds issued in India usually carry a rating of AAA indicating lack of interest in bonds of lower rated borrowers in the debt market. Institutional participants, such as, banks, primary dealers, mutual funds, insurance companies, pension funds, corporates, etc. are the major players in this market.


According to SEBI, the total trading volume in the secondary corporate bond market has increased from Rs. 961 bn in FY2008 to Rs. 2,207 bn in FY2010 CAGR of over 50% over the last two years.• SeFY2008 16,547 967FY2009 21,651 1,487Fy2010 20,933 2,207


Resource mobilization by the Corporate Sector

PublicEquity Pub. Pri. Total Res. Share of debt in issues mob total res. mob.

.

1999-00 30 47 547 594 624 95.23

2000-01 25 41 524 566 591 95.80

2001-02 11 53 462 516 526 97.94

2002-03 10 47 484 531 542 98.08

2003-04 178 43 484 528 706 74.75

2004-05 214 41 552 593 807 73.45

2005-06 237 0 818 818 1055 77.56

2006-07 250 0 924 924 1173 78.70

2007-08 522 10 1153 1163 1685 69.01

YEAR


Components of corporate bonds:-Issue Price :- It is the price at which the Corporate Bonds are issued to the investors. Issue price is mostly same as Face Value in case of coupon bearing bond.Face Value :-It is also known as the par value or principal value. Coupon (interest) is calculated on the 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.


Coupon :- It is the cash flow that are offered by a particular security at fixed intervals. The coupon expressed as a percentage of the face value of the security gives the coupon rate.Coupon Frequency :-It means how regularly an issuer pays the coupon to holder. Bonds pay interest monthly, quarterly, semi-annually or annually.Maturity date :-It is a date in the future on which the investor's principal will be repaid.


Call / Put option:- It is an option on which issuer or investor can exercise their rights to redeem the security.Maturity / Redemption Value:-It is the amount paid by issuer other than coupon payment is called redemption value.


Issuers of Corporate Bonds can be broadly classified in following classes:• Bonds issued by Public Sector Units• Bonds issued by Financial Institutions• Bonds issued by Banks• Bonds issued by Corporates


1) 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.

TYPES OF CORPORATE BONDS


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.


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 bond's 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.


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.


Growth of Indian debt market

The growth of corporate bond market in India has been aided by existence

of a well-developed G-sec market which provides a benchmark yield curve

for bond pricing, a well-functioning depository system, credible system of

rating 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, and

implementation of DvP settlement of corporate bond trades have had an

encouraging impact on the market resulting in considerable increase in

issuance as well as secondary market trading of corporate bonds.


Volumes climb to Rs63,782.46 crore in July compared to Rs54,404

crore in June; further upward momentum expected due to

increased FII activity. According to data released by the Securities

and Exchange Board of India (SEBI), corporate bond trading

volumes have climbed 17% at Rs 63,782.46 crore in July 2010

compared to Rs54,404 crore the month before. There were 4,446

combined trades on the National Stock Exchange (NSE), Bombay

Stock Exchange (BSE) and The Fixed Income Money Market and

Derivatives Association of India (FIMMDA) platforms.


Total issuance has increased from `1,747.81 billion in 2008-09 to `2,968.94

billion in 2011-12. Similarly trade volume has increased from `1,481.66

billion in 2008-09 to ` 5,937.83 billion in 2011-12. During the current fiscal

year upto September 2012, the trade volumes have been ` 3261.14 billion.

The share of bonds issued through public issues has increased from 0.86 per

cent in 2008-09 to 7.3 per cent in 2011-12. Out of the four modes of resource

mobilisation namely, IPOs, FPOs, bonds and rights 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 on bonds for resource mobilisation in the

recent period.

22United states China India Japan

Share of corporate bonds in total debt


The problems in India today lie in debt. Banks accounted for 14.4% of the financing of large firms in 2000-01, which went up to 17.8% in 2010-11. The bond market stagnated, with 3.5% in 2000-01 and 3.9% a decade later. Despite considerable interest in bond market development, the corporate bond market accounted for only 3.9% of the sources of funds of large Indian companies. Finally, foreign borrowing rose sharply, from roughly nothing in 2000-01 to 3.2% in 2010-11. To some extent, borrowing abroad has served as a way for Indian firms to overcome the difficulties of obtaining debt financing domestically.


TRENDS OF CORPORATE DEBT MARKET IN 2011

In India the long-term debt market largely consists of government securities. The market for corporate debt papers in India primarily trades in short term instruments such as commercial papers and certificate of deposits issued by Banks and long term instruments such as debentures, bonds, zero coupon bonds, step up bonds etc. In 2011, the outstanding issue size of Government securities (Central and State) was close to Rs. 29 lakh crores (USD 644.31 billion) with a secondary market turnover of around Rs. 53 lakh crores (USD 1.18 trillion). In contrast, the outstanding issue size of corporate bonds was close to Rs. 9 lakh crores (USD 200 billion). Moreover, the turnover in corporate debt in 2011 was roughly Rs. 6 lakh crores (USD 133 billion)


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 1,025


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.


Issues and challenges in Corporate Bond Market

While the measures taken so far have generated the momentum needed to develop the market, the indicators are suggesting that the market is yet to develop to its potential in relation to needs of our macro-economy. The size of the Indian corporate bond market at 11.8 per cent of GDP is lower than the average for Emerging East Asia and for Japan at 17.2 and 19.8 per cent respectively.


• 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;


• 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.


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.


• 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.


• 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.


• 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.


The criticality of corporate bond market in the economy as it allocates resources efficiently and enables long-term resource raising to sectors, such as, infrastructure. A vibrant corporate bond market provides an alternative to conventional bank finances and also mitigates the vulnerability of foreign currency sources of funds. From the perspective of financial stability, there is a need to strengthen the corporate bond market. Limited investor base, limited number of issuers and preference for bank finance over bond finance are some of the other obstacles faced in development of a deep and liquid corporate bond market. Some of the issues and challenges faced by this market and the approach to be adopted to address them in order to enable the market to reach its potential.

CONCLUSION


• www.rbi.org.in/scripts/BS_ViewBulletinaspx?Id=1374 4retrieved on 22/11/12 at 10:43

BIBLIOGRAPHY

SOURCE:INTERNET:

• www.nseindia.com/us/ismr2011ch5.pdf, 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.


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