NAMRATA SAHU 4TH SEM PROJECT

APROJECT REPORT

“ A Study on Indian Debt Market”

Submitted under partial fulfillment of two year full time Master Degree in Business Administration (MBA)

By

NAMRATA SAHU

Guided by

RANPREET KAUR

ThroughTHE DIRECTOR

BHARATI VIDYAPEETH DEEMEED UNIVERSITY,INSTITUTE OF MANAGEMENT AND ENTREPRENEURSHIP

DEVELOPMENT, PUNE2009-2011

1

DECLARATION

This is to declare that the study presented by me to Bharati Vidyapeeth University I.M.E.D in part completion of the degree of Masters in Business Administration under the title “Indian Debt Market” had been done under the guidance of Mam RANPREET KAUR

Namrata Sahu

4

BHARTI VIDYAPEETH UNIVERSITY, PUNE

INSTITUTE OF MANAGEMENT AND ENTREPRENUERSHIP DEVELOPMENT, PAUD ROAD, ERANDWANE

PUNE-38

CERTIFICATE OF COMPLETION

This is to certify that Miss. NAMRATA SAHU is a bonafide student of MBA program of the university in this institute for the year 2009-11. As a part of the University curriculum, the student has completed the summer internship report report titled “STUDY OF INDIAN DEBT MARKET”. The project report is prepared by the student under the guidance of Mam RANPREET KAUR. .

(Teacher Guide) Program Co-ordinator Director

Date:Place:

ACKNOWLEDGMENT

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It gives me immense pleasure to acknowledge the opportunity provided by Bharati Vidyapeeth University I.M.E.D. Pune for giving me an opportunity to undertake the project with Finance practices on this project titled, “Indian Debt Market”.

I acknowledge the support, the encouragement, extended for this study by Director

Dr. Nitin Nayak and project coordinator Mam Ranpreet Kaur

I would also like to thank my course coordinator who has been generous with their time, advice and support during the entire course of the project .The successful completion of this project is a result of their guidance and the timely inputs I have received from various other members of all the departments at Bharati Vidyapeeth University I.M.E.D. Pune.

I would also like to express my gratitude towards for his encouragement and guidance throughout this project.

Namrata SahuMBA FinanceBVU I.M.E.D Pune

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TABLE OF CONTENTS PAGE NO.

Executive Summary …………………………………… 9-10

Chapter 1: Introduction ………………………………….11-13

Chapter 2: History of Indian Debt Market ………………14-17

Chapter 3: Indian Debt Market …………………………18-20

Chapter 4: Research Design …………………………….21-22

Objective of the study

Materials & Methods

Chapter 5: Debt Instruments of India……………………23-29

Treasury Bills ………………………………………….

Non –SLR Bonds……………………………………….

Public Sector Undertaking Bonds……………………

Corporate Bonds……………………………………….

Inter-Corporate Deposits of India………………….

Government Securities of India……………………….

Certificate of Deposits of India……………………….

Chapter 6: Bond Market of India……………………………30-36

Chapter 7: Trade Mechanism of Debt Market………………37-45

Wholesale Debt Market……………………………………..

Retail Debt Market…………………………………………….

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Chapter 8: Analysis ……………………………………46-54

A. Frequency……………………………………………….

B. Cross

Tabs………………………………………………...

C. Factor Analysis…………………………………………..

Chapter 9: Recent Development of Indian Debt Market……….55-57

Chapter 10: Findings, Recommendations & Conclusions…………

58-64

BIBLIOGRAPHY 65

Annexure:

Annexure I-Questionnaire

EXECUTIVE SUMMARY:

8

Within any country’s capital market, it is essential that there exists

a well –developed bond market with a sizeable corporate bond

segment alongside the banking system, so that the market

mechanism ensures that funds flow in accordance with the

productivity of individual investments and the market exerts a

competitive pressure on commercial banks lending to private

business and helps improve the efficiency of the entire capital

market .Further ,the debt market must emerge as a stable source of

finance to business when the equity market are

volatile .Moreover ,for business investments debt capital is

generally considered to be more suitable for large-scale ,long term

financing of fixed assets and investments ,whereas bank loans are

thought to be more appropriate for financing short term

investments in working capital ,inventories and other current

assets.

However, although debt financing may be an efficient means, most

countries do not have a well developed corporate bond market .As

a matter of fact they do not have corporate bond markets

comparable in efficiency with their equity markets, as the

secondary market for corporate debt is mostly Over-the Counter

9

(and/or telephonic), rather than exchange traded, and it is

extensively dominated by a few institutional investors and

professional money managers. The market for non –sovereign debt

(particularly, the corporate debt segment) in India also has a

number of shortcomings: a primary market structure where private

placements, sans mandatory credit ratings, dominate in an

overwhelming manner, lack of transparent market making, and a

tendency on the part of institutional investors to hold securities to

maturity .The secondary market is thus prone to suffer from low

liquidity and fragmentation and the consequent pricing anomalies.

In this paper, I had made an attempt to understand the current

scenario of Indian corporate debt market by primary and secondary

research both. I had also understand the significance of corporate

debt market and as well as its shortcomings and measures to

overcome the same.I had also observe the recent developments that

have taken place in the Indian corporate debt market to improve

lomg-term as well a short-term financing that would enhance the

economic and liquidity condition of the country.

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CHAPTER 1: INTRODUCTION

The role of a healthy corporate debt market as a channel that links

society’s savings into investment opportunities is of vital

importance for several reasons.

For the issuer it provides low cost funds by bypassing the

intermediary role of a bank. Although corporations have to go

through intermediaries like brokers, underwriters in the debt

market too, the intense competition amongst them pushes down

intermediation cost. Presence of bond funds gives the corporations

an alternative means of raising debt capital and thus ameliorates

any potential adverse effect that a bank credit crunch may have on

the economy.

For the investor, there exists a yield premium opportunities in

comparison to traditional deposits at banking institutions. It also

increases the investment opportunities in different type of

instruments and tailors risk reward profile according to his/her

preferences.

The basic philosophy of developing a diversified financial system

with bans and non-bans operating in equity market and debt market

11

is that it enhances risk pooling and risk sharing opportunities for

investors and borrowers.

The importance of a well-developed bond market is very well

summarized in the following words “coexistence of domestic bond

market and banking system helps each to act as a backstop for

other. In a relatively open economy since non-bank intermediation

may get located outside the country. The domestic bond market

helps in avoiding double mismatches of currency and maturity.

Generally a domestic capital market has several segments – Viz.,

commercial banks, the equity market, non-bank financial

institutions and the bond market. What should be the nature of

composition of the capital market for a given economy is largely a

policy matter, although policies alone cannot determine the

compositional structure of the market. In most countries the debt

market segment of the capital market developers later, as the

financial sector becomes mature. In fact, although debt financing

may be an efficient means, most countries do not have a well

developed corporate bond market. For most developing countries,

where dependence on ban loans is substantial, corporate bond

markets are small, marginal and heterogeneous in comparison with

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corporate bond markets in developed countries. The only country

that has a vibrant bond market is the United States. Company

financing from bonds for non-financial corporations in the USA is

about 50 percent.

Many researchers have discussed the issue of corporate bond

market development in the Asian Countries (Particularly in

Southeast Asian in the Post-Asian Crisis period) and noted the

relatively small size of the corporate bond market and its sluggish

growth in these countries. The main reason put forward by them is

the peculiarity of the financing patterns of business firms in most

of these countries. The main reason put forward by them is the

peculiarities of the financing patterns of business firms in most of

these countries. To be specific, it is pointed out that family based

corporations/ business conglomerates in Thailand, Malaysia and

Indonesia tender to prefer a combination of internal earnings and

ban borrowing to bond issuance for financing their fixed capital

investments primarily due to their close and interlocking links with

bans and the governments. Thus, it is the institutional setting that

works against the development of a well functioning corporate

bond market in thee countries.

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CHAPTER 2: HISTORY OF INDIAN DEBT MARET

The debt market in India is of some substantial size and some age.

The Government Securities came into existence in the year 1859

when British government too over the East India Company. There

was active participation by the government in the debt market both

before and after independence.

The Indian debt market has traditionally been a wholesome market

with participants restricted to few institutional players-mainly bans.

The bans were the major participants in the government securities

market due to statutory requirements. The turnover in debt market

too was quite low at a few hundred crores till early 1990s.

The debt market was fairly underdeveloped due to the

administrated interest rate regime and the availability of

investments avenues which gave a higher rate of return to

investors.

Corporate bonds or the debentures were being issued by the good

rating companies in the both pre and post war years. There was

decline in Corporate Bonds in the years of sixties and seventies.

The term lending institutions can=me into the market, who

14

supplied the medium and long term funding requirements to the

Private Sector. Earlier the needs of Private Sector of long term

funding were met by the State.

The Corporate bond market started reviving in 1980 and now we

see a fairly, well-segmented debt market in India.

The debt market comprises of:

Government Securities (G-Sec)

Corporate Bonds.

PSU Bonds.

Company Deposits.

In the early 1990s, the government needed a large amount of

money for investment in development and infrastructure projects.

The government realized a need of a vibrant, efficient, and healthy

debt market and undertook reform measures. The Reserve Bank

put in substantial effort to develop the government securities

market but its two segments, the private corporate debt market and

the public sector undertaking bond market, have not yet fully

developed in terms of volume and liquidity.

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It is the debt market which can provide returns commensurate to

the risk, a variety of instruments to match the risk and liquidity

preference of investors, greater safety, and lower volatility. Hence,

the debt market has a lot of potential for growth in the future.

The debt market is critical to the development of developing

country lie India which requires a large amount of capital for

achieving industrial and infrastructure growth.

The Reserve Bank of India regulates the government securities

market and money market while the corporate debt market comes

under the purview of the Securities Exchange and Board on India

(SEBI).

In order to promote an orderly development of the market, the

government issued a notification on March2, 2000, delineating the

areas of the responsibility between the Reserve Bank and SEBI.

The contracts for sale and purchase of government securities, gold

related securities, money market securities derived from these

16

securities, and ready forward contracts in debt market securities

shall be regulated by the Reserve Bank.

The Retail Debt Market in India is been created by the joint efforts

of the Exchange and the market participants and guidelines by

SEBI, RBI, and the government f India.

The Honorable Union Finance Minister accepted the

recommendations of High Level Committee of Corporate Bonds

and Securitization, while presenting the Union Budget for 2006-

2007. He announced the policy about the creation of a single,

unified exchange traded market for corporate bonds. An internal

committee under the chairmanship of SEBI whole Time Member

Dr. T C Nair was constituted to draw a plan for implementation of

a Unified Exchange Traded Corporate Bond Market in India.

On July2, 2007 SEBI permitted BSE to launch a trade matching

platform in OTC market. The other initiatives taken by SEBI like

rationalization of stamp duty, simplification of Debt listing

arrangement and introduction of Repos on Corporate Bonds.

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CHAPTER 3: THE INDIAN DEBT MARET

The debt market plays a crucial role for growing economy. The

debt market is more popular than the equity market in the rest of

the world. In India the reverse has been true. This has been due to

the dominance of government securities. The debt market of India

is a market for the issuance, trading and settlement in fixed income

securities. The fixed income securities include, the central and state

governments, public bodies, statutory corporations, banks and

institutions and corporate bodies.

Indian firms are still seeking ban finance as the path to fulfill the

funding requirements. While, the secondary market activities in

corporate bonds have not picked up till date. Efforts of Securities

Exchange Board of India (SEBI) and the stock exchanges to bring

the trading to electronic stock exchange platforms have not yielded

desired results.

On the flip side, the government securities market has grown

exponentially during last decade. This is mainly down to the many

structural changes introduced by the Government ad Reserve Ban

of India to improve transparency in the market dealings, method of

18

primary auctions, deepening the market with new market

participants like primary Dealers, borrowings at market determined

rates, and creating technology platforms lie NDS to recognize the

institutional characteristics of the market. The same kind of

impetus has been lacking in the corporate bond markets in India

and as a result this major source of corporate funding is all but non-

existent.

The Indian debt market in India comprises broadly of two

segments, Government Securities Market and Corporate Debt

Market. The Corporate Debt Market is further classified as markets

for PSU Bonds and Private Sector Bonds.

It is necessary to understand microstructure of any market to

identify processes, products and issues governing its structure ad

development. A schematic presentation illustrated below gives a

bird’s eye view of Indian debt market structure showing micro-

structure of India corporate debt market so that the issues are

placed in a proper perspective.

The government securities (G-sec) market is the largest and the

oldest debt instrument in the terms of market capitalization, trading

volumes and outstanding securities. The Government Securities

19

plays a vital role in the debt market, as it used to determine the

level of interest rate in the country though the yields on the

government securities.

The yields on government securities are also known as risk free

rate of return in an economy.

The PSU bonds were generally treated as surrogates of sovereign

paper, sometimes due to explicit guarantee of government, and

often due to the comfort of government ownership. The perception

and the reality are two different aspects. The listed PSU are traded

on the Whole sale Debt market of NSE.

The Corporate Bond Market, in the sense of private corporate

sector raising debt through public issuance in capital market, is

only insignificant part of the Indian Debt Market. A large part of

the issuance in the non-government debt market is currently on

private placement basis.

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CHAPTER 4: RESEARCH DESIGNOBJECTIVES OF THE

STUDY

There are several empirical / theoretical studies conducted out to

bring out developments and status of Indian Debt Market and to

make suggestions to convert it into vibrant market. This report has

some of the following objectives:

To identify the gap or deficiency in the Indian Debt Market.

To identify why individuals not investing in Debt Market.

Review market related development of debt market for the

past years in India.

Make suggestions/recommendations to develop Indian

Corporate Debt Market s one of the most efficient market

places.

States recent development in the Indian Corporate Debt

Market and its impact on the market.

MATERIAL AND METHODS

Both primary research and secondary research has been used in this

study. The primary research has been conducted on 100

respondents i.e. sample size is 100.

The secondary research is used in this study are:

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1. Research from various books, journals, magazines, internet etc.

2. Interaction with people in the industry.

3. Interaction with faculty members.

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CHAPTER 5: DEBT INSTRUMENTS ON INDIA

Debt instruments are obligations of issuer in terms of interest and

principal, which the issuer would pay to the legal owner of the

instrument. It is also term as tradable form of loans.

Debt instruments are of various types like Debentures Securities,

Bonds, Commercial papers, Certificate of Deposit, T-Bills, etc. The

Reserve Ban of India has permitted primary dealers, Bans and

Financial Institutions in India to do transactions in debt instruments.

It provides fixed return declared as coupon rate.

Retail Investors have a preference over fixed income securities

because of fixed income returns and especially in the current

situation of increasing volatility in the financial markets. Now, retail

investors also shows keen interest particularly in the Government

Securities. An individual investor, mainly invest in Government

Securities because of zero default risk and lower volatility.

The distinguishing factors of the Debt Instruments are as follow :

Coupon bearing / Discounted.

Issue class.

Repayment Terms.

Interest Terms.

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Security / Collateral / Guarantee

TREASURY BILLS

Treasury bills are borrowing instruments of Government of India

which is short term in nature (up to one year). It enables investors to

park their short term surplus funds by reducing their market risk.

TYPES OF TREASURY BILLS :

RBI issues T-bills for three different maturities.

91 days Treasury Bills, issued on weekly auction basis.

182 days Treasury Bills, auction is held on Wednesday

preceding non-reporting Friday.

364 days Treasury Bills, auction on Wednesday preceding the

reporting Friday.

ADVANTAGES OF INVESTING IN TREASURY BILLS:

No Tax deducted at source (TDS)

Zero default risk

Liquid money Market Instrument.

Active in secondary market therefore, enabling holder to

meet immediate fund requirement.

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NON-SLR BONDS:

Reserve Bank of India has specified the securities having SLR

status which are eligible securities for investment by banks to

meet their SLR commitments under Sec 24 (2-A) of the B R Act

1949. The Investment in Non-SLR bonds are not eligible for SLR

requirement.

It Includes:

PSU bonds.

Corporate Bonds.

Government securities like OIL Bonds, Food Bonds, Fertilizer

Bonds etc.

PUBLIC SECTOR UNDERTAKING BONDS (PSUs)

The PSU Bonds are issued by Public Undertakings (PSUs), which is

of medium or long term debt instruments.

These bonds are mainly issued by the central PSUs (i.e. PSUs

funded by and under the administrative control of the Government of

India). Mostly, these PSU Bonds are sold to the targeted investors on

Private Placement Basis at market determined interest rates. These

Bonds are issued in Demat form and may carry call / put option.

25

These bonds are rated by rating agencies lie CRISIL, ICRA, CARE

etc. in order to attract the investors and increase liquidity.

CORPORATE BOND :

Corporate Bonds are issued by public sector undertakings and

private corporations, which is of long term in nature (up to 15 years).

Therefore, some companies and ban has also issued these Bonds lie

Reliance have issued Perpetual Bonds.

As compared to government bonds, corporate binds have a higher

risk of default. This risk depends up on the particular corporation

issuing the Bonds, its rating, the current market conditions and the

sector in which the Company is operating. The holders are

compensated for this risk by receiving a higher yield than the

government bonds.

The corporate Bonds carry both call / put option. The Bonds

carrying call option allows the issuer to redeem the debt before it

maturity date and the Bonds carrying put option also benefits the

investor. Some of these bonds known as convertible bonds, allows

investors to convert the bond into equity.

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INTER – CORPORATE DPOSITS INDIA:

Corporate can also participate in another market called “ Inter

Corporate Deposits’ also non as (ICD) Market.

An ICD is an unsecured loan extended by one corporate to another.

The market allows corporate with surplus funds to lend to other

corporate. Also the better – rated corporate scan lend in this market

by borrowing from the banking system. The CDs has much higher

return than that for a ban. These are unsecured instrument. The risk

inherent is high and the risk premium is also built into the rates.

RBI permits Primary Dealers to accept Inter – Corporate

Deposits up to fifty percent of their Net Worth and that also for a

period of not less than 7 days. Primary Dealers cannot lend in the

ICD market.

GOVERNMENT SECURITIES OF INDIA:

Government Securities are issued by Government for the purpose of

raising a public loan or as notified by Government in the Official

Gazette. The Government Securities are issued by RBI on behalf of

the Government of India as interest bearing securities. GOI uses

these funds to meet its expenditure commitments. These securities

27

have fixed coupon rate carrying semi-annual interest payments, fixed

maturity and are subject to market risk.

The prices of GOI tend to fall when interest rate rises and tend to

rise when interest falls. Thus, investing in GOI instruments not only

gives the investor higher returns but also an opportunity to sell these

securities at a profit when interest rates decline.

The attraction for investments in GOI is that they carry the Zero

Default risk or sovereign risk. Hence, enjoy the greatest amount of

security possible. The returns earned on the government securities

are referred to as the risk free return in financial markets. The risk

free rates are often used to price the other Non-Government

Securities in the financial markets.

The Advantages of GOI are:

The lower volatility and greater safety, as compared to other

debt instruments.

Transparency in transactions and settlement procedures

through CDSL/NSDL.

In case of borrowings against GOI, higher leverage is

available.

No TDS charge on interest payments.

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Scope of greater diversification.

CERTIFICATE OF DEPOSIT INDIA:

Certificate of Deposit India are negotiable money market instrument

issued by bans, which is of short term in nature. The maturity of

Certificate of Deposits may be less than 7 days and not more than 1

year. It is issued in demat form or as a Usance Promissory Notes.

Financial Institutions are allowed to issue CDs for a period between

1 year and up to 3 years.

CDs are freely negotiable instrument and are often referred to as

Negotiable Certificates of Deposit. CDs normally give a higher

return than Ban term deposit. CDs are rated by approved rating

agencies (e.g. CARE, ICRA, CRISIL and FITCH) depending up on

demand.

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CHAPTER 6 : BONDS MARKET OF INDIA

A Bond is simply a loan, but in the form of security. A

company needs funds to expand into new markets, while

governments need money for everything from infrastructure to social

programs. The problem with large organization run into is that thy

typically need far more money than the average ban can provide.

The solution is to rise money by issuing bonds (or debt instruments)

to a public market. The organization that sells a bond is known as

the issuer.

Bond is a debt instrument traded in the debt market. When we

purchase a bond from the issuer, we are lending money to a

corporation, government, municipality federal agency or other entity

as the issuer. In return the issuer promises to pay the face value of

the bond (the principal) when it matures and also the interest at

specified rate during the life of the period.

Bonds are issued by public authorities, credit institutions, companies

and supranational institutions in the primary market. The most

common process of issuing bonds is through underwriting. In

underwriting, one or more securities firms or banks, forming a

syndicate, buy an entire issue of bonds from an issuer and re-sale

30

them to investors. Government bonds are typically auctioned. The

issuer of a bond must pay the interest payments, which are made at a

predetermined rate and schedule. The interest rate is often referred to

as the coupon and the date on which the issuer has to repay the

amount borrowed (known as face value) is called the maturity date.

Bonds are known as fixed income securities because we know the

exact amount of principal we will get back if we hold the security

toll the maturity.

There are different types of Bonds traded in the market. An

individual can choose from are:

U S government securities.

Municipal Bonds.

Corporate bonds.

Mortgage.

Asset – backed securities.

Federal agency securities.

Foreign government bonds.

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MUNICIPAL SECURITIES MARKET;

Municipal securities are debt obligations issued by cities, countries,

states and other governmental entities to raise money to build

hospitals, highways, schools and sewer systems, as well as many

other projects fore the public good. The US state and local

government borrow money as Municipal Securities to finance their

capital investments and cash flow needs. On Municipal securities to

finance their capital investment and cash flow needs. On Municipal

securities there is the exemption of interest from federal income

taxes. The federal government provides the implicit subsidy that

permits the municipal issuer to compete effectively for capital in the

domestic securities market. There is currently is excess of $ 1.8

trillion in outstanding municipal debt. It comprise approximately

50,000 issuers.

TREASURY SECURITIES MARKET:

The US Treasury securities market is the most liquid and the largest in

the world. There is currently $ 3.1 trillion in outstanding marketable

Treasury debt.

32

The U.S. Treasury Securities are of three types:

Bills, maturity of less than 1 year.

Notes, maturity of 2 to 10 years.

Bonds, maturity of more than 10 years.

FEDERAL AGENCY SECURITIES MARKET:

The congress created Federal agency debt which is issued by various

government sponsored enterprises (GSEs) to fund loans to borrowers

such as homeowners, farmers and students. Through GSEs, the

government addressed various public policy concerns about the

ability of members of these groups to borrow sufficient funds at

affordable rates. Mostly, GSEs rely on debt financing for their day-

to-day basis.

CORPORATE BOND MARKET:

The Corporations lie financial, Industrial and service related

industries issued various types of Corporate debt for capital and cash

flow purposes. There is currently $ 4.0 trillion in outstanding

corporate debt.

MONEY MARKET INSTRUMENTS :

Money Market instruments are of short-term.

33

It Includes:

Bankers acceptances which are typically used to finance

international transactions in goods and services and

currently represent an estimated $ 5.2 billion.

Certificates of deposit are large denomination negotiable

time deposit issued by commercial banks and currently

represent an estimated $ 1.2 trillion.

Commercial Paper are issued by both financial and non-

financial corporations. It is of short-term in nature. It

currently represent as estimated of $ 1.3 trillion.

MORTGAGES SECURITIES MARKET:

Mortgages securities are made by financial institutions. It

represents an ownership interest in mortgage loans to finance

the borrower’s purchase of a home or other real estate.

Mortgage securities are created by issuers or services when

these loans are packaged or “pooled” for sale to investors. The

mortgage loans are paid off by the homeowners, the investors

receive payments of interest and principal. The US

Government, the Government national Mortgages Association

(Ginny Mae) or Government, the – sponsored enterprises such

34

as the Federal National Mortgage Association (Fannie Mae)

and the Federal Home Loan Mortgage Corporation (Freddie

Mac) issued or guaranteed most of the mortgage securities.

The various types of mortgage loans and mortgage pools are

packaged by some private institutions, such as subsidiaries if

investment bans, financial institutions and home builders. The

securities are issued and / or guaranteed by Ginny Mac, Fannie

Mac, or Freddie Mac and these securities are known as ‘

Private - label” mortgage securities, in contrast to “agency’

mortgage securities. There is currently $ 4.40 trillion in

outstanding agency mortgage securities and an additional $

584 billion in outstanding private lable mortgage securities

debt.

ASSET BACKED SECURITIES:

Asset – Backed securities (ABS) are certificates which

represent an interest in a pool of assets such as credit card

receivables, auto loans and leases or home equity loans. The

interest and principal payments of Asset–Backed securities are

passed through investors, typically institutional, who invest in

35

highly rated, short-term liquid assets. There is currently

approximately $ 1.5 trillion in outstanding debt.

36

CHAPTER 7: TRADING MECHANISM OF THE DEBT

MARKET

WHOLESALE DEBT MARKET:

The wholesale Debt Market segment deals in fixed income securities

and is fast gaining importance in an environment that has high focus

on equities.

The Wholesale Debt Market (WDM) segment of the Exchange

began its operation from June ’30, 1994. This provides the first

formal screen-based trading facility for the debt market in the

country.

The segment provides trading facilities for a variety of debt

instrument including Government Securities, Treasury bills and

Bonds issued by the Public Sector Undertakings of Corporate or

banks like Floating Rate Bonds, Zero Coupon Bonds, Commercial

Papers, Certificate of Deposits, Corporate Debentures, State

Government loans, SLR and Non-SLR Bonds issued by Financial

Institutions, Units if Mutual Funds and Securitized debt by bans,

financial institutions, corporate bodies, trusts and others.

37

TRADING SYSTEM :

The fully computerized, on-line trading system used in the WDM

segment of the exchange has changed the entire perception of how

trading is perceived in the Indian Securities Market. Besides, the fact

that the system helped increase in trading velocities and cut time

frames, it has also managed to incorporate the critical aspect of

security in its functioning.

The trading system also provides complete on-line market

information through various inquiry facilities, Detailed information

on the total order depth in a security, the best buys and sells

available in the ma market, the quantity traded in that security, the

high the low and the last traded prices are available through the

various market screens at all points of time.

BROKERAGE RATES:

The exchange has specified the maximum rates of brokerage chargeable by trading

members in relation to trades done in securities available on the WDM segment of the

Exchange.

Govt. of India Securities and T-Bills:

Order value up to Rs. 10 million 25 ps. Per Rs. 100

More than 10 million up to 50 million 15 p.s. Per Rs. 100

38


More than 100 million 05 p.s. Per Rs. 100

State Govt. Securities and Institutional Bonds:

Order value up to Rs. 2.5 million 50 ps. Per Rs. 100

More than 2.5 million up to 5 million 30 p.s. Per Rs. 100





PSU & Floating Rate Bonds

MARKET TIMINGS:

Trading in the WDM segment is open on all days except Saturdays,

Sundays and other holidays, as specified by the Exchange. The

market timings are given below:

Trading Days Same Day Settlement Other Day Settlement

Monday to Friday 10:00 a.m to 3:00 p.m 10:00 a.m to 5:45 p.m

Trading on WDM segment is divided in to three phases as specified

under:

39

Pre – Open.

Market-Open

SURCON.

PRE-OPEN MARET PHASE:

The Pre-open period commences from 9.00 am this period allows the

trading members participants to:

Set up counter party exposure limits.

Set up Market Watch (the security descriptor)

Make inquiries.

MARKET OPEN PHASE:

The system allows for inquiries f the following activities when the

market is open for trading:

Order Entry

Order Modification

Order Cancellation

Negotiated Entry

Trade Cancellation

Setting u counter party exposure limits.

POST MARKET PHASE (ALSO CALLED SURCON):

40

During the period of SURCON a trading member gets only inquiry

access with a facility to request for trade cancellation. On

completion of SURCON the trading system processes data and gets

the system ready for the next day.

LISTING:

All Government securities and Treasury Bills are deemed to be listed

automatically as and when they are issued. Other securities can be

issued publicly or placed privately. And can be listed or admitted for

trading, if eligible as per rules of the Exchange.

RETAIL DEBT MARET:

To encourage wider participation of all classes to investor across the

country (including retail investors) in government securities, the

Government RBI and SEBI have introduced trading in government

securities for retail investors. Trading in this retail debt market

segment (RDM) on NSE was introduced on january16, 2003, trading

takes place in the existing Capital Market of the Exchange.

In the first phase, all outstanding and newly issued central

government securities were traded in the retail segment. Other

securities lie state government securities, T-Bills etc. would be

added in subsequent phases.

41

TRADING MECHANISM:

Trading in the retail debt market take place in the same manner in

which the trading takes place in the equities (capital market)

segment. The retail debt market facility on the NEAT system of

capital market segment is used for entering transactions in RDM

session.

Member eligible for trading in RDM segment.

Market Timings and Market Holdings.

Trading Parameters.

Trading System.

Trading Cycle.

MEMBERS ELIGIBLE FOR TRADING IN RDM SEGMENT:

Subject to fulfillment of the capital adequacy norms Trading

Members who are registered members of NSE in the capital market

segment and wholesale Debt Market segment are allowed to trade in

the Retail Debt Market (RDM)

MARKET TIMINGS AND MARKET HOLIDAYS:

42

Trading in RDM segment takes place on all days of wee, except

Saturday and Sunday and holidays declared by the Exchange in

advance (The holidays on the RDM segment shall be the same as

those on equities segment).

The Market Timings of the RDM segment are the same as Equities

segment, Viz.

Normal Market Open: 09:55 hours.

Normal Market Close: 15:30 hours.

TRADING PARAMETERS:

The trading parameters for RDM segment areas are below:

Face Value Rs. 100

Permitted Lot Size 10

Tick Size Rs. 0.01

Operating Range +/- 5%

Market Type Indicator D(RETDEBT)

Book Type RD

TRADING SYSTEM:Trading in RDM takes place on the “National

Exchange for Automated Trading (NEAT)’ system, a fully

automated screen based trading system, which adopts the principle

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of an order driven market. The RETDEBT Market facility on the

NEAT system of capital Market segment is used for entering

transactions in RDM session.

TRADING CYCLE:

Trading in the Retail Debt Market segment is permitted under the

Rolling Settlement, where in each trading day is considered as a

trading period and trades executed during the day are settled based

on the net obligations of the day.

Settlement is on a T+2 basis i.e. on the 2nd working day. For arriving

at the settlement day all intervening holidays, which include ban

holidays. NSE holidays, Saturdays and Sundays are excluded.

Typically takes place on Monday are settled on Wednesday,

Tuesday’s trades settled on Thursday and so on.

LISTING:

All Government securities and T- Bills are deemed to be listed on

the Exchange automatically, as when and they are issued.

Initially, 85 central government securities were traded in the retail

debt market segment. The Exchange will introduce additional

securities for trading from time to time. Other securities like state

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government securities, T-Bills etc. would be added in subsequent

phases.

CLEARING AND SETTLEMENT:

National Securities Clearing Corporation Limited (NSCCL) is the

clearing and settlement agency for all deals executed in the Retail Debt

Market.

45

Chapter 8: ANALYSIS

A. FREQUENCY ANALYSIS:

TABLE 8 A.1 GENDER WISE CLASSIFICATION

GENDER FREQUENCY

MALE 83

FEMALE 17

Total 100

Source: Primary Data

GENDER WISE CLASSIFICATION

83

17

0

10

20

30

40

50

60

70

80

90

Frequency

1 2

GENDER

GENDER WISE CLASSIFICATION

INTERPRETATION:

Out of 100 respondents, 83 respondents are male and 17 respondents

are female.

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TABLE 8 A.2 AREA WISE CLASSIFICATION

Place of Residence Frequency

Rural 7

Urban 93

Total 100


INTERPRETATION:

Out of 100 respondents, 07 respondents are from rural and 93 respondents

are from urban.

TABLE 8 A.3 AGE WISE CLASSIFICATION

AGE GROUP FREQUENCY

20-30 72

30-40 15

40-50 8

47

AREA WISE CLASSIFICATION

RURAL, 7

URBAN, 93

0

10

20

30

40

50

60

70

80

90

100

1 2FREQUENCY

Pla

ce o

f R

esid

ence

50-60 1

60-70 3

Total 100

AGE WISE CLASSIFICATION

72

158

1 30

10

20

30

40

50

60

70

80

Frequency

Series1

Series1 72 15 8 1 3

1 2 3 4 5

INTERPRETATION: Out of 100 respondents, 72 respondents fall in

the age Group of 20-30, 15 respondents fall in the age Group of 30-40,08

respondents fall in the Age Group of 40-70,1 respondent fall in the age

Group of 50-60 and 3 respondents fall in the Age Group of 60-70.

TABLE 8 A.4 EDUCATION WISE CLASSIFICATION:


Education Frequency

Up to Matriculation 0

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Under Graduate 0

Graduate 34

Post Graduate 31

Professional Qualification 25

Technical Qualification 10

Total 100

Up to Matriculation

Under Graduate

Technical Qualification1

Professional Qualification

Post Graduate

Graduate

0 5 10 15 20 25 30 35 40

1

2

3

4

5

6

Series1

INTERPRETATION: Out of 100 respondents, 34 respondents are

graduate, 31 respondents are post graduate, 25 respondents are

professional qualification and 10 respondents are technical qualifications.

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TABLE 8 A.5 OCCUPATION WISE CLASSIFICATION:

Occupation Frequency

EMPLOYED IN GOVERNMENT

SECTOR

6

EMPLOYED IN PRIVATE

SECTOR

74

BUSINESS 8

PROFESSIONAL 7

OTHERS 5

TOTAL 100

OCCUPATION WISE CLASSIFICATION:

Employed in Govt. Sector, 1Others 5

Professional, 4

Business, 3

Employed in Private Sector, 2

1

2

3

4

5

INTERPRETATION: Out of 100 respondents, 6 respondents are

employed in government sector, 74 respondents are employed in

private sector,8 respondents are in business,7 respondents are

professional, and 5 respondents fall in the category of others.

TABLE 8 A,6 INVESTMENT WISE CLASSIFICATION:

50

Investment In Frequency

Financial Strength:

According to respondents, the most important factor is Financial Strength

of the company. The financial strength comprises of balance sheet and

income statement of the company.

. Company Plans:

According to respondents, the next important factor is Company Vision.

The company vision states the company planes and its goals. SO the

respondents are interested in Company’s future and its plans.

Market Capitalization:

According to respondents, the next important factor is

Market Capitalization. The respondents study the movement of

share prices of different companies on the stock exchange while

investing in the Indian Market.

. Economy Condition :

51


Economy Condition. The respondents consider the economy

condition of India i.e. whether the economy is favorable or

unfavorable while investing in the market.

Other factors lie government factors ad political factors are

not considered so important while investing in Indian Market.

I have conducted survey on individuals that factors they

consider while investing in Indian Debt Market, considering seven

different factors.

These factors are as follows :

. Interest Rate

. Maturity

. Redemption Feature

. Call Provision.

. Credit Rating

. Price

. Yield

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Factor Analysis is conducted on these factors and it is found that :

Rate of Return :

According to respondents, the most important actor is Rte of

Return. The rate of return includes the interest rate and the price.

The interest rate can be fixed, floating or payable at maturity. Mostly

debt securities carry an interest rate that stays fixed until maturity.

The price you pay for a bond is based on a whole host of variables,

including interest rates, supply and demand, credit quality, maturity

and tax status. Bonds traded in the secondary market, however,

fluctuate in price in response to changing interest rates. When the

price of a bond increases above its face value, it is said to be selling

at a premium. When a bond sells below face value, it is said to be

selling at a discount, so while investing in Indian Debt Market

respondents consider rate of return to be the most important factor.

Maturity :


Maturity. Maturity refers to the specific future date on which the

investor’s principal will be repaid. Bond maturities generally range

from one day up to 30 years. Maturity ranges are often categorized

as follows :

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. Short –term notes: maturities of up to five (5) years.

. Intermediate notes / bonds: maturities of five (5) years;

. Long-term bonds: maturities of 12 or more years.

So, while investing in Indian Debt Market, individuals

consider maturity according to their preference.

. Redemption Feature:


Redemption Feature. It states that the maturity period is a good

guide as to how long the bond will be outstanding, certain bonds

have structures that can substantially change the expected life of the

investment.

. other factors lie call provision, price, yield and credit

rating are not considered so important while investing in Indian Debt

Market.

CHAPTER 9: RECENT DEVELOPMENT IN INDIAN DEBT

MARKET

54

Over the past few years, due attention has been given to the

development if the Indian debt market. As a matter of fact, the

Union Budget, 2006-2007 paid special attention to debt market

restructuring. Efforts were taken to increase bond market liquidity

and make it more broad-based and competitive. Following are some

points of action that were included in the budget:

As part of the reforms in the banking sector introduced in

1993-1994, capital was infused in the banks by issue of special

securities. To date, the Government has injected Rs. 228

billion. Thanks to the capital support, a sound banking sector

has emerged. As a result, the budget proposed to wind down

the special arrangements between the Government and the

banks by conversion of non-tradable special securities in to

tradable, SLR Government of India dated securities. This will

facilitate increased access of the banks to additional resources

for lending to productive sectors in the light of the increasing

credit needs of the economy and will simultaneously add to

bond market volume.

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Finance Minister has increased the limit of FII investment in

Government securities from US $ 1.75 billion to US $ 2

billion and the limit of FII investment in corporate debt from

US $ o.5 billion to US $ 1.5 billion.

The Finance Minister has also raised the ceiling on

aggregate investment by mutual funds in overseas

instruments from US $ 1 billion to US $ 2 billion and has

removed the requirement of 10% reciprocal share holding.

He has further allow a limited number of qualified Indian

mutual funds t invest, cumulatively up to US $ 1 billion, in

overseas exchange traded funds. This will facilitate the

integration of the Indian bond market with the more

developed, global markets and will enable investors to hedge

their risks through international portfolio diversification.

.

The RBI had introduced the anonymous electronic order

matching trading module called NDS – OM on its

Negotiated Dealing System. In the first phase, RBI –

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regulated entities, bans and Primary Dealers were allowed to

trade on the system. The system has now been extended to

all insurance entities. In view of the encouraging response of

market participants and to further deepen the Government

Securities Market, the Ministry of Finance has proposed to

extent access to qualified Mutual Fund, Provident Funds and

Pension Funds as well.

The importance of the corporate bond market has been

recognized and the budget felt the need to tae steps to create

a single, unified exchange – traded market corporate bonds.

.

Given that the common debt market investor is increasingly

being exposed to market based volatilities in return, the

Budget has proposed the establishment of an Investor

Protection Fund under the aegis of the SEBI. His will boost

retail investor confidence and will help diversify the market

base.

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CHAPTER 10: FINDINGS, RECOMMENDATIONS &

CONCLUSION

FINDINGS:

Demand for corporate bond is limited:

The Demand for corporate bond is India is limited. Traditionally,

the companies borrowed funds from bans to meet their financing

needs.

Lack of Transparency:

Quality of paper is poor:

Quality of paper refers to the regular payment of coupon and

repayment of principal amount on time. When the company do not

default in these two aspects it is said that the company is issuing

high quality of paper and vice-versa.

Liquidity:

The corporate debt market lacks liquidity in India. Hardly few

trades takes place and that is too in limited issues. The liquidity is

inadequate in India is due to lack of sufficient investors base. The

liquidity issues cane be addressed:

By developing “Bond Manager”

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By enlarging number of investors.

By introducing good quality paper.

By Incomplete access to Information :

The most important issues is lack of sufficient information on

bonds and on bond market to the investors. The whole information

of the bond market is not available at one place.

I conducted a survey on the “Indian debt market. ‘It was found

that

Mainly respondents invest in equity and mutual funds than

the debt and derivative market. It is because respondents

want higher return with low risk.

Mainly respondents invest for mid term and long term

because of fixed return at low risk.

The respondents who invested in debt market, they mainly

invest in government of securities because government of

securities as it is consider risk free securities.

The respondents invest in debt market mainly for

diversification purpose.

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When gender is compared with the investment in different

instruments, it is found that female respondents mainly

invest in mutual funds and no investments in derivative

where as male respondents invest in all the investment

instruments .

When gender is compared risk appetite, it is found that male

respondents are more aggressive as compared to female

respondents.

The respondents in the age group of 20-30 ,invest in all the

different debt instruments whereas respondents in the age

group of 40-50,50-60&60-70 are moderate neither too

aggressive nor too defensive.

When education is compared with the investment in

different instruments, it is found that the respondents who

are post graduate and professional qualified invest in all the

instruments say equity, debt, mutual funds & derivative.

When occupation is compared with the investment in

different instruments, it is found that respondents who are

employed in private sector invest in all different instruments.

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After applying the statistical tool i.e. factor analysis it is

found that the respondents consider the four most important

factors before investing in the market. These factors are:

1. Financial strength of the company.

2. Company plans & its future.

3. Market capitalization

4. Economic condition.

After applying the factor analysis, it is found that

respondents consider the three most important factors while

investing in the debt market. These factors are :

1. Rate of return

2. Maturity

3. Redemption feature .

RECOMMENDATIONS:

The Investor base needs to be broadened.

The listing norms to be eased: The listing norms for the

companies should be eased. The companies which are not listed

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and which are opting for private placements should be subject

to stringent disclosure norms.

To develop a trade reporting system.

The specialized debt funds for infrastructure financing should

be issued.

The cost of Issuance should be reduced.

Bond Insurance : To increase liquidity for the bonds of less-

known or infrequent issuers, there is a need to encourage the

insurance industry to market bond insurance.

Standardization: The standardized trading and settlement

processes increases the liquidity in the market by reducing

transaction costs.

The concept of debt manager should be implemented : The

concept of debt manager is quite essential for the development

of Indian corporate debt market. The debt manager should be

allowed to subscribe, hold and trade in debt .It can increase

liquidity in the market.

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CONCLUSION:

The debt market plays a crucial role for growing economy. The

debt market of India is a market for the issuance, trading,and

settlement in fixed income securities .The fixed income securities

include ,the central and state governments, public bodies ,statutory

corporations ,banks , institutions and corporate bodies.

In Indian debt market ,the Government securities plays a vital role

in the debt market ,as it used to determine the level of interest rate

in the country through the yields on the government securities .

The corporate Bond Market is only an insignificant part of the

Indian Debt Market. A large part of the issuance in the non

government debt market is currently on private placement basis.

I have conducted a survey that why individuals are not investing

in the corporate bonds and I found that the respondents want

higher return at lower risk. They are ready to take risk, if the

return is high .In bond market, the return is guaranteed but the risk

of default is high.

The policies of SEBI is very stringent in the case of bond market

as compared to equity market .The cost of issuance is high. The

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inadequate liquidity is also the reason to not to invest in debt

market. The various risks are associated with it and the

respondents lack knowledge of debt market. Other issues have

been discussed earlier in the project.

The few recommendations have been mentioned earlier in the

report. If these recommendations are implemented in Indian

Corporate Debt Market, are likely to make it more mature.

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BIBLIOGRAPHY

Books:

Chaturvedi.” The financial Management”,Vol.-

10,July 2005

Shashi K Gupta”The book on Management

Accounting “,Vol-8,June-2003

Websites:

www.ntpc.co.in

www.cerc.gov.in

www.google.com

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http://www.google.com/

http://www.cerc.gov.in/

http://www.ntpc.co.in/

ANNEXURE-I:

QUESTINNAIRE

1. Name:

2. Place of Residence : (a) Rural (b) Urban

3. Gender : (a) Male (b) Female

4. Age :

5. Education:

Up to matriculation

Under Graduate

Post Graduate

Professional Qualification

Technical Qualification

6. Occupation

Employed Government

Employed in private sector

Business

Professional

Others

7. Do you invest: Yes/No

8. You have invested in

Equity

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Debt

Mutual Funds

Derivative

9. The Duration of your investment is

Short term

Mid Term

Long Term

10.What factors influence you to invest in market? Scale from 01to

09(01 be the most important and 9 be the least important).

1. Economic Factors:

Economic Condition

Inflation rate

Market capitalization

2. Political Factors:

Elections

3. Government Factors

1. Government Policy

2. Tax Structure

4. Company Factors :

Balance sheet

Income statement

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company vision

11.Do you invest in Debt Market?

If YES

If No. Why?

………………………………………………………………………

………………………………………………………………………

………………………………………………………………………

12.In which Debt Instruments do you invest ?

Government Securities

Corporate debentures

Public sector bonds

Company deposits

13.What kind of interest rate do you prefer?

Fixed interest rate

Floating Interest Rate

14.Scale from 1 to 7, According to you which factor should be

most important while investing in Debt market. (1 be the most

important and 7 be the least important)

Interest Rate

Maturity

Redemption feature

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Call provision

Credit rating

Price

Yield.

15.For what purpose do you invest in Debt market?

Diversification

Liquidity

16.What is your risk appetite?

Low

Moderate

High

17. What suggestion you will give to invest in retail or debt

market?

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NAMRATA SAHU 4TH SEM PROJECT

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