2

0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Indian Corporate Bond Market
Financing Indias Future
November 28, 2013
1
Roopa Kudva
MD & CEO, CRISIL Limited

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Key messages
Strong growth in corporate bond issuances in recent times
Corporate bond market issuances increased seven-fold over the last decade
Expanding issuer and investor base
Increase in issuer base, primarily driven by private sector issuers
Significant growth in investments by FIIs and Mutual Funds in corporate bonds
Increasing sophistication
Several innovations in recent times: Inflation-indexed debentures, Basel III bond,
50-year bond, infrastructure debt fund
Enabling regulatory initiatives
Concerted efforts from all financial market regulators instrumental in the development
Way forward
Significant emerging capital requirements from infrastructure and banking sector
Imperative to build vibrant domestic corporate bond markets
2

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

CRISIL Limited
www.crisil.com
www.standardandpoors.com
CRISIL Limited
www.crisil.com
www.standardandpoors.com
LinkedIn YouTube Facebook Stay Connected | | | | Twitter

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

484
552
794
924
1,153
1,743
1,895 1,921
2,514
3,518
1221
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 H1 FY 14
R
s

B
i
l
l
i
o
n

Total Issuance
Strong growth in recent years
Source: Prime Database

4
India corporate bond issuances

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Growth in issuer base
Source: Prime Database

5
42 43
46
51
46
42
47
32 32
41
5
7
7
4
5
3
7
5
7
7
13
7 7
6
4
10
15
10
11
18
25
14
5
4
4
10
8
6
5
7
55
43
34
32 45
102
115
129
109
194
140
114
99
97
104
167
192
182
164
267
0
50
100
150
200
250
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
All-India Fin. Inst. & Banks State Fin.Inst. Public Sector Undertakings State Level Undertakings Private Sector
Driven by increase in Private sector issuers

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Expanding issuances and investor base
Source: Prime Database, CRISIL Research

Strong growth in number of issuances; expansion beyond AAA and AA






Substantial increase in investments by FIIs and Mutual Funds
Investment by MFs increased from Rs. 1.09 trillion in March 2009 to Rs. 1.71 trillion in Oct 2013,
constituting 20% of their investment portfolio
Investment by FIIs increased from Rs. 18.95 billion in 2008-09 to Rs. 283.34 billion in 2012-13
Growing interest from HNIs in structured debt papers and high-yield securities
6
Rating-wise distribution of number of issuances
Rating category FY04 FY09 FY13
AAA 164 371 566
AA 77 341 1078
A 39 29 118
BBB & below 8 12 39
Unrated 36 7 28
Grand total 324 760 1829

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Recent innovations
7
In June 2013 United Bank of India issued Indias first Basel III bond
(rated CRISIL AA+).
Followed by Bank of India, Bank of Baroda, Central Bank of India
and Union Bank of India issuing Tier II bonds under BASEL III.
BASEL III bond
In May 2013 L&T issued the first inflation indexed debentures
(rated CRISIL AAA)
Inflation
indexed
debenture
In July 2013 first infrastructure debt fund, India Infradebt Limited,
has been constituted (rated CRISIL AAA)
Infrastructure
Debt Fund
In July 2013, Mahindra & Mahindra issued Indias first 50 year bond
(rated CRISIL AA+)
50-year bond

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Enabling regulatory initiatives (1/2)
8
Liberalization in investment regulations
Expanding mechanisms to access bond market
2013: EPFO proposes investment of up to 55% of corpus in bonds of public and private sector companies
2013: FII investment limits in corporate bonds increased from USD 40 bn. in August 2011 to USD 51 bn. in June 2013
2013: EPFO allows investment in debt of 15 private sector companies (only 7 earlier)
2013: IRDA increases proportion of debt investments by insurance companies in non-AAA or non-A1+ paper
2013: IRDA permits investment by insurance companies in papers rated A and below, securitized debt and infrastructure
debt funds backed by central government
2013: EPFO extends the tenure of investments in AAA rated public sector units (PSUs) to up to 25 years and for AA rated
PSUs up to 15 years
2013: PFRDA permits pension funds to invest in rated ABS transactions
2013: RBI allows CDS for unlisted rated corporate bonds in addition to listed ones
2013: GOI promotes the concept of Infrastructure Debt Funds
2013: RBI Launches inflation indexed bonds to channelize household savings
Simplification of issuance procedures
2007: SEBI brings down the mandatory requirement of credit rating from two rating agencies to one for public/ rights
issues of debt instruments
2007: SEBI removes stipulation of minimum investment grade rating for debt instruments issued through public/rights issues
2007: SEBI relaxes the restrictions on structuring of debt instruments such as those on maturity, put/call option, on
conversion, etc. to provide greater flexibility to issuers

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Enabling regulatory initiatives (2/2)
9
Strengthening market infrastructure / promoting efficiencies
2013: RBI proposal to allow banks to offer partial credit enhancements to corporate bonds by credit/ liquidity facilities
2013: RBI has also allowed SEBI registered FIIs, QFIs and long term investors registered to invest up to $5 billion in
credit-enhanced bonds issued locally by Indian companies
2013: SEBI facilitates the creation of dedicated debt segment in stock exchanges
2013: SEBI permits FIIs to offer AA and above rated corporate bonds as collateral in cash and F&O segments
2013: RBI allows repo of short term debt securities in addition to long term securities
2012: SEBI allows MFs to participate in repos of securities rated AA and above
2012: SEBI allows MFs and IRDA allows insurers to participate in CDS transactions as protection buyers
2012: IRDA allows insurers to undertake repos in corporate bonds
2009: SEBI issues a circular on Mandatory Settlement of Corporate Bonds Trades through CCIL
2007: BSE and NSE create platforms for trading in corporate bonds
2007: SEBI reduces tradable lots in corporate bonds in respect of all entities to Rs.1 lakh
Enhancing transparency and disclosure
2011: SEBI enhances disclosure requirement for structured products and mandated third party valuation
2007: SEBI permits NSE also to set up and maintain a reporting platform
Improving tax efficiency
2013: Reduction in withholding tax rate on FII investment in corporate bonds to 5%

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Emerging capital requirements: Infra & Banking Sector
Infrastructure and banks need Rs.10.4 lakh crore from bond market in next 5 years
Demand from infrastructure sector to be Rs.7.0 lakh crore towards debt funding
Banks require Rs.3.4 lakh crore non-equity capital under Basel III regulations
Key challenges to meet this requirement
Large funding quantum in context of existing issuance volumes
Average annual need 60% higher than average of bonds issued in last 3 years
Bond market funding to infrastructure is mainly indirect
Encouraging direct access of infrastructure projects to bond market is a key priority
Bond markets appetite for banks non-equity instruments to be fully tested
Key challenge will be to raise Tier I instruments, given their riskier features
Regulatory and policy support will be critical to
Deepen the bond market
Develop credit enhanced structures and facilitate scale-up of Infrastructure Debt Funds
Realign policies of long-term investors to include eligibility for banks Tier I instruments
10

2
0
1
3

C
R
I
S
I
L

L
t
d
.

A
l
l

r
i
g
h
t
s

r
e
s
e
r
v
e
d
.

Way forward for vibrant corporate bond market
Reduce Concentration of issuers
BFSI sector issuers continue to dominate the market with over 75% of volumes
Top 10 issuers account for bulk of the total issuance
Improve liquidity in secondary market
Introduce market making mechanism for corporate bonds
Revive the securitization market
Alignment of tax rate to ease the issuance of Pass Through Certificates (PTCs)
Further liberalize investment norms for PFs and insurance companies
Boost demand for corporate bonds by allowing higher investments in non-AAA/non-A1+ paper
Increasing scope of investment by provident/pension/gratuity funds and insurance companies
Increase FII Inflows
Allow higher degree of capital account convertibility and relaxation of investment limits
Enhancing responsibility of debenture trustee
Enforcing a strong code of conduct for debenture trustee to act in interest of investors
11