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Asia Rates Research

November 3, 2011

India local corporate bond guide


Access to Indian bonds is not straightforward. Over the last 15 years, India
has slowly opened up its government bond market through quotas called
Foreign Institutional Investor (FII) limits. But these government quotas
are now practically filled up, and India has instead switched to opening up its
corporate bond market, especially infrastructure bonds. The corporate quotas are not filled yet, and realistically they are the only way through which
foreigners can invest in India fixed income for the time being. Having said
that, it is possible that the limits for government bonds may be revised
higher in the future

Contents
1. Growth of the India corporate bond market
2
2. Uses of corporate bonds for foreign investors 3
3. Limits for Foreign Investors in Corporate Bonds 4
4. Infrastructure corporate bonds
6
5. Corporate debt market: Instruments & Issuers 7
6. Corporate debt market: Ratings and Maturity 11
7. Corporate debt market:: Investors
13
8. Corporate debt market:: Market dynamics
15
9. New Developments
15

By opening up limits in infrastructure bonds, India is attempting to direct


foreign investment into areas where it is needed most. The currently available FII limit for infrastructure bonds is INR1,115bn (or USD23bn),
whereas only INR33bn (USD700mn) is available for government bonds.

Appendices

In this primer, we look at the India corporate bond market and answer three
questions. First, we answer why and how foreign investors should get involved. Second, we list the available instruments and highlight sizes, liquidity, ratings etc. Finally, we explain the market infrastructure and the main
onshore players

Steps for FIIs to register and bid for limits


WHT on FIIs based on location
SEBI notifications on FIIs
Useful Web addresses
Abbreviations used in the primer
FIMMDA credit spreads matrix

Chart: History of Indian AAA corporate bond credit spreads

Abhishek PandaAC

In bp

1y

5y

10y

550

(91-22) 6157-3387
abhishek.x.panda@jpmorgan.com
J.P. Morgan Chase Bank Ltd., Mumbai

Nitin DiasAC
(44-20) 7325-4760
nitin.a.dias@jpmorgan.com
J.P. Morgan Chase Bank Ltd., London

450

350

250

150

50

-50
Jan-06

Oct-06

Jul-07

Apr-08

Jan-09

Oct-09

Jul-10

Apr-11

Source: Bloomberg

The certifying analyst(s) is indicated by the notation AC. See last page of the report for
analyst certification and important legal and regulatory disclosures.

www.morganmarkets.com

16
17
18
19
19
21

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

1. Growth of the India corporate bond market


The Indian non-sovereign local bond market also referred
to as the Corporate bond market has evolved swiftly in the
last few years. The size of the corporate market has grown
to INR8,900bn (US$151bn) this year, and the gross
issuance doubled from INR1tn (USD21bn) in 2007 to
INR2.4tn (US$48bn) in 2010.

Chart 1: Gross Issuance of corporate bonds in India


INR bn
2500
2000
1500

The rapid growth in recent years is because of a number of


technical reforms instituted by the regulators: SEBI and
RBI. These include compulsory reporting of trades on the
reporting platforms, overhauling the disclosure norms for
public offers and reducing stamp duty on corporate bonds.
The settlement system improved even further when SEBI
mandated that all trades in corporate bonds must be cleared
and settled through the National Securities Clearing
Corporation (NSCCL) or the Indian Clearing Corporation
(ICCL). This step also helped address investor concerns
about settlement and counterparty risk by establishing
Delivery vs Payment (DVP) settlement by a central clearing
agency.
While the growth in the Indian corporate bond market has
been impressive, the government bond market still
dominates (86% of the total bond market). The dominance of
the government over corporate bonds in India is also
evident when we compare the Indian bond market to that of
other countries.
By definition, corporate bonds include bonds issued by
financials, corporates as well as public sector companies
(PSUs). The term government bond market refers to
Chart 3: Percent breakup of total Indian outstanding bonds
100%

2%

3%

7%

9%

4%

2007
Source: SEBI

2008

2009

2010

2011 YTD

Chart 2: Total Outstanding corporate bonds


INR bn
10000

8,895

9000
8,535
8,338
8000

7,940

7000
Jun-10
Source: SEBI

Sep-10

Dec-10

Mar-11

Chart 4: Comparison of percent breakup of outstanding bonds by


issuer across countries (Dec 2010)
100%

4%
11%

7%
9%

1%
18%

1%
13%
21%

17%

11%

29%

45%

37%

60%
91%

88%

86%

86%

85%

80%
62%

54%

20%

44%

0%

0%
2008
Source: BIS, RBI, JPM

40%

66%

20%

80%

60%
40%

1,506

1,431
1,057

500

11%

80%

2,378

2,026

1000

India

2009
Government

Financial

2010
Corporate

Japan

Source: BIS, RBI, JPM

UK

Germany

Government

Brazil

China

Financial

US

Corporate

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

Chart 5: Timeline of events in India corporate debt market


January 2007

February 2008

BSE sets up reporting platform to



capture trading data of corporate bonds

SEBI made regulator for primary and


secondary market

RBI responsible for market repo of


corporate bonds

Listed corporate
bonds made
exempt from TDS
(Tax deducted at
source)

2007

February 2009

FII limits for


investment in
infrastructure
bonds announced
First corporate
bond repo trade

2008

NSE sets up reporting platform for corporate bonds




Disclosure norms for listed bonds is rationalized


Shut period in corporate bond is reduced

Actual day count convention is made mandatory for new bond issues

Use of electronic payment facility for coupon and redemption started

Order driven trading platforms become operational on NSE & BSE

securities issued by the central government, state


governments and some special securities like oil bonds,
fertilizer bonds and food bonds.

2. Uses of corporate bonds for foreign investors


2a. Corporates as an alternative to government bonds
When we compare risk and retun of corporate bonds over
govenrment bonds, we find that the former offer value.
Over the last five years, the average yield of 5-year India
corporate bond was 9%, i.e. higher than the average yield of
7.6% for government securities, implying credit spreads of
about 140bp. Interestingly, our analysis shows that this
additional return did not come at the expense of too much
extra volatility. Vol. of corporate returns over the period was
0.8% vs. 0.7% for government bonds.
In recent months, credit spreads have traded around their
historical average of 130bp. Chart 7 shows that 5-year
spreads trade in a 60-170bp range, except during the financial
stress of 2008 when the 5-year spread reached 400bp. In
other words, credit spreads in India are generally stable, but
have a tendency to witness excessive volatility if significant
risk aversion arises. But what is interesting is that in recent

First public issue of nonconvertible of debt securities

Compulsory clearing and


settlement of all trades through
centralized clearing houses

2010

2009

March and April 2007

October 2010

2011

March 2011 and afterwards

SEBI formalized infrastructure bond


guidelines for FIIs

RBI eases norms for FII investment in


infrastructure bonds

Proposed introduction of CDS on


corporate bonds

months India local spreads have been stable, whereas in the


rest of the world credit spreads have widened.
The most actively traded INR corporate bonds are rated
AAA and are issued by PSUs (Public Sector
Undertakings). Therefore, it appears that in most cases
investment in corporate bonds is a view on interest rates
rather than credit risk. As large majority of issuance (44%) in
the corporate space is done by state-owned enterprises,
such bonds are viewed by investors as quasi-sovereign risk
with a slight premium.
Chart 6: 10-year benchmark Corporate bond yield
%
13

AAA

AA

11

7
Jan-07 Oct-07
Jul-08
Source: Bloomberg

Apr-09

Jan-10

Oct-10

Jul-11

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

2b. Bonds hedged with currency forwards


Given the past volatility in USD/INR (see chart 8), it may be
advisable to hedge the currency exposure by paying the
forward premia in USD/INR. Many FIIs prefer to match the
hedge with the maturity of the bond. For short-dated bonds
(1y), the investor may hedge using the 1y forward, but for a
5y corporate bond the hedge may be done using 5y MIFOR.
This can be attractive as often the FX implied interest rate
sits well below the bond yield. In other words, for a 1-year
tenor the investor would then be receiving the spread
between the 1-year corporate bond yield and the 1-year
forward premia in implied interest terms. Chart 9 illustrates
the FX hedged returns for a 1-year paper as well as a 5-year
AAA PSU bond. After hedging the currency exposure
(maturity matched), the average carry works to 550bp and
230bp in the 1-year and 5-year bonds, respectively.

Chart 7: Corporate bond credit spreads


In bp
550

1y

5y

10y

450
350
250
150
50
-50
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Source: Bloomberg

Chart 8: USD/INR currency performance in last 5 years

Table 1: Risk-return for corporate and government bonds


In percentage

2006-11

Avg
Yield

1y AAA PSU
Govt 1y
5y AAA PSU
Govt 5y
10y AAA PSU
Govy 10y

8.3
6.7
9.0
7.5
9.1
7.7

Average
Volatility
credit
of yield
spread
1.6
1.67
1.4
0.8
1.42
0.7
0.7
1.43
0.6

53

Max
spread

Min
spread

5.29

-0.21

4.07

0.57

4.11

0.57

48

43

Source: Bloomberg

2c. Limited opportunities for relative value of local vs. USDdenominated corporate bonds
While we could evaluate relative value between INR and
USD bonds, comparison with hard currency bonds is
rendered difficult as there is limited availability of shortdated dollar bonds and limited liquidity in dollar bonds
issued by Indian companies. We highlight that the 5-year
USD bond issued by REC was trading at an indicative yield
of 4.4% in November 2011. In comparison, the FX hedged
yield of buying a 5-year and 1-year AAA-rated local bonds
issued by a PSU are 4.1% and 6.2%, respectively.

38
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Source: Bloomberg

Chart 9: FX hedged carry in 1-year and 5-year AAA PSU bonds


In bp
1400

5y AAA PSU hedged in 5y MIFOR


1y AAA PSU hedged in 1y forward

1200
1000
800
600

3. Limits for Foreign Institutional Investors in


Corporate Bonds
Foreign institutional investors (FIIs) are allowed to access
the Indian bond market up to a ceiling of US$10bn

400
200
0
Jan-07 Oct-07 Jul-08
Source: Bloomberg, JPM

Apr-09

Jan-10

Oct-10

Jul-11

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

(INR480bn) in government securities and US$40bn


(INR1,920bn) in corporate bonds. However, FIIs must obtain
a so-called bond quota (through auctions or on tap, for
details see Appendix 1) before buying bonds.

SEBI circular specifically states that a regular FII registered


with SEBI would not be allowed the access this category.
This is available on tap.

The quota for government bonds for FIIs has been almost
fully utilized. As of September 30, 2011, only INR33bn (i.e.
US$ 700mm) or 6% of the existing government quota was still
available.

Category 2 - (Up to US$5bn): FIIs can purchase


infrastructure bonds which had an initial 5-year maturity
or more at the time of issue and the residual maturity of at
least one year. If the bond has an embedded option, then the
exercise date of the bond option will be used to determine

Of the entire US$40bn corporate quota, US$27bn is still


available, as follows:

Table 2: FII investable universe

- The non-restricted corporate quotas: Within the US$40bn


corporate bond quota, USD15bn of quotas have no
restrictions in terms of tenor and issuer. However, only
INR43bn (6%) of this unrestricted corporate bond quota is
still available as of September 2011. This quota is mostly
invested in extremely short-dated corporate bonds and CPs.
- The restricted corporate quota: The balance US$25bn of
corporate bond quota is still available to FIIs. However,
these limits must only be used to invest in bonds issued by
infrastructure companies whose original maturity is greater
than five years. The US$25bn quota has been further subdivided as per recent notifications, which we discuss later in
this section. Over 92% (USD23bn) of the infrastructure
corporate bond limit is available for FIIs as of September
2011.

Description
Government debt
(unrestricted)
Government debt
(long-term)
Corporate debt
(unrestricted)
Infrastructure (debt
mutual funds)
Infrastructure (lock
in 1y)
Infrastructure (lock
in 3y)
Total

Amount
Utilization* (%) Availability
(USD bn)
5

98

Through auctions

87

Through auctions

15

94

Through auctions

3
5

On tap
8

Through auctions

17

On tap

50

*As of September 2011


Source: SEBI, JP Morgan

For any practical purposes therefore, only infrastructure


corporate bonds currently provide the opportunity to FIIs to
gain meaningful access to the Indian fixed income space. In
order to help attract FII investment in the infrastructure
sector, the government has recently eased the norms further.
Newest norms for Infrastructure corporate bonds
New norms were issued in September 2011 regarding the
restricted quota. This USD25bn quota has been divided into
three different categories. These categories are aimed at
different type of investors and have a varying array of
regulations regarding the nature of bonds that can be
bought. Two out of the three categories are freely available
for FIIs:
Category 1 - Retail investors (Up to US$3bn): Retail foreign
investors are allowed to purchase units in local mutual fund
debt schemes who invest in the infrastructure sector. The

Table 3: India's infrastructure requirements

11th Plan (2007-12)


US$ bn Share (%)
Electricity
165
32
Telecom
86
17
Roads
70
14
Irrigation
62
12
Railways
50
10
32
Oil & Gas
6
Water supply 28
5
2
Ports
10
9
2
Airports
2
0
Storage
514
Total
100
Sectors

12th Plan (2012-17)


US$ bn Share (%)
322
31
274
26
125
12
97
9
80
8
65
6
43
4
16
2
17
2
7
1
1046
100

Growth
(%)
95
219
79
56
60
103
54
60
89
250
104

*Source: Planning Commission, Government of India

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

the residual maturity of the bond. This is a relaxation of the


former rule, which only permitted FIIs to buy bonds whose
residual maturity was greater than five years. There is a
minimum lock-in period of one year for this investment.
During the lock-in period, a FII may trade with another FII
but cannot sell the bond to a domestic investor.
These limits must be purchased through an auction
conducted by SEBI periodically. The last auction took place
in October 2011, when the cut-off fee for acquiring the limits
was 8bp upfront. For details regarding the auction process,
please refer to Appendix 1.

(as of November 2011), if we take into account only central


government bonds of greater than 5-year maturity in which
FII limits are available. However, a large proportion of bonds
may be held to maturity, limiting the actual availability of
bonds in the secondary market.
Unlisted bonds
FIIs are also allowed to invest in unlisted bonds, as several
infrastructure companies are not listed entities and they may
be in the form of a special purpose vehicle.
Some benchmark bonds in the infrastructure sector are in
table 4.

Category 3 - (Residual US$17bn): The residual amount can


be invested in infrastructure bonds whose residual maturity
is three years or more and initial maturity at issue should
have been at least five years. FIIs who purchase bonds
under this category will face a lock-in period of three years.
Limits are available on tap.
Table 4: Liquid Infrastructure bonds

4. Infrastructure corporate bonds

Issuer Bond

Given that the available limits are mostly for infrastructure


bonds, we take a closer look at what they are.

REC
PFC
PGC
IRFC

What are infrastructure companies: The India


infrastructure sector includes the following sub-sectors: (i)
power, (ii) telecommunication, (iii) railways, (iv) roads
including bridges, (v) ports, (vi) industrial parks and (vii)
urban infrastructure (water supply, sanitation and sewage
projects) (Source: Finance Ministrys ECB policy, June
2005). In addition, certain Non-Banking Financing
Companies (NBFCs) that are designated as Infrastructure
Finance companies by the RBI have been recently included
under this definition. However, investors must confirm with
the custodian whether the issuer qualifies as an
infrastructure company.
Total investable market: Out of an entire corporate market
outstanding of INR 8,900bn (as of March 2011), we find that
INR1,910bn (J.P. Morgan estimates) or 21% is available for
FIIs, as these bonds conform to the limitations set by the
RBI for foreign investment (i.e., issued by infrastructure
companies, and original maturity of the bond over five
years). This investable universe compares to the
government bond market size of INR16,633bn or USD337bn

9.48% 2021
9.61% 2021
9.35% 2021
9.57% 2021

Bloomberg
Ticker
EI7715903
EI7212059
EI7970193
EI6959825

Issue
date
08/10/11
06/29/11
08/29/11
05/31/11

Coupon Maturity
9.48%
9.61%
9.35%
9.57%

08/10/21
06/29/21
08/29/21
05/31/21

Indic
Yield*
9.70%
9.69%
9.61%
9.57%

*As of Oct 2011


Source: Bloomberg, JPM

Chart 10: Outstanding amount of corporate bonds (Infra vs non-infra)


Noninfrastructure
72%

Source: JPM, NSDL

Infrastructure
28%

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

Table 5: Top Infrastructure bond issuers

Rural Electrification
Corporation (RECL)

Issuer

Description
Govt. Ownership*
Free float
Income before XO (INR mn)
Net Debt (INR mn)
Local rating

Power Finance
Power Grid Corporation
Corporation (POWFIN) (PWGRIN)

Financial Institution
Finances rural
which lends to power
electrification projects
and related sectors
67%
74%
33%
26%
25849
26471
686903
853484
AAA
AAA

Power transmission
company
69%
31%
26719
368017
AAA

Indian Railway
Finance Corporation
(INRCIN)
Finances
development needs
of Indian railways
100%
0%
4852
381244
AAA

As of March 2011
Source: Bloomberg, REC, PFC, Power Grid, IRFC

5. Overview of the Corporate Debt market: Instruments and Issuers


In sections 5 to 8 we look more broadly at the entire corporate
bond market, including infrastructure bonds. In this section
in particular, we look at the the three types of bonds: CPs,
CDs and (long-dated) corporate bonds.
Short-dated paper (less than 1y): CP

Commercial Paper (CP) is a short-term discount obligation


issued by Corporates and Public Sector Undertakings
(PSUs) that are (quasi-government) entities that satisfy
certain Reserve Bank of India (RBI) guidelines on net worth,
credit rating and financial health. The maturity period ranges
from seven days to one year. CPs are generally issued for
the purpose of working capital management. The total CP
outstanding as of September 15, 2011 was INR1,597bn
(USD32bn).

Chart 11: Overview of Corporate debt market

Issuers
Banks
Subordinated bonds to
raise capital

Instruments
Certificates of deposits
Short-dated discounted
obligation issued by banks

Investors
Mutual funds

Mostly buyers of short-dated paper


Insurance companies

Mostly buyers of long-dated paper


NBFCs

Perpetual bonds

Deeply subordinated bonds


(Tier 1), callable after 10 years

Corporates
Working capital
management & long term
capital needs

PSUs

Largest category of
borrowers

Commercial papers
Short-dated discounted
obligation issued by
corporates

Corporate bonds

Short-long term debt


obligations, mostly fixed
coupon

Provident funds
Mandatory investment in corporate
bonds
Banks
MTM investors under non-SLR

FIIs
New breed of investors (limits apply)
Corporates
Emerging class of investors

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

FIIs are allowed to buy CPs under the US$15bn unrestricted


corporate bond limits.
The CP market received a big boost after RBI introduced
the base rate scheme for banks in July 2010. The base rate
is calculated by adding a certain operating margin to the cost
of funding for each bank, and banks are not allowed to lend
below the base rate. Since the base rate acts as a floor for
interest rates for bank lending, a corporate who wishes to
borrow at lower rates has to rely upon alternate sources of
funding, such as CP issuance for short-term funding
requirements. The CP market helps corporates to access
funding below base rates, thus proving to be cheaper than
the base rate-linked borrowing from banks.
The difference in yields between various CPs depends on
the nature of the issuer and the long-term rating of the
company. For example, the CPs issued by state-owned
companies (PSUs) trade at the lowest yields, while those
issued by private corporates and non-bank financial
companies trade at higher yields.

Chart 13: Gross CP Issuance per fortnight


INR bn
400
350
300

CP issuance after base-rate


was introduced

250
200
150
100
50
0
Jan-05 Jan-06
Source: RBI

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Chart 14: Total CP outstanding


INR bn
1400
1200
1000

Short-dated paper-Certificates of Deposit (CDs)


Certificates of deposits are short-dated discounted
obligations issued by banks and all-India Development
Financial Institutions (DFI). DFIs in India are non-bank
financial institutions, which provide long-term finance to the
industrial sector. The RBI permits DFIs like EXIM Bank,
NABARD, SIDBI and NHB to issue CDs. While the tenor of
bank CDs ranges from seven days to one year, typically
banks issue CDs in tenors of 3-month, 6-month, 9-month and
1-year tenors. The DFIs are allowed to issue CDs of tenor

Chart 12: Breakup of outstanding of CD, CP, corporate bonds

800
600
400
200
0
Jan-05 Jan-06
Source: RBI

CPs
6%

Jan-08

Jan-09

Jan-10

Jan-11

Chart 15: Bank base rate vs the 3m CP yield


%
12

Corporate
bonds
64%

Jan-07

3m Corporate CP yield
Base Rate HDFC bank

11
10
9
8
7

CDs
30%
Source: NSDL, SEBI, RBI

6
Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11
Source: Bloomberg

Jul-11

Sep-11

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

between one and three years. The total bank CD outstanding


as of September 9, 2011 was INR3,865bn (USD78bn).
FIIs are not allowed to buy CDs.

Chart 16: Gross CD Issuance per fortnight


INR bn
800
700
600

Banks view CDs as an alternative to regular time and


demand deposits especially when deposit mobilization is low.
The CD yields are generally higher than regular savings and
fixed deposits but are lower than bulk fixed deposit rates
offered to corporates and high net-worth individuals. At
present, the ratio of CDs to total bank deposits is 7.5%.
The CDs are regularly issued in domestic money market and
witness strong demand from mutual funds. The supply of
CDs depends on funding needs of banks especially upon
credit off-take growth relative to deposits as suggested in
Chart 18.
The demand for CDs has shifted to the extreme short-term
(less than 3-month paper), after SEBI changed the mark-tomarket (MTM) regulations for mutual funds. Before, mutual
funds were allowed to not mark-to-market their CD holdings
with less than 1-year maturity. However, now only 3-month
maturity or shorter CDs are permitted to not be marked to
market. CDs with over 3-month maturity must be MTM, thus
reducing their attractiveness vis--vis the less than 3-month
CDs. This has also forced banks to issue more paper in the
less than 3-month bucket and roll-over their CD obligations
more frequently.

500
400
300
200
100
0
Jan-05 Jan-06
Source: RBI

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Chart 17: Gross CD outstanding and as % of bank deposits


INR bn
5000

9
8

4000

CD outstanding RHS

CD % of bank deposits

3000

5
4

2000

3
2

1000

1
0
Jan-05 Jan-06
Source: RBI

0
Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Chart 18: Credit to Deposit ratio (RHS) vs 1y CD yields

Long-dated paper-Corporate Bonds


Corporate bonds are medium and long-term obligations with
maturities from 2 to 20 years. They generally pay an
annual, fixed coupon with bullet redemption. The variations
include floating-rate bonds, step-up coupon bonds, zerocoupon bonds, perpetual bonds and bonds with put-call
options. Most bonds are issued via private placement with
issue size ranging from INR1-20n.

%
14

%
1y CD yield

Credit/Deposit ratio

76
12

74
72

10

70
68

66
64

The issuers in the long dated segment are banks, non-bank


financial companies (NBFCs), PSUs (i.e. majority owned by
federal or state governments) and private sector corporates.
This market is dominated by PSUs who account for 44% of
total bonds issued. They are followed by banks who have
issued 25% of total outstanding bonds.

78

62
4
Mar-07
Dec-07
Sep-08
Source: Bloomberg, RBI

60
Jun-09

Mar-10

Dec-10

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

In terms of gross issuance, PSU accounted for 45-50% of


total issuance in the last five years. The share of NBFCs and
corporates has been picking up steadily over the years.
Purpose of Corporate bond issuance
Bonds issued by banks: The INR bonds issued by the
banks/financial institutions comprise of Tier I, Tier II
(subordinated bonds) and hybrid bonds. State Bank of India
(SBI) and ICICI Bank are the largest issuers among banks, in
terms of total bond outstanding. We understand that banks
do not issue senior bonds in India and most of the senior
funding comes from retail or wholesale bank deposits and
from interbank borrowing.

Chart 19: Sectoral breakup of outstanding amount of corporate bonds


(across Banks, PSUs, NBFC and Corporate)

Banks
25%
PSU
44%

Corporate
15%

NBFC
16%
Source: NSDL

INR-denominated subordinated bond financing are used by


banks in place of equity, as they meet investor need for
issuance and reduce the EPS dilution for the equity
investors. The data from 2009-2011 also supports the
argument that banks have predominantly used subordinated
bonds to strengthen the balance sheet.
The bonds issued by Indian banks in hard currencies (USD,
EUR and CHF) have been senior bonds and to a very small
extent subordinated bonds. The data from the last five years
suggests that of the USD21bn of hard currency bond
issuance from Indian banks, about 84% has been senior
bonds with the remaining being subordinated/perpetual
bonds. Most of the issuance in non-INR currencies has been
to fund their non-INR assets (typically lending to Indian
companies seeking to borrow in non-INR currencies for
various projects/M&A transactions outside India).

Chart 20: Percentage sector wise breakup of issuance in last 5 years


100%
80%

50

40

42

14

12

18

20

44

45

47

60%
11
2

40%
20%

37

22

16
21

28

18

27
13

0%
2007

17
27

2008

2009
Banks

Source: NSDL

23

2010

2011

Corporate

NBFC

Total
PSU

Bonds issued by corporates: Corporates (especially those


with lower ratings) prefer borrowing from banks through
loans rather than issuing corporate bonds, because most
investors can only buy rated securities, which forces
corporates to be rated by credit rating agencies. Lower rated
issuers see limited interest from investors and investor
interest in India is mostly limited to AA-rated bonds or
higher, pressuring up the borrowing cost of lower rated
issuers above their bank funding costs.

Chart 21: Breakup of total debt financed across bank credit & bonds
China

85%

15%

India

84%

16%

UK

72%

28%

Japan

71%

29%

Brazil

66%

Germany

The total bank credit outstanding is nearly five times the size
of total local currency non-sovereign bond market. This is
considerably lower than other developed and EM countries.

52%

Korea
US

48%

45%

55%

8%
0%

92%
20%

Source: BIS, JPM, CEIC (Dec 10)

10

34%

40%

60%
Bank Loans

80%

100%

Corporate bonds

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
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Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

Bonds issued by Public Sector Undertakings (PSUs):


PSUs are the largest and most active corporate bond issuers
in India. The largest issuers (in terms of bond outstanding)
are Power Finance Corporation (PFC), Rural Electrification
Corporation (REC), National Bank for Agriculture & Rural
Development (NABARD), LIC Housing Finance and India
Railway Finance Corporation (IRFC) and SAIL (Steel
Authority of India Limited). These bonds enjoy better
secondary market liquidity and are also well-known to
foreign investors.
They decide an overall borrowing target at the beginning of
the fiscal calendar and borrow at regular intervals through
the private placement route. The borrowing is divided across
bank loans and corporate bonds, roughly in the 1:1 ratio
depending on interest rate differential and market conditions.

Bonds issued by Non-Banking Finance Companies


(NBFCs): Private NBFCs are also quite active in the
corporate bond market. The prominent private NBFC issuers
are Housing Development Finance Corporation (HDFC),
Infrastructure Development Finance Corporation (IDFC) etc.
They issue senior and subordinated bonds.

6. Overview of the Corporate Debt market:


Ratings and Maturity profile

Table 6: Top 10 issuers in terms of total outstanding

(in INR bn)


Company
Power Finance Corporation
Housing Development Finance Corporation
Rural Electrification Corporation
National Bank For Agriculture and Rural Development
IDBI Bank Limited
India Railway Finance Corporation
LIC Housing Finance
State Bank of India
Power Grid Corporation of India
ICICI Bank
Total

Total
630
469
454
345
313
298
298
297
282
270
3,655

Source: NSDL

Table 7: List of credit rating agencies in India

Agency

Majority shareholders

% share

CARE
CRISIL
ICRA
Fitch (India)
Brickwork Ratings

IDBI, Canara Bank, SBI


S&P India, S&P International
Moody's Investment
Fitch Ratings
_

58%
52%
29%
100%
_

Listed /
Unlisted
Listed
Listed
Listed
Unlisted
Unlisted

Source: CARE, CRISIL, ICRA, Fitch, Bloomberg

Ratings
Local corporate bonds are rated by many domestic agencies,
of which the main ones are listed in table 7.
Nearly 70% of total outstanding bonds in India are locally
AAA-rated, the highest grade, and close to 100% of all
bonds outstanding qualify as investment grade (BBB- or
above). In terms of issuance, 73% of total bonds issued in
the last five years have been rated AAA.
The larger concentration of AAA rated paper and nearabsence of speculative-grade paper can be explained by the
investment regulations of the major investors. Insurance
companies cannot buy securities whose ratings are below
A+ as per investment regulations. Provident funds are only

Chart 22: Outstanding bonds across credit ratings

BBB
1%

BBB+
1%

A A- A+
2% 1% 3%

AA
10%

AA3%
AA+
10%

AAA
69%

Source: NSDL

11

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Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

allowed to buy investment-grade bonds. As investors prefer


bonds with higher ratings, corporates with ratings below
BBB struggle to access the corporate bond market and
must primarily rely on bank loans to finance their long-term
capital requirements.
Maturities
More than 50% of bonds issued have maturity of longer
than 10 years. The 10-year to 14-year tenor is the most
preferred at the time of issuance. However, a large
percentage of bonds with put-call options may get exercised
on their respective option exercise dates, which should
shorten the actual tenor of the bonds. For example, bonds
with 3-5 year tenors and put-call options in the 1-2 year
bucket should shift to the 1-2 year tenor bucket if the option
is exercised. The maturity profile of corporate bonds shows
redemptions are concentrated in 2013-2015.

Chart 23: Outstanding bonds across maturities of bonds (buckets)

Perpetual
3%

15y or above
18%

1y-2y
5%
3y-5y
25%

6y-9y
8%

10y-14y
41%

Source: NSDL, data based on actual maturity (put-call option data ignored)

While analyzing the maturity of bonds outstanding, we have


considered only the final maturity date as the redemption
date and have calculated the tenor of various bonds.

Chart 24: Percentage maturity wise breakup of issuance in last 5 years


100%

2
16

4
26

80%

42

60%

17

21

33

30

37
5

40%
12

31

21
2007

Source: NSDL

12

37

1y-2y

2008
3y-5y

38
1
2009
6y-9y

29
11
2010
10y-14y

3
19

36

3
7

10

20%
0%

3
13

30
30
14
2011
15y or above

5
Total
Perpetual

Chart 25: Maturity amounts in subsequent years


INR bn
1000
900
800

951
856
790
640
619

700

551 542

600
500
400
300 206
200
100
0
2011

645
597
404

303

298
204190

129
10 3 2

2014

Source: NSDL

2017

2020

2023

2026

48 40

2029

3 3 2 4

2032

2035

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

7. Overview of the Corporate Debt market: Investors


The main investors in the corporate bond market are mutual
funds, banks, insurance companies and provident funds.
Mutual Funds
Mutual funds are important investors at the short-end of the
yield curve. Investment by mutual funds is flow dependent,
such that debt mutual funds receive more inflows at the
expense of equity mutual funds in times of weakness in
equity markets. Total Assets Under Management (AUM) of
all mutual funds as of July 31 was INR7.28tn or USD146bn
(Source: AMI Monthly July 2011) with 70% controlled by
debt and liquid mutual funds.
Non-equity mutual funds in India may be categorized under
liquid and debt mutual heads:
Liquid funds (Money-market mutual funds). Liquid funds
invest in short-term securities of maturity upto three months.
Investors are allowed to redeem their investment at any
point of time during the life of the scheme (open-ended
schemes). This is the only category of mutual funds that is
allowed not to mark-to-market their investments.

determined by the stated objective of the fund. These are


open-ended funds.
- Debt Mutual Funds - Gilt Funds: They invest in central
government securities (bonds and bills) and bonds issued or
guaranteed by state governments.
- Debt Mutual Funds - Fixed maturity plans (FMPs): FMPs
have a fixed tenure (closed-ended) and invest in 1-month to
5-year maturity securities.
Insurance companies
Insurance companies are one of the largest buyers of longtenor bonds. They are a significant investor in this space,
because they need to invest in corporate bonds as per their
mandated investment guidelines.
Insurance companies are categorized under life and non-life
insurance:
Life Insurance: Life insurance companies offer two separate
plans to investors. These are:
Chart 26: Breakup of Assets under management of mutual funds
Liquid
25%

Gilt
0%

Others
2%

Equity
26%

Debt Mutual Funds (nearly 50% of total AUM of industry


on July 31, 2011) are classified in three subcategories:
- Debt Mutual Funds - Income Funds: They invest in
corporate bonds as well as government bonds of maturity
from 1 to 10 years The investment pattern of each fund is
Source: AMFI

Debt
47%

Table 8: Mandated investment pattern for Indian investors

% of total assets
Category
Banks
Life Insurance
Non-life Insurance
Provident funds

Central
Government
securities
24*
25**
20
35**

Other
Cash
Govt
Reserve
securities Ratio
6
25**
20
15**

Other Approved
Priority
Infrastructure Investment grade
(includes Corporate Sector % of
& Housing
PSU bonds
bonds, equities, FDs) total credit
40
15**
35
60***
30**
10***

* SLR includes central & state govt paper


**At least
***Not exceeding
Source: IRDA, PFRDA, RBI

13

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Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

- Term plans (Traditional products): Life insurance


companies have to invest at least 50% of their assets in
government and other approved securities with the rest
available for equity and corporate bond investments. Life
insurance companies may invest upto 35% of total assets in
corporate bonds and CPs. Within this category, 15% of total
assets are reserved for the infrastructure and social sector.
LIC is the largest life insurance company and had 70%
market share total premium received by life insurance
companies in 2009-2010 (Source: IRDA Annual Report). Life
insurance companies receive large inflows from retail
investors, typically in the last quarter of the financial year
(January-March). They receive the least amount of flows in
the April-June quarter. Their investment pattern is reflective
of the timing of their inflows. This is largest category in the
insurance sector (in terms of total premia)

Unit-linked plans (ULIPs): ULIPs represent the fastest


growing category within the insurance sector. ULIPs are a
combination of a mutual fund with insurance and are
typically closed-ended schemes (with a specific maturity
date). They must offer a guaranteed return of 50bp above the
average of RBIs reverse repo rate on last dates of June,
March, September and December of the previous year.
ULIPs invest 70-80% of their assets in equity and 20-30% in
debt, primarily corporate bonds, depending on the fund
managers discretion.
Non-life Insurance: This is the smallest among the three
categories of insurance companies. They include general
and health insurance. They must hold at least 40% of their
total assets in government securities out of which at least
20% should be in central government paper. The remaining

60% can be invested in approved securities like corporate


bonds, equity and bank term deposits.
Provident funds
Provident funds must invest at least 35% in central
government and at least 50% in government securities
(including state government securities). They are allowed to
invest at least 30% in investment-grade bonds issued by
PSUs and maximum of 10% in private corporate bonds.
Employee Provident Fund Organization (EPFO) is the largest
provident fund in the country and their investments are
managed by four different fund managers. The total
contribution received by the EPFO in 2009-10 was INR395bn
(USD8bn), achieving a 16.7% growth on top of the
contribution collected in the previous year. Total investment
by EPFO was INR444bn (USD9bn) in 2009-10
Banks
Banks only hold 2% of their assets in corporate bonds and
CPs. The largest asset on the banks balance sheet (63% of
assets in August 2011) is loans (credit). Banks prefer the
loan rather than the bond route to provide financing, since
loan targets are used to benchmark performance and there
are no specific investment targets. Hence, the emphasis is on
the loan book, meeting credit targets to individual sectors
and the overall amount. In addition, bank investment in
bonds must be marked-to-market unlike the loan book, which
increases their P&L volatility.
Foreign Institutional Investors (FIIs)
FIIs are allowed to buy CPs and listed corporate bonds,
within the limits allocated by SEBI. The FII limit for corporate
bonds is USD40bn, of which USD25bn must be invested
only in infrastructure bonds. The remaining USD15bn limit is
Chart 27: Breakup of bank assets as on Sep 2011

Table 9: Premia received by insurers

INR bn
Premia in
2009-10
Life Insurance Term plan 1499
Life Insurance Unit-linked 1155
Non-life Insurance
358
Total
3013
Category

Source: IRDA

14

Year on Year
growth
14.3%
27.4%
14.0%
19.0%

Share of total
industry
50%
38%
12%

Corporate
bonds
2%
CPs
0%

Credit
63%
Source: RBI

Shares
1%

Mutual funds
1%

Govt
Securities
27%

Cash +
Reserves
6%

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
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Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

unrestricted but has been fully utilized, mostly in extremely


short-dated papers (CPs and short-tenor bonds).

8. Overview of the Corporate Debt market:


Market Dynamics
Primary market
Corporate bonds are mostly privately placed with banks,
insurance companies, mutual funds, financial institutions,
pension funds and corporates. The issuer, typically in
consultation with merchant bankers, decides on a fixed
coupon for the bond which is issued at par. Alternatively,
corporate bonds are also issued through a book-building
process. The issuer provides an indicative range for yields
and accepts the lowest bid yield as the uniform cut-off for
the placement.
Issuers prefer the private placement route because it is less
cumbersome and faster than the public issue of bonds.
Secondary market trading and reporting of trades
Corporate bonds trade over the counter (OTC) as well as
directly on the trading platforms provided by the stock
exchanges, NSE and BSE. However, nearly all secondary
market volume takes place through the OTC market through
brokers and intermediaries.
Clearing and Settlement of trades
All secondary OTC market trades in corporate bonds are
cleared and settled through a centralized clearing agency
(i.e., the National Securities Clearing Corporation Limited
(NSCCL) or the Indian Clearing Corporation limited). Clearing
and settlement of bonds takes place on a DVP-I system (i.e.
settlement is done on a gross basis).
Secondary market liquidity
While the bid-ask spreads for AAA-rated on-the-run bonds
can range between 2-5bp, that spread tends to widen to 1015bp after the bond becomes off-the-run. The bonds do not
stay benchmark for long as each of their individual size is
relatively small compared to the entire market and investors
tend to hold them until maturity. There is no re-issue of
individual bonds.

9. New developments
Proposed introduction of CDS
The Reserve Bank of India (RBI) has proposed that single
name CDS contracts on corporate bonds be introduced from
November 2011.
The proposal categorizes market participants in the CDS
market as users (Commercial Banks, PDs, NBFCs, Mutual
Funds, Insurance Companies, Housing Finance Companies,
Provident Funds, Listed Corporates and Foreign
Institutional Investors (FIIs)) and market-makers
(Commercial banks, PDs and some NBFCs). The proposals
state that users can only buy CDS protection and they must
own the underlying bond to buy protection. The users
cannot buy protection for an amount greater than the face
value of underlying bonds they own and for tenors greater
than the tenor of the underlying bond. The market-makers
can buy or sell protection and may take naked CDS
positions.
The CDS contracts are only permitted for listed corporate
bonds of original maturity greater than one year. The
guidelines also permit CDS contracts to be written on
unlisted but rated bonds of infrastructure companies and
unlisted or unrated bonds of SPVs set up by infrastructure
companies. The CDS contracts cannot be written on
Commercial Papers (CPs), Certificate of Deposits (CDs) and
Non-Convertible Debentures (NCDs) with original maturity
of upto one year. Obligations such as asset-backed
securities/mortgage-backed securities, convertible bonds
and bonds with call/put options are not permitted as
Chart 28: Weekly secondary market volumes of Corporate bonds on
NSE
INR bn
35
30
25
20
15
10
5
0
Aug-04

Nov-05

Feb-07

May-08

Aug-09

Nov-10

Source: RBI

15

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Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

reference and deliverable obligations.

Appendix 1: Steps for foreign investors to


register and bid for FII limits

We believe that the introduction of CDS in India could lead


to differentiation between credit and interest rate risk, thus
driving the development of the INR corporate bond market
in India. As the CDS prices in the pure credit risk of the
reference entity, investors, issuers and market makers would
be able to trade that risk independent of interest rates.

Registering with the Securities Exchange.


In order to invest in Indian bonds or Treasury bills, foreign
investors must register with the Securities Exchange
Board of India (SEBI) as a Foreign Institutional Investor
(FII) under the specific proforma provided by SEBI. Foreign
institutions (Mutual Funds, Pension Funds, insurance
companies), international organizations (Sovereign Wealth
Funds, Foreign central banks), financial institutions (Banks,
other asset management companies) are eligible to register
as FIIs.

Corporate bond repo


The Reserve Bank of India has recently permitted market
participants to undertake repos in corporate bonds (listed
and rated AA or above). This is expected to improve
liquidity in the corporate bond market. To contain leverage, a
minimum haircut of 25% has been stipulated and selling of
borrowed securities under repo has been disallowed during
the repo period. This market has been slow to pick up with
very few trades reported so far.

A single FII may register several sub-accounts under whose


names it can invest in India. The individual sub-accounts
may be held by a corporation, a fund or even an individual.
However, non-resident Indians (NRIs) are not eligible to
hold a sub-account.
After registering with SEBI, FIIs must appoint a domestic
custodian bank to conduct their onshore investment. The
domestic custodian settles the transaction, ensures
compliance with respect to investment limits and reports
daily transactions to SEBI.
Allocation of limits
As per SEBI notifications, the USD15bn unrestricted limits
are allocated via open bidding in an auction as well as on a
first-come-first-served basis. However, infrastructure bond
limits are available on tap.
Open bidding process via auctions
For the allocation of limits via auctions, the BSE and NSE
stock exchanges provide an open-bidding platform, through
which FIIs bid for the price of individual lots in a French
auction format. The bidding is executed through the existing
trading members of the stock exchanges, who have access to
the bidding platform. The maximum amount that can be
allocated to a single investor varies from auction to auction,
so does the minimum lot size. The price of the bid for these
limits is quoted as a percentage of notional amount in basis
points and needs to be paid in advance.
These limits must be utilized within 90 calendar days of the
allocation. In case of redemption or sale by a FII, the FII has
to replenish its limit up to the extent of the redemption/sale
within 15 working days, failing which the limit expires and

16

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Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

become eligible for re-allocation.


First come first served basis (FCFS)
Some part of the limits as well as FIIs unutilized limits
may be re-allocated to others. Interested FIIs may apply
directly via email to SEBI for allocation. There is no auction
in this case nor is there any fee charged. SEBI announces a
date (typically the day after the limits auction) for this
process. The email server remains open from 8:30 a.m.
local time and emails must be addressed to
fii_debtrequests@sebi.gov.in. A penalty is charged if the
FII did not utilize its limit within 22 working days of
allocation. The penalty for non-utilization of limits is the
weighted average of the winning bids in the multiple price
auction that took place just before.
Taxation and Repatriation
FIIs that have registered with the RBI can fully repatriate
capital gains and interest income, together with initial
capital, after the payment of Indian withholding taxes. All
gross interest income is subject to a maximum withholding
tax of 20%. Residents of certain countries with which India
has tax treaties have a lower withholding tax. For example,
residents of Singapore and UK have to pay 15%. Investors
are also subject to a capital gains tax of 10%, if the holding
period is less than one year.
Both the tax on interest and on capital gains can be lower or
even exempt for residents of certain countries that have
concluded tax treaties with India. Investors should consult
tax professionals to determine their specific tax liabilities.

Appendix 2: WHT on FIIs based on location


Country
Australia
Austria
Bangladesh
Belarus
Belgium
Brazil
Bulgaria
Canada
China
Cyprus
Czechoslovakia
Czech Republic
Denmark
Egypt
Finland
France
Germany
Greece
Hungary
Indonesia
Israel
Italy
Japan
Jordan
Kazakhstan
Kenya
Korea
Kyrgyzstan
Libya
Malaysia
Malta
Mauritius
Mongolia
Morocco
Namibia
Nepal
Netherlands
New Zealand
Norway
Oman
Philippines
Poland
Portugal
Qatar
Romania

Dividends
%
15
20
15
15
15
15
15
25
10
15
20
10
20
20
15
10
10
20
15
15
10
20
15
10
10
15
20
10
20
20
15
15
15
10
10
15
10
15
15
12.5
20
15
15
10
20

Interest
%
15
20
10
10
15
15
15
15
10
10
15
10
15
20
10
15
10
20
15
10
10
15
15
10
10
15
15
10
20
20
10
20
15
10
10
15
10
10
15
10
15
15
10
10
15

Royalties
%
15
30
10
15
20
15
20
15
10
15
30
10
20
30
20
10/20
10
30
30
15
10
20
20
20
10
20
15
15
30
30
15
15
15
10
10
15
10
10
30
15
15
22.5
10
10
22.5

17

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Abhishek Panda (91-22) 6157-3387
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Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

Country

Dividends Interest
%
%
Russian Federation
10
10
Singapore
15
15
South Africa
10
10
Spain
15
15
Sri Lanka
15
10
Sweden
10
10
Switzerland
15
15
Syria
0
7.5
Tanzania
15
12.5
Thailand
20
20
Trinidad & Tobago
10
10
Turkey
15
15
Turkmenistan
10
10
UAE
15
12.5
United Kingdom
15
15
United States
20
15
Uzbekistan
15
15
Vietnam
10
10
Zambia
15
10
Non treaty countries
0
20
*Source: Ministry of Finance
Please verify with tax professionals

Royalties
%
10
15
10
20
10
10
20
10
20
15
10
15
10
10
15
15
15
10
10
20

Appendix 3: SEBI notifications on FIIs


1. Foreign Institutional Investors (FII) Regulations, amended
upto October 2008
http://www.sebi.gov.in/acts/fiiregu2009.pdf
2. SEBI notification on Government bond and Corporate
bond (including infrastructure) limits for FIIs, November
2010
http://www.sebi.gov.in/circulars/2010/cirimdfiic182010.pdf
3. SEBI notification on Infrastructure Finance companies as
eligible infrastructure bonds issuers, August 2011
http://www.sebi.gov.in/cms/sebi_data/attachdocs/
1314336255733.pdf
4. Sub-categories under the Infrastructure bond limit for FIIs,
September 2011
http://www.sebi.gov.in/cms/sebi_data/attachdocs/
1317378140313.pdf
5. Definition of Infrastructure Companies as per Indias
External Commercial Borrowing policy, June 2005
http://www.pib.nic.in/newsite/erelease.aspx?relid=9593

18

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

Appendix 4: Useful Web addresses

Appendix 5: Abbreviations used in the primer

Clearing Corporation of India


www.ccilindia.com

CCIL Clearing Corporation of India Limited


CD Certificate of Deposit

Employees Provident Fund Organization


www.epfoindia.com
Gateway to Government of India Information
www.nic.in

CP Commercial Paper
CRR Cash Reserve Ratio
DFI Development Financial Institution

Life Insurance Corporation of India


www.licindia.com
J.P. Morgan Bloomberg Page
JPMU
Ministry of Finance
www.finmin.nic.in
National Stock Exchange of India
www.nseindia.com
Reserve Bank of India
www.rbi.org.in
Securities and Exchange Board of India
www.sebi.gov.in

DVP: Delivery vs Payment


EXIM Bank Export-Import Bank of India
FII Foreign Institutional Investor
FIMMDA The Fixed Income Money Market and
Derivatives Association of India
ICCL: Indian Clearing Corporation
IRFC Indian Railway Finance Corporation
MTM Mark-to-Market
NABARD National Bank for Agriculture and Rural
Development
NBFC Non-banking Finance Corporation
NHB National Housing Bank
NSCCL National Securities Clearing Corporation (NSCCL)
NSDL National Securities Depository Limited
PFC Power Finance Corporation
PGC Power Grid Corporation
PSU Public Sector Undertaking
QFI Qualified Foreign Investor
RBI Reserve Bank of India

19

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com
Nitin Dias (44-20) 7325-4760
nitin.a.dias@jpmorgan.com

REC Rural Electrification Corporation


SAIL Steel Authority of India Limited
SBI State Bank of India
SEBI Securities and Exchange Board of India
SIDBI Small Industries Development Bank of India
SLR Statutory Liquidity Ratio

20

Asia Rates Research


India local corporate bond guide
November 3, 2011

J.P. Morgan Securities (Asia Pacific) Limited


Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

Appendix 6: FIMMDA credit spreads matrix


Table: Average Traded Spreads of Corporate Bonds over FIMMDA-PDAI-Bloomberg Gilt Curve on September 29, 2011

In years

PSU & FIs


In bp

0.5

10

15

AAA

80

98

94

98

100

87

86

77

77

77

92

68

AA+

92

109

105

114

114

100

98

89

89

89

104

83

AA

106

123

121

129

130

118

118

110

108

106

119

100

In bp

0.5

10

15

AAA

73

98

94

85

87

88

87

85

85

85

85

68

AA+

85

109

105

100

101

101

99

97

97

97

97

81

AA

97

123

121

115

117

119

119

118

116

114

112

95

In years

Banks

In years

NBFCs
In bp

0.5

10

15

AAA

100

130

138

142

140

124

124

116

117

117

132

103

AA+

120

149

160

177

179

167

169

162

158

154

165

143

AA

144

169

175

195

204

198

199

192

188

184

194

161

In years

Corporates
In bp

0.5

10

15

AAA

89

115

112

118

118

103

103

96

95

95

109

88

AA+

104

130

132

140

142

130

132

126

125

123

137

116

AA

124

155

157

165

167

155

157

151

150

148

162

141

*Source: FIMMDA

21

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Abhishek Panda (91-22) 6157-3387
abhishek.x.panda@jpmorgan.com

Asia Rates Research


India local corporate bond guide
November 3, 2011

Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

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Nitin Dias (44-20) 7325-4760


nitin.a.dias@jpmorgan.com

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23