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The debt market is one of the most critical of the financial system of any economy
and acts as the fulcrum of a modern financial system. The debt market in most
developed countries is many times bigger than the other financial markets. Including
the equity market. The US bond market is more than USD 35 trillion in size with a
turnover exceeding 500 billion daily, representing the largest securities market in the
world The size of the world bonds market is close to USD 47 trillion which is nearly
equivalent to the total GDP of all the countries in the world.
The total size of the Indian debt market is currently estimated to be in the range of
USD 150 billion to 200 billion. India’s debt market accounts for approximately 30 per
cent of its GDP. The Indian bond market, measured by the estimated value of the
bond outstanding, is next only to the Japanese and Korean bond markets in Asia. The
Indian debt market in terms of larger than the equity market. In terms of the
daily settled deals, the debt and the forex markets currently (2008-09) command a
volume of Rs.1,40,000 crore against a meagre Rs. 20,000 crore in the equity markets
(including equity derivatives).
In the post-reforms era, a fairly well- segmented debt market has emerged comprising
the following
 Private corporate debt market
 Public sector undertaking bond market
 Government securities market
The government securities market accounts for more than 90 per cent of the turnover
in the debt market. It constitutes the principal segment of the debt market.

The debt market is a market where fixed income securities of various types and
features are issued and traded

History of the Indian Debt Market

The Indian debt market has traditionally been a wholesale market with participation
restricted to a few institutional players__ mainly blanks. Banks were the major
participants in the government securities market due to statutory requirements. The
turnover in the debt market too was quite low at a few hundred crores till the early
1190s.The debt market was fairly underdeveloped due to the administered interest rate
regime and due the availability of investment avenues which gave a higher rate of
return to investors.
In the early 1990s, the government needed a large amount of money for investment in
development and infrastructure projects .the government realized the need of a
vibrant6 efficient, and healthy debt market and undertook measures. The reserve bank
put in substantial efforts to develop the government securities market but market have
not yet fully developed in terms of volume and liquidity.
The debt market plays a key role in the efficient mobilization and allocation of
resources in the economy, financing the development activities of the government
transmitting signals for implementation of the monetary policy, facilitating liquidity
management in tune with both short-term and long term objectives, and pricing of
non-government securities in financial markets.
It is the debt market which can provided 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 a developing country like Indian
which requires a large amount of capital for achieving industrial and infrastructural
Regulation of the debt market the RBI regulated the government securities market and
money market while the corporate debt market comes under the purview of the
Securities Exchange and board of India (SEBI).
In order to promote an orderly development of the market, the government issued a
notification on March2, 2000,delineating the areas of responsibility between the
Reserve bank and the SEBI. The contracts for sale and purchase of government
securities, gold related securities money market securities and securities shall be from
these securities, and ready forward contracts in debt securities shall be regulated by
the RBI. Such contracts, if executed on the stock exchanges shall, however. Be
regulated by SEBI in a manner that is consistent with the guidelines issued by the

Do you know the impact of the debt market on the economy ?

 Opportunity for investors to diversify their investment portfolio. • Higher liquidity
and control over credit. • Better corporate governance.
 Improved transparency because of stringent disclosure norms and auditing
 Less risk compared to the equity markets, encouraging low-risk investments. This
leads to inflow of funds in the economy.
 funds for Increased implementation of government development plans. The
government can raise funds at lower costs by issuing government securities

The major reforms that took place in the 1990’s ?

 Introduction of the auction system for sale of dated government securities in June
 The RBI moved to computerize the SGL and implement a form of a ‘delivery
versus payment’ (DVP) system.
 Innovative products in form of Zero Coupon Bonds and Capital Indexed Bonds (Ex.
Inflation Linked) were issued.
 The RBI setup “trade for trade” regime. All forms of netting were prohibited.
 Wholesale Debt Market (WDM) segment was set up at NSE.
 Interest Income in G-Secs was exempted from the purview of TDO you know the
impact of the debt market on the economy?
 Opportunity for investors to diversify their investment portfolio.
 Higher liquidity and control over credit.
 Better corporate governance.
 Improved transparency because of stringent disclosure norms and auditing
 Less risk compared to the equity markets, encouraging low-risk investments. This
leads to inflow of funds in the economy.
 Increased funds for implementation of government development plans. The
government can raise funds at lower costs by issuing government securities. The
major reforms that took place in the 1990’s
 Introduction of the auction system for sale of dated government securities in June
 The RBI moved to computerize the SGL and implement a form of a ‘delivery versus
payment’ (DVP) system.
 Innovative products in form of Zero Coupon Bonds and Capital Indexed Bonds (Ex.
Inflation Linked) were issued. • The RBI setup “trade for trade” regime. All forms of
netting were prohibited.
 Wholesale Debt Market (WDM) segment was set up at NSE. • Interest Income in G-
Secs was exempted from the purview of T

Link Between the Money Market and the Debt Market

The money market is a market dealing in short-term debt instruments (up to one
year).while the debt market is a market for long-term debt instruments (more than one
year). The money market supports the long-term debt market by increasing the
liquidity of securities. A developed money market is a prerequisite for the
development of a debt market.

Characteristics of the Debt Market

The characteristics of an efficient debt market are a competitive market structure. low
transaction costs, a strong and safe market infrastructure and a high level of
heterogeneity among market participants. An efficient debt market helps in reducing
the borrowing costs, of the government. Reducing the pressure on institutional
financing by providing greater funding avenues, enhancing mobilization of resources
by unlocking unproductive investment like gold, and developing a stable yield curve.

Following are some features of debt market?

-Efficient mobilization and allocation of resources in the economy
-Financing the development activities of the Government

-Transmitting signals for implementation of the monetary policy

-Facilitating liquidity management in tune with overall short term and long term

Since the Government securities are issued to meet the short term and long term
financial needs of the government, they are not only used as instruments for raising
debt, but have emerged as key instruments for internal debt management, monetary
management and short term liquidity.


The debt market is the market where debt instruments are traded. Debt market refers
to the financial market where investors buy and sell debt securities, mostly in the
form of bonds. These markets are important source of funds, especially in a
developing economy like India. India debt market is one of the largest in Asia.

Participants in Indian debt markets

Central Government

The Central and the State Government need money to manage their short term and long term
finances and fund budgetary deficits. Being the largest issuers in the Indian Debt markets, they
raise money by issuing bonds and T-bill of different maturities.

Reserve Bank of India (RBI)

As a banker to the government, the RBI has a key task of managing the borrowing program of the
Government of India. It has the Money market and the G-Secs market under its purview. Apart
from its regulatory role it also performs several other important functions such as controlling
inflation (by managing policy / interest rates in the country), ensuring adequate credit at
reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the
country and ensuring a stable currency environment.


The SEBI acts as the regulator for the corporate debt market and the bond market wherein the
entities raise money from the public through public issue. The regulation comprises of manner in
which the money is raised and tries to ensure a fair play for the retail investor. It forces the issuer
to make the retail investor aware of the risks inherent in the investment, through its disclosure
norms. SEBI also regulates Mutual Funds and the instruments in which these mutual funds can
invest. Investment from Foreign Institutional Investors (FIIs) also falls under the SEBI's scanner.

Primary Dealers (PDs)

Primary Dealers (PDs) are market intermediaries appointed by RBI who underwrite and make
market in government securities by providing two-way quotes, and have access to the call and
repo markets for funds.


Banks are the largest investors in the debt markets, particularly the government securities market
due to SLR requirements. They are also the main participants in the call money and overnight
markets. They issue CDs and bonds in the debt markets and also arrange the CP issues of

The other participants in the Indian debt markets are…

 Financial Institutions
 Mutual Funds
 Provident & Pension Funds
 Insurance Companies
 Corporates

While financial institutions and corporates issue short and long term fixed income instruments to
meet their financial requirements. Insurance companies and Mutual Funds along with Provident &
Pension Funds are also the other large investors in the Indian debt markets who invest significant
amount mobilized from their investors.

The following are the advantages of debt market:

 The biggest advantage of investing in Indian debt market is its assured returns.
The returns that the market offer is almost risk-free (though there is always
certain amount of risks, however the trend says that return is almost assured).

 Safer are the government securities. On the other hand, there are certain
amounts of risks in the corporate, FI and PSU debt instruments. However,
investors can take help from the credit rating agencies which rate those debt
instruments. The interest in the instruments may vary depending upon the

 Another advantage of investing in India debt market is its high liquidity. Banks
offer easy loans to the investors against government securities.

 Greater safety and lower volatility as compared to other financial instruments.

 Variations possible in the structure of instruments like Index linked Bonds,


 Higher leverage available in case of borrowings against G-Secs.

 No TDS on interest payments.

Example: Tax exemption for interest earned on G-Secs. up to Rs.3000/- over
and above the limit of Rs.12000/- under Section 80L (as amended in the latest

 Greater diversification opportunities adequate trading opportunities with

continuing volatility expected in interest rates the world over.
As there are several advantages of investing in India debt market, there are certain
disadvantages as well.

 As the returns here are risk free, those are not as high as the equities market at
the same time. So, at one hand you are getting assured returns, but on the other
hand, you are getting less return at the same time.
 Retail participation is also very less here, though increased recently. There are
also some issues of liquidity and price discovery as the retail debt market is not
yet quite well developed.

 Debt securities usually have much smaller relative price changes than stocks or
commodities. Traders in debt securities must take larger positions to achieve the
same level of profits. It is not uncommon for individual stocks or even stock
indexes to move two percent or more during a trading day. Debt securities may
move two percent over several weeks or a month. Even with ten-to-one
leverage, trading debt securities requires the trader to use much larger position
sizes than a stock market trader.

 The debt trading markets are dominated by hedge funds and the trading desks
of large financial institutions. These traders have access to information and
capital that is difficult or impossible for the individual trader to obtain. By the
time the small trader gets the news that these large players are trading on, it may
be too late to profit from the news.

 Traders in corporate debt securities trade high-yield or junk bonds to earn the
higher interest rates these bonds pay. The trader can also achieve capital gains
if the issuing corporation gets an upgrade in its credit rating. The downside of
high yield bonds is a bankruptcy and total loss of the principal invested.

Types of Instruments Traded in the Debt Market

1. Government Securities –
o It is the Reserve Bank of India that issues Government Securities or G-Secs on
behalf of the Government of India.
o These securities have a maturity period of 1 to 30 years. G-Secs offer fixed
interest rate, where interests are payable semi-annually.
o For shorter term, there are Treasury Bills or T-Bills, which are issued by the
RBI for 91 days, 182 days and 364 days.
2. Corporate Bonds –
o These bonds come from PSUs and private corporations and are offered for an
extensive range of tenures up to 15 years.
o Comparing to Government Securities , corporate bonds carry higher risks,
which depend upon the corporation, the industry where the corporation is
currently operating, the current market conditions, and the rating of the

3. Certificate if Deposits
o Bank term deposits, are issued in Demat form
o Banks can offer CDs which have maturity between 7 days and 1 year.
o CDs from financial institutions have maturity between 1 and 3 years

4. Commercial Paper
o There are short term securities with maturity of 7 to 365 days.

Structured Debt –

o Structured debt is some type of debt instrument that the lender has created and
adapted to fit the needs and circumstances of the borrower .
o A debt package of this type usually includes one or more incentives that
encourage the debtor to do business with the lender, rather than seeking to
develop a working relationship with other lenders.
o While the overall structure of the debt is adapted to the needs of the borrower,
the terms also benefit the lender in the long term.
o The main goal of structured debt is to create a debt situation that provides the
debtor with as many benefits as possible, while also keeping the overall debt
load as low as possible
o At the same time, the lender receives an equitable return for the structured debt

The different types of instruments traded in debt market can be classified into
following segments:

Types Issuers Instruments

1. Zero Coupon bonds
2. Coupon bearing bonds
Central Government : 3. Treasury bills
Government Securities
State Government : 4. Floating rate bonds
1. Coupon bearing bond
1. Debentures
Government agencies , 2. Government guaranteed
Public sectors bonds statutory bodies , public bonds
sector undertakings 3. Commercial papers
4. PSU bonds
1. Debentures
2. Commercial papers
3. Fixed floating rate
4. Zero coupon bonds
Corporates :
5. Inter-corporate deposits
Private sector bonds Bank :
1. Certificate of debentures
Financial Institutions :
2. Debentures
3. Bonds
1. Certificate of deposits
2. Bonds

Dematerialization of Debt Securities

Dematerialized trading was earlier restricted only to the equity shares and units of
MFs. With the passage of Finance Act 2000, stamp duty payable on transfer of debt
instruments was waived, in case of the transfer taking place in the demat mode. In
order to promote dematerialization, RBI specified that repos on PSU bonds would be
permitted only in demat form. From June 30, 2001, FIs, PDs and SDs have been
permitted to make fresh investments and hold CP only in dematerialized form. The
outstanding investments in scrip had to be converted into demat by October 2001.
Since June 30, 2002, banks and FIs are required to issue CDs only in demat form.
With these developments, NSDL and CDSL have admitted debt instruments such as
debentures, bonds, CPs, CDs etc., irrespective of whether these debt instruments are
listed, unlisted or privately placed.
Holding and trading in dematerialized form provides a number of benefits to the
investors. As securities in demat form can be held and transferred in any
denomination, it is possible for the participant to sell securities to corporate clients,
provident funds, trusts in smaller lots. This was not possible in the physical
environment, as splitting of securities involved considerable amount of time. In the
demat form, it is possible for the participant to STRIP these securities and create a
retail market for the same.
With effect from October 31, 2001, banks, financial institutions, and primary dealers
can make fresh investment in and hold bonds and debentures, privately placed or
otherwise, only in demat form.


The private corporate sector needs large amounts of long-term funds for expansion.
Modernization, restructuring operations and mergers/acquisitions. It can raise funds
through equity and debt. Equity is risk capital and there are limit to which a corporate
can raise funds through equity shares. Corporates need to diversify funding sources.
Hence, they can raise capital either through long-term borrowing from banks and
financial institutions or by issuing debentures/bonds in the debt market. Banks do lend
long-term loans but they do not have the capacity nor the appetite for such long-term
loans. Moreover, lending a large number of long-term loans would create asset-
liability mismatch problem for the banks as banks accept short-term deposits. But,
banks would be willing to invest in 10 to 20 years bonds issued by corporates if they
have an exit route. i. e, they are in a the corporate bond market. The corporate debt
market is a market wherein debt securities of corporates are issued and traded therein.
A well-developed corporate bond market enables corporates to raise long-term capital
for long-gestation projects/acquisitions at a lower cost and thereby aid in economic
growth. The corporate debt market supplements the banking system. It enables a
better asset- liability match for both corporates and banks. Moreover, rating of debt
securities by credit rating agencies helps in increasing investor confidence, which, in
turn. Enables investors to hold a diversified portfolio consisting of both debt and
equity instruments. As investors such as mutual funds, banks, and insurance
companies need a steady flow of income to cater to the varying needs of their
customers, they are major investors in this market. An active corporate debt market
fosters market discipline and nurtures credit culture.
SEBI ( Issue and Listing of Debt Securities) regulation, 2008 define ‘debt securities’ as
non-convertible debt securities which create or acknowledge indebtedness, and include
debentures, bonds and such other securities of a body corporate or any statutory body
constituted by virtue of a legislation, whether s non-convertible debt securities which
create or acknowledge constituting a charge on the assets of the body corporate or not,
but excludes bonds issued Government or such other bodies as may be specified by the
SEBI receipts and securitized debt instruments.

Significance of the Corporate Debt Market

 Aids in economic growth by providing long-term capital
 Supplements the banking system
 A stable source of finance
 Reduces cost of debt capital of corporates
 Fosters market discipline and nurtures credit culture
 Enables investors to hold a diversified portfolio
 Enable a better asset-liability match for banks and corporate

The investors in this market are banks, financial institutions, insurance companies,
mutual funds, retirement funds ,provident funds, and foreign institutional investors.
Private sector companies raise funds from the debt market by issuing debentures. These
debentures may be convertible debentures, which can be converted into equity (partially
or fully convertible debentures), or non- convertible debentures (NCDs) These are
governed by the provisions of the Companies Act. Interest on these debentures is
calculated on an actual 365- day basis. Tax deduction at source (TDS) is applicable.
Convertible bonds is a preferred source of raising funds in volatile market. In 2007,
India was the fourth most active market in the world in convertible debentures
Corporates adopt either the public offering route or private placement route for issuing
debentures/bonds. The public issues of debentures are open to all investors and
allotment is made on a pro-rata basis. Coupon rates are fixed by the issuer and lead
manager prior to the offering. In the case of privately placed debentures, the terms of
the issue are decide by negotiations between issuers and bidders. Some privately placed
debt instruments are subsequently listed on stock exchanges.
The private corporate sector has designed a hybrid variety of instruments combining
the features of both debt and equity. A wide variety of instruments with longer maturity
and with call and put options have been issued by the private corporate sector. Many
Corporates have issued floating rate bonds (FRBs), besides fixed rate bonds.

Primary and Secondary Segment of Debt Market

In the primary market, new debt issues are floated either through prospectus, rights or
privates placement. The private placement market is more attractive because the cost
of raising a loan is only half of that of loans from the market. Under the current
guidelines, corporates are required to report details of resources raised through private
placements to the stock exchanges-BSE and NSE. This was aimed at giving investors
a good idea of how the companies propose to use these funds and also the risk return
allowed. In mid-2006, the US private placement market, raising 300 million through a
10 – 12 year loan. More Indian companies are likely to tap this market.

The debt instruments are traded on the OTCEI, BSE, and WDM segment of NSE.
BSE is the first exchange in the country to provide an electronic trading platform for
corporate and other non-government debt securities rough the order matching system.
The clearing and settlement of the trades is undertaken through the clearing house of
the exchange.

At present, bond deals in India are struck over phones, following which the players
report the transactions on NDS. The negotiated dealing system NDS is used
predominantly as a reporting

Platform. The RBI wants the price discovery. Order matching and deals to take place
on the NDS.

The National Stock Exchange of India Ltd, se up a separate segment for trading in
debt securities known as the Wholesale Debt Market segment of the exchange. In fact,
NSE commenced operations in June 1994 with the WDM segment of the exchange.
Prior to he commencement of trading in the WDM segment of NSE, the only trading
mechanism available in debt market was the telephone. The NSE provided, for the
first time in the country, an on-line automated screen based system known as NEAT
(National Exchange for Automated Trading) across a wide range of debt instruments.
This system is an order driven system which matches the best buy and sell orders on a
price time priority and simultaneously protects the identity of the buyer and the seller.
Trading under this system leads to a risk free, efficient price mechanism and

Initially, government securities, T-bills, and bonds issued by public sector

undertakings were made available for trading. Now his range has been widened to
include non-traditional instruments such as floating rate bonds, zero coupon bonds,
index bonds, commercial a paper, certificate of deposit, corporate debentures state
government loans, SLR and non-SLR bonds issued by financial institutions and local
bodies, units of mutual funds and securitized debt.

Types of Entitles on the NSE- WDM Segment

 Trading members
 Participants

On the NSE-WDM segment, brokers are involved merely in order execution for their
clients only. Besides brokers there are two types of entities in this segment: (1)
trading members and (2) participants. Trading membership is open to corporates,
subsidiaries of banks and financial institutions satellite dealers and primary dealers
who have a minimum net worth of Rs 2 crore. They can place orders and execute
Trades on the system. Participants take direct settlement responsibility for trades
executed on the exchange on their behalf by an NSE Trading member. Participants
comprise of large investors such as banks, primary dealers and institutions who are
not members of NSE and therefore cannot directly transact but effect transactions
through the NSE-WDM segment.

Types of Trades on the NSE- WDM segment

 Outright
 Repos

The government security trade on the WDM segment could be outright trade or repo
transaction with a flexibility for varying dats of settlement which. in Turn, is to be
clearly specified. However. For non-government securities only outright transactions
are allowed. ALL outright secondary market transactions in government securities are
settled on T +1 basis form May 24, 2005. In case of repo transactions in government
securities, the first leg can be settled either on T+0 basis or T + 1 basis. All outright
transactions of non- government securities can be settled up to T + 2. All trade in
government securities is reported to RBI- SGL through the Negotiated Dealing
System (NDS) or the order matching of RBI. The clearing Corporation of India
Limited (CCIL) provides settlement guarantee for transactions in government
securities including repos. The trader are settled on a net basis through the DVP-III
system while the trades for non- government securities basis directly between
participants on delivery versus payment basis. The settlement cycle government
securities was standardized to T + 1 FROM May 11, 2005.

Regulations on Issue and Listing of Debt Securities

The SEBI issued regulations on issue and listing of debt securities on june 6, 2008
which are as follows:

1. An issuer cannot make any public issue of debt securities if on the date
of filling of draft offer document and final offer document, the issuer
or the person in control of the issuer, or its promoter, has been
restrained or prohibited or debarred by the SEBI from accessing the
securities market or dealing in securities and such direction or order is
in force. Moreover, the issuer needs to apply to one or more recognized
stock exchanges for listing of such securities therein. If the application
is made to more than one recognized stock exchanges having
nationwide trading terminals, the issuer shall choose one of them as the
designated stock exchange. ‘Designated stock exchange’ means a stock
exchange in which securities of the issuer are listed or proposed means
a listed and which securities of the purposes of a particular issue.
2. The issuer shall appoint one or more merchant bankers registered with
the SEBI at least one of whom shall be a lead merchant banker and one
or more debentures trustees in accordance with the provisions of
sections 117B of the Companies Act, 1956 ( 1 of 1956) and Securities
and Exchange board of India (Debentures Trustees0 Regulations’
3. The issuer shall not issue debt issue securities for providing loan to or
acquisition of shares of any person who is part of the same group or is
under the same management. Two persons shall be deemed to be ‘part
of the same group’ if they belong to the same group within the
meaning of clause (ef) of section 2 of the Monopolies and Restrictive
Trade Practices Act, 1969 (54 of 1969) or if they own ‘inter-connected
undertakings’ whitin the meaning of clause (g) of section 2 of that Act;
The expression ‘ under the same management ‘ shall have the meaning
derived from sub-section (1B) of section 370 of the companies act,
1956 (1 of 1956).
4. The offer document shall contain all material disclosures which are
necessary for the subscribers of the debt securities to take an informed
investment decision. The offer document shall contain the disclosures
specified in schedule II of the companies act ,1956, disclosures
specified by the SEBI . For the purpose of this regulation, ‘material’
means anything which is likely to impact an investors’ investment