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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 volume.is 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
-Facilitating liquidity management in tune with overall short term and long
term objectives.
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.
DEFINATION:
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.
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.
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.
SEBI
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
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 corporates.
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 Advantages and Disadvantages of Debt Market
Advantages
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 ratings.
Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans to
the investors against government securities.
Disadvantages
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.
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 corporation
3. Certificate if Deposits
o Certificate of Deposits (CDs), which usually offer higher returns than
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 arrangement
The different types of instruments traded in debt market can be classified into
following segments:
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.
BROKERS
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.
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.
THE PRIVATE CORPORATE DEBT MARKET
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.