Corporate Bonds

• A Corporate bond is a security issued by a corporation.

• It represents a promise to pay bondholders a fixed sum of money at a future matu
rity date along with periodic payments of interest.
• Bond is a debt security, in which the authorized issuer owes the holders a debt
and, depending on the terms of the bond, is obliged to pay interest (the coupon
) and/or to repay the principal at a later date, termed maturity.
• A bond is a formal contract to repay borrowed money with interest at fixed inter
vals
• Issuers (borrowers) can be the government, public and private sector corporation
s.
• Bonds issued by government are known as G-securities and bonds issued by corpora
tions are known as corporate bonds.
• corporate bonds" is used to include all bonds except those issued by governments
in their own currencies. Strictly speaking, however, it only applies to those i
ssued by corporations. The bonds of local authorities and supranational organiza
tions do not fit in either category
Bond Market in INDIA
Indian debt market is composed of government bonds to the extent of 92% of the v
olumes; the corporate bond market is still at the nascent stage. The Bond Market
in India with the liberalization has been transformed completely. The opening u
p of the financial market at present has influenced several foreign investors ho
lding upto 30% of the financial in form of fixed income to invest in the bond ma
rket in India. The bond market in India has diversified to a large extent and th
at is a huge contributor to the stable growth of the economy. The bond market ha
s immense potential in raising funds to support the infrastructural development
undertaken by the government and expansion plans of the companies.
Sometimes the unavailability of funds becomes one of the major problems for the
large organization. The bond market in India plays an important role in fund rai
sing for developmental ventures. Bonds are issued and sold to the public for fun
ds.
Bonds are interest bearing debt certificates. Bonds under the bond market in Ind
ia may be issued by the large private organizations and Government Company. The
bond market in India has huge opportunities for the market is still quite shallo
w. The equity market is more popular than the bond market in India. At present t
he bond market has emerged into an important financial sector.
Initiatives to promote Corporate Bond Market
The corporate bond market has been in existence in India for a long time. Howeve
r, despite a long history, the size of the public issue segment of the corporate
bond market in India has remained quite insignificant. The lack of market infra
structure and comprehensive regulatory framework coupled with low issuance leadi
ng to low liquidity in the secondary market, narrow investor base, inadequate cr
edit assessment skills, high cost of issuance, lack of transparency in trades an
d underdevelopment of securitization of products are some of the major factors t
hat hindered the growth of the private corporate debt market.
India needs to strengthen its corporate bond market in order to meet the funding
requirements of various infrastructure projects "Although India has a vibrant e
quity market, there is an absence of bond market which is required for funding o
f long-term infrastructure projects. The presence of a bond market is necessary
for India's success. Over the years greater innovation has been witnessed in the
corporate bond issuances, like floating rate instruments, zero coupon bonds, co
nvertible bonds, callable (put-able) bonds and step-redemption bonds.
In the past few months SEBI had initiated a slew of measures in order to properl
y
Promote primary and secondary corporate debt market in India.
In 2005, the High Level Expert Committee on Corporate Bonds and Securitization s
ubmits its report giving a plethora of recommendations for the development of th
e corporate bond and securitization markets in India. The Government had set up
this committee to look into legal, regulatory, tax and market design issues in t
he development of the corporate bond and securitization markets. Steps were take
n to create a single, unified exchange traded market for corporate bonds.
In 2006, SEBI permits BSE to set up a reporting platform from January 1, 2007
to capture all information related to trading in corporate bonds as accurately a
nd as close to execution as possible.
SEBI also announces its intention to permit recognized stock exchanges having na
tionwide access to set up corporate bond trading platform to enable efficient pr
ice discovery and reliable clearing and settlement in a gradual manner. Followin
g are some of the measures taken to promote corporate bond market:
(i) SEBI will be responsible for primary market (public issues as well as pr
ivate placement by listed companies) for corporate debt;
(ii) RBI will be responsible for the market for repo/reverse repo transactio
ns in corporate debt. However, if it is traded on exchanges, trading and settlem
ent procedure would be determined by SEBI.
(iii) SEBI will be responsible for the secondary market (OTC as well as Excha
nge) for the corporate debt;
(iv) The above framework would apply irrespective of the parties (bank or non b
ank involved in a transaction;
(v) The views in respect of trading of unlisted securities and derivatives o
n corporate debt (other than repo/reverse repo) would be taken as and when the n
eed arises.
In 2007, SEBI permits both BSE and NSE to have in place corporate bond trading
platforms to enable efficient price discovery and reliable clearing and settleme
nt facility in a gradual manner
In March 2007, the Fixed Income Money Market and Derivatives Association of Indi
a (FIMMDA) proposes to set up a reporting platform for corporate bonds and also
provide value added dissemination of information on corporate bonds as in the ca
se of government securities.
In August 2007, SEBI grants approval to FIMMDA for starting Corporate Bond Trade
Reporting Platform as the third reporting platform after BSE and NSE.
In October 2007, SEBI obtains confirmations from BSE and NSE on their preparedne
ss for introduction of repos in corporate bonds.
In May 2008, SEBI sets up an Advisory Committee named “Corporate Bonds and Securit
ization Advisory Committee” (CoBoSAC) for making recommendations to SEBI on develo
ping the market for corporate bonds and securitized debt instruments further.

Equity Are More Popular Than Debt Market In India

• Though all over the a well developed capital market consists of both the equity
and bond market, in India equity markets are more popular and far developed than
the debt markets whereas in developed economies bond markets tend to be bigger
in size then the equity market.
• The President of ASSOCHAM Dr, Swarti Piramal while releasing the chamber paper o
n “Indian Financial Markets- Roadmap 2020” further said Indian debt market is compos
ed of government bonds to the extent of 92% of the volumes; the corporate bond m
arket is still at the nascent stage.
• Although we have the largest number of listed companies on the capital market, t
he share of corporate bonds in GDP is merely 3.3%, compared to 10.6% in China 41
.7% in Japan, 49.3% in Korea among others. Further, close to 80% of corporate bo
nds comprises privately placed debt of public financial institutions. The second
ary market, therefore, has not developed commensurately.
• SEBI has made efforts to facilitate trading of corporate bonds on the stock exch
ange platforms, however, government securities trading have turned out a better
performance owing to several structural changes introduced by the Government and
RBI.
• The study indicates that companies raised Rs 2.12 lakh crore through corporate b
onds in 2009-10, up 22.71% from Rs 1.73 lakh crore in 2008-09. India has witness
ed a boost in trading in the recent past. Total trading in corporate bonds more
than doubled from an average of Rs. 1,550 crore in October 2009 to Rs 3,356 cror
e in March 2010, as reported by the National Stock Exchange and the Bombay Stock
Exchange.
• Dr. Piramal said that government decisions to increase the FII investment limit
in Government Securities and Corporate Bonds by US $ 5 billion would open up new
avenues for FII investment in debt and cater to the growth of debt markets in t
he country.
• It may be mentioned that, SEBI has stipulated that all trades in corporate bonds
would now be routed through stock exchange platform. This would help in reducin
g settlement risk and reduce transaction costs.
• The measure recommendations for reforms in the corporate debt market include exp
ansion of the Corporate Bond market would be – means to uniform stamp duty, screen
based trading, clearing house settlement, increase in secondary market activity
and thereby assist in transparent price discovery and avenue for early exits fo
r investors and consequently also lead to more Issuers of long tenor debt.
• The investment guidelines of provident and pension funds for investing in corpor
ate bonds are stringent and biased towards category of issuers. There should be
a gradual relaxation of investment restrictions and forced rule based buying on
long-term investors such as insurance companies, pension funds and Banks. This w
ill give the required flexibility in deciding the investments based on its merit
.
• Relaxing FII limits for corporate bond participation when needed. Allow greater
participation for FIIs (Not just limited by their exposure) as it will help crea
te liquidity. Interest-rate derivatives are needed to hedge rate risks, the larg
est macro-economic risk. Make interest rate futures available on a broader range
of securities (both long- and short-term)
• Credit trading is an essential prerequisite for the development of the corporate
debt market. Regulatory reforms are required in this space keeping in mind the
learning’s from the International space. The current withholding tax of 20% should
be removed to encourage investors to invest in debt securities.

Bonds
Risk
Yield To Maturity (Per Annum)
GILTS or Gilt Edged or G-Securities
Low – Available in various maturities and Zero, Fixed or Floating Interest
/Coupon
6% - 9%
State Government Bonds
Low – Perceived guarantee from Central Government
6% - 9%
Municipal Bonds (Urban Local Bodies)
Still Developing. Very few issuances.
Public Sector Unit (PSU) Bonds / Public
Low to Medium –Perceived guarantee from Central Government
6% - 9%
Corporate Debt / Non Convertible
Debenture
Medium to High
8% - 11%

Features of Corporate Bonds

• The bond’s principal is the amount borrowed by the company and the amount owed to
the bond holder on the maturity date.
• The bond’s maturity date is the time at which a bond becomes due and the principal
must be repaid.
• The bond’s coupon rate is the specified interest rate (or $ amount) that must be p
eriodically paid.
• The bond’s current yield is the annual interest (income) divided by the current pr
ice of the security.
• The bond’s yield-to-maturity is the yield (expressed as a compound rate of return)
earned on a bond from the time it is acquired until the maturity date of the bo
nd.