REFORMS OF DEBT MARKET

IN INDIA

Submitted by Ashish
Patel
Chetna Srivastava
Damishk Verma
Indresh Pratap Singh

INTRODUCTION OF DEBT MARKET

Debt market refers to the financial market
where investors buy and sell debt securities.
A debt is a amount borrowed, or it gives the
borrowing party permission to borrow money
under the conditions that is to be paid back at
a later date (with interest)
These markets are important source of funds in
developing economies- like INDIA
Entire debt segment is generally consists of 2/3
of primary market and 4/5 of secondary
market.
The Indian debt market is today one of the
largest in Asia and includes securities issued by
the
Government
(Central
&
State
2
Governments), public sector undertakings,

Why do we need Debt Market?

Insuring financial stability- supplements the
banking system to meet long term capital requirements
of corporate sector.

Enabling meaningful coverage of real state

sector.
Reduced Currency Mismatches- allowing for the
issue of local currency bonds.

Enable the generation of market interest

rates at the long end of the yield curve.
Creating new classes of investors- enabling
insurance companies & provident fund to invest in long
term corporate debts so as to diversify risk.

Types of Debt Market

Government Securities (G-SEC) MarketThe government debt market is the market for bonds and
securities issued by the central govt. ,state govt. , and the
semi govt. authorities such as IDBI ,IFCI ,SFCs

Corporate Debt Market-

It is consists of
Corporate Bonds, Debentures, CPs, CDs, ZCBs, Corporate
bonds are fixed income securities issued by corporates i.e.
entities other than Government.
Corporate debt market can be classified into: Primary market- The corporate sector can raise debt funds either through
prospectus or private placement.
Secondary market- It is a market where the corporate debt securities of
both private sector & public sector undertakings are traded.

Comparison of
Resource
Mobilization

33.30% increase
in Volume in
comparison of
In 2011-12
2010-11
about 72.60%
resources raised
by G-Sec

Regulators

Reforms in Debt Market

1992 Started auction of Central Government Securities at market
rates for the first time
364 day T-bill was introduced.

1993 91 day T-Bills offered through auctions at market rates.

1994 Issued Zero Coupon Bond for the first time.

Securities Trading Corporation of India (STCI) started
operation.
A historic agreement was signed b/w RBI and the govt. on the
net issue of ad-hoc T-bills.

1995 Floating Rate Bonds (FRBs) was introduced.

Delivery-versus-Payment (DVP) in Gsecs was introduced

Reforms in Debt Market contd.

1997 Technical Advisory Committee (TAC) was constituted.
FIMMDA(Fixed Income Money Market and Derivatives
Association of India) was established
FIIs were permitted to invest in G-sec

2002 Negotiated Dealing System (NDS) (Phase I)

operationalized
Clearing Corporation of India Ltd. (CCIL) was
operationalized
G-sec with call and put option was introduced.
Trade data of NDS is being made available on RBI website

2003 Trading of G-sec on stock exchanges started

Interest Rate Derivatives (IRD) have been introduced

Reforms in Debt Market contd.

2004 RTGS(Real Time Gross Settlement) system started functioning.

2005 over the NDS Electronic trading screen, with settlement on

price/time basis.
Sellers and buyers are ensured privacy due to settlement via
CCIL.

2006 PD structure was modified to allow banks to operate directly as

PDs.
RBI has published a yearly issuance timetable for dated bonds.
Short selling was allowed in march 2006.

2007 SEBI began publishing trading details of Corporate bond.

Impact of Debt Reforms

Market price determination of securities are very easy due to
transparency.
STCI acts as PD along with 17 other PDs have been acted as
important intermediaries.
Market intermediation has been improved.
Settlement risk have been reduced due to DVP-3.
Added more instruments(15-20% of borrowings of GOI is
Floating Rate Bonds).
Autonomy in monetary policy making.
Repo market has been developing.
FIIs have become an important player in market today(spec. in
T-Bills).
NDS, TAC, CCIL, FIMMDA, STCI Contributed to the institutional
framework for the market and reduced settlement risk.
Saving pattern in the economy has been shifted to public sec
saving to house hold saving and corporate savings.

BONDS ?
A bond is adebt investmentin which an investor
loans money to an entity (typically corporate or
governmental) which borrows the funds for a defined
period of time at a variable orfixed interest rate.
Bonds are used by companies, municipalities, states
and sovereign governments to raise money and
finance a variety of projects and activities. Owners of
bonds are debtholders, orcreditors, of the issuer.
Bonds are commonly referred to asfixed-income
securities.

TYPES OF BONDS

Fixed rate bonds

Floating rate bonds
Zero- coupon bonds
High yield bonds
Convertible bonds
Inflation indexed
Govt. bonds
Corporate bonds
Municipal bonds

REFORMS in BOND MARKET

Primary dealers
Primary dealers were introduced in 1996 to support the
auction system. Primary dealers may be independent or
may be linked to banks. In 2006, the primary dealer
structure was modified to allow banks to operate directly
as primary dealers (separate primary dealer subsidiaries
of banks were permitted to reintegrate into the parent
bank). There are currently six primary bank dealers and
11 "stand-alone" primary dealers. Primary dealers have
privileged access to preferential finance at the RBI
through the liquidity access facility and through repos.
Primary dealers are also given favored access to the
RBI's open market operations.

 Issuance
A when-issued (grey) market was introduced in
May 2006. Initially, it was only permitted when the
issue was a re-opening of an existing bond (one that
was currently trading). The rules were subsequently
relaxed to allow when-issued trading in selected
new issuances (bonds that were not re-openings of
old bonds). In 2001, a published timetable was
introduced for Treasury bill auctions but not for
longer-dated bonds. In part, this was a consequence
of weak control of the budget deficit, leading to
frequent revisions in funding requirements during
the course of the year. Since September 2006, the
RBI has published a yearly issuance timetable for
dated bonds.
Indian state governments raise finance through
omnibus issues organized by the RB

 Short selling

Short-selling was absolutely prohibited until

March 2006. It was then relaxed, allowing
primary dealers and scheduled commercial
banks to run intraday short positions. In
January 2007, this was further relaxed to
allow short positions to run for 5 days.
. However, the direction of policy is clear and
the barrier caused by short selling restrictions
is likely to continue to decline in importance.

Collateralized Borrowing and Lending

Obligations (CBLOs)
Established in 2001, CCIL is India's first
exclusive clearing and settlement institution
to provide guaranteed settlement facility for
transactions in government securities,
money market instruments, and foreign
exchange transactions and operates the
CBLO facility.

 Trading and Settlement Infrastructure

The Reserve Bank of India has significantly
enhanced Indias trading and settlement
infrastructure. Until 2002, the secondary
government bond market was a purely OTC
telephone market. The main participants were
banks and primary dealers with agency brokers
acting as intermediaries. In February 2002, the RBI
launched the Negotiated Dealing System (NDS). The
NDS was designed to work complementary to the
OTC trading structure, with the aim of its gradual
replacement. In August 2005, the RBI introduced its
Negotiated Dealing SystemOrder Matching
Segment (NDS-OM). This is a screen-based
anonymous trading and reporting platform enabling
electronic bidding in primary auctions and
disseminates trading information with a minimum

CORPORATE BONDS: REFORMS

Key developments have affected corporate bond
markets over the past decade:
dematerialization of holdings, as required by SEBI
since 2002;
increased trading transparency from compulsory
reporting of trades. There are currently three trade
reporting avenues for corporate bondsSEBI began
publishing trading details in January 2007;
documentation requirements for private placements
have been enhanced. Five years ago the term sheet
sent out to potential buyers was little more than
half a page and many key pieces of information
were omitted or implied. Today, it is far more
completemarket participants consider the
documentation adequate;
linking local rating agencies (of which there are five
offering bond ratings) to international rating

Treasury Bills
The treasury bill was created by the British
Treasury in 1877 at the urging of Walter
Bagehot, editor of The Economist
The T-bill is a discount bill intended to mimic
the commercial bill. The idea was to tap the
thriving London market that traded in
commercial bill.
Treasury bill are the main instruments for short
term borrowing by the Indian government.
Although State Governments also issued
treasury bills until 1950, since then it is only
the Central Government that has been selling
them.

TYPES OF T-BILLS
These have traditionally been of two types-:

1-Ordinary
These are issued to the public and RBI to meet the
needs of supplementary short-term finance by the
Government.
These bills are freely marketable and they can be
bought and sold at any time and they have
secondary market also

2-Ad hocs
always issued in favour of the RBI only
They are not sold through tender or auction.
They are purchased by the RBI on top and the RBI is
authorized to issue currency notes against them.

TYPES OF T-BILLS (on basis of

period)
On the basis of periodicity, treasury bills may be
classified into three they are:

1. 91 Days treasury bills-

91 day T-Bills are

issued at a discount by the RBI on behalf of the Central
Government as its agent.

2. 182 Days treasury bills-

The 182-day TB
was introduced in November,1986.This 182 day T-bill
was sold in the market by the RBI in auctions. The rates
available on 182 day T-bills were more attractive than
the 91 day T-bills.

3. 364 Days treasury bills-

364days bills do
not carry any fixed rate. The discount rate on these bills
are quoted in auction by the participants and accepted
by the authorities. Such a rate is called cut off rate.

REFORMS IN T-bills
Before the reforms of 1990s there were no dealers in
T-bills outside the RBI who were willing to buy and sell
any amount of such bills in the market

1992-93
364 day T-bill was introduced in April 1992 with the
objective of widening the T-bill market. They were
offered for sale on auction basis.
From April 92 DFHI started offering a 2 way quote in
Government securities to develop a secondary
market for T-bills.
182 day T-bill - No fresh 182 day treasury bills were
issued after April 16, 1992. The outstanding
treasury bills were all repaid before Oct 92

 1993-94
STCI(Securities Trading Corporation of India) was
setup.
Funding of 364 and 91 day T-bills was effected as an
important aspect of Internal Debt Management.
1994-95
GOI indicated that the practice of automatic
monetisation through ad hoc T-bills would be phased
out over a three year period so as to strengthen
fiscal discipline. This was formalised by an
agreement signed on Sep 9, 1994 between RBI and
GOI on the net issue of ad hoc T bills. As per the
agreement , the net issue of ad hoc Treasury bills for
the year 94-95 was not to exceed Rs. 6000 crore at
end of the year. If the net issue of ad hoc T-bills
exceeded Rs 90000 crore for more than ten
consecutive working days any time during the year,
RBI would issue fresh Government paper to curtail

 1994-95
An auction system for conversion of T-bills into
Government dated securities was introduced in
April 1995.
The DVP (Delivery Vs Payment) system in
Government securities was extended to T-bill
auction from Feb 14, 1996

Thank
You
`