UNIT:IV

DEBT MARKETS
DEBT MARKETS
Unit IV: Debt Markets - Introduction, History of Indian debt market, Debt market participants, Primary and secondary segment, The private Corporate debt market, The public sector undertaking bond market, The government securities Market, Issuance mechanism auction, sale, private placement; Trading system, SGL A/c, PD system, steps to develop debt markets.

Refer FIMMDA material Chapters 1, 2,3,5,7,11 & 12 Financial Institutions & Markets L.M.Bhole; 4th Edition

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OBJECTIVE of the SESSION

To understand what is meant by Debt & Debt market How has the Debt market evolved in India Debt Market Segments & Participants Government Securities (G-Sec) Market PSU Bond Market Private Corporate Debt Market Issuance Mechanism & Trading System Securities General Ledger Account & Primary Dealer System Steps to Develop Debt Markets

DEBT MARKETS

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DEBT & DEBT MARKET

Bonds & Shares form part of the capital markets. Shares are equity capital while bonds are debt capital. A bond is a debt capital market instrument issued by a borrower, who is then required to repay to the lender/investor the amount borrowed plus interest, over a specified period of time. Bonds are also known as Fixed Income Instruments & Dated Securities. Term to maturity is usually more than one year; Debt which are issued for less than a year are considered to be Money Market Debt.

DEBT MARKETS

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DEBT & DEBT MARKET

DEBT MARKETS

Technically speaking, Debt instruments are contracts in which: one party lends money (i.e., principal) to another on pre-determined terms w.r.t. rate of interest (i.e., coupon) to be paid by the borrower to the lender, the periodicity of such interest payment, and the repayment of the principal amount borrowed (i.e., either in installments or in bullet on maturity).
In the Indian securities markets, we generally use the term bond for debt instruments issued by the Central and State governments and public sector organizations, and the term debentures for instruments issued by private corporate sector.

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DEBT MARKET SEGMENTS

Three main segments in the Indian Debt Market are:

Government Securities
Centre; State & State Sponsored Securities Oldest & Most Dominant in terms of Mkt. Cap, Securities, trading volume & No. of participants Benchmark for pricing Corporate Paper An instrument of Monetary Policy by RBI Regulated by RBI

DEBT MARKETS

Outstanding

Public Sector Unit Bonds

Banks, FIs & Corporates have been the major subscribers Tax Free Bonds constitute over 50 % of outstanding PSU Bonds

Corporate Securities
Commercial Papers & Bonds Regulated by SEBI.

Banking Short Term Papers (Less Dominant Segment)

Certificate of Deposit

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DEBT MARKET PARTICIPANTS

1. 2.

3.

4. 5. 6. 7.

Central Govt. to raise money RBI Investment Banker to the Govt.; raises funds; participates in the market through open market operations; regulates Bank rates, REPO etc. Primary Dealers Market Intermediaries appointed by RBI; Underwriters & Market Makers for G. Sec.; have access to CALL markets & REPO markets. State Govts. for funding development projects & budget deficits. PSUs large issuers of Debt Securities; investors in Debt markets. Corporates issuers & investors. Public Sector FIs issuers & investors.

DEBT MARKETS

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DEBT MARKET PARTICIPANTS

8.

9.

10.

11. 12.

Banks largest investors (Treasury Bond & Bill Markets); for SLR requirements; arrangers for Commercial Papers; issuer & investor in Short Term Bond Markets. MFs as investors, who trade on their portfolios. (cannot borrow). FIIs Can invest up to US $ 1.75 Billion (applicable to Dated G. Sec. & T-Bills); both under 100% Debt route & the general 70:30 route. PFs Large investors; not active traders & limitations on selling (unless shortfall in funding). Charitable Institutions, Trusts & Societies Large Investors (but limitations on buying & trading).

DEBT MARKETS

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G-SEC. / BOND MARKET

# #

#
#

#
# # #

Comprises of long-term Govt. borrowings Largest segment of the debt market The government raises resources by issuing G-Secs, pre-dominantly to fund the fiscal deficit. Qualifies for SLR holdings of banks Auction-based price determination Screen based negotiations for trading Development of the yield curve for G-Secs for marking-to-market (M2M) portfolios of banks The G-Sec market also benefited from emergence of liquidity arrangement through the Liquidity Adjustment Facility (LAF)

DEBT MARKETS

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G-SEC. / BOND MARKET

YEAR Total Amount Issued (Rs. cr.)
38634.24 27911.06 43390.39 83752.82 86629.85 100183 114213 125000 121500 80350 131000 146000 156000

Weighted Tenor (Yrs)

5.7376 5.5112 6.5757 7.7064 12.6614 10.6 14.3 13.8 14.94 14.13 16.9 14.72 14.9

Weighted Cut-Off Yield (% p.a.)

13.7496 13.6928 12.01 11.8624 11.7661 10.95 9.44 7.34 5.71 6.11 7.34 7.89 8.12

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1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

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G-SEC. / BOND MARKET

Govt's Market Borrowings - Average Tenor & Yield
180000 160000
Total Amount Issued (Rs. Cr.)

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18
ield(% p.a.) rs) Weighted Tenor(Y & Y

16 14 12 10 8 6 4 2 0 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 200796 97 98 99 00 01 02 03 04 05 06 07 08 Years

140000 120000 100000 80000 60000 40000 20000 0

Total Amount Issued (Rs. cr.)

Weighted Tenor (Yrs)

Weighted Cut-Off Yield (% p.a.)

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SUBSIDIARY GENERAL LEDGER {SGL}

Central Govt. Secs. & T-Bills are held as dematerialized entries in the SGL of RBI. To trade these securities, participants should have an account (for securities) with the SGL & also a Current account (for money) with RBI. Settlement is on DvP basis. The PDO, enables the transfer of securities, thru SGL. CCIL Settlement Guarantee; Funds & Securities are netted for settlement.

DEBT MARKETS

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CONSTITUENT SUBSIDIARY GENERAL LEDGER {CSGL}

SGL account is a facility provided by RBI to large banks and FIs to hold their investments in G-Secs & T-bills in the electronic book entry form. Such institutions can settle their trades for securities held in SGL through a deliveryversus-payment (DvP) mechanism, which ensures simultaneous movement of funds and securities. As all investors in G-Secs do not have access to the SGL system, RBI has permitted such investors to open a gilt with any entity authorized by RBI for this purpose and thus avail of the DvP settlement. RBI has permitted NSCCL, NSDL, CDSL,SHCIL, banks and PDs to offer constituent SGL account facility to an investor who is interested in participating in the government securities market.

DEBT MARKETS

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PRIMARY DEALERS {PDs}

19

DEBT MARKETS

PDs Act as UNDERWRITERS (primary mkts.) & MARKET MAKERS (secondary mkts.) PDs are cos. having Minimum Net Owned funds* of Rs. 1000 crore. PDs are cos. having Net NPAs of 3% & a profit making record for the last 3 yrs.
*{Net Owned Funds = (Paid-up Equity Capital + Free Reserves + Balance in Share premium account + Capital Reserves) (Accumulated Loss Balance + Book value of intangible assets)}

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BIDDING COMMITMENT of PDs

#

#
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PDs have to make an annual commitment to bid for G. Secs. & T-Bills. A success ratio of 40% in T-Bill auctions should be on a half-yearly basis. A success ratio of 40% in Dated Sec.s auctions should be on a yearly basis. Aggregate bids should not be less than a specified amount. Specified amounts are separately quoted for Dated Secs. & TBills. RBI holds a discussion with PDs in the month of March immediately after the Union Budget, to finalize the annual business plan of each PD. The business plan is inclusive of Bidding Commitment & Underwriting obligation.

DEBT MARKETS

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U/w G-Secs of Central Govt.

#

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The u/w commitment in this case is divided into 2 parts (1) MUC & (2) ACU.. The MUC is so divided among all the PDs that at least 50% of the notified amt is mandatorily u/w equally by all PDs, put together. The remaining portion of the notified amount will be u/w through an ACU auction. RBI announces the MUC of each PD & the balance amt to be u/w under the ACU auction. Each PD has to bid for a minimum amt equivalent to its allotted MUC. PDs cannot bid for more than 30% of the notified amt in the ACU auction.

DEBT MARKETS

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U/w G-Secs of Central Govt.

#

# # #

Bids within the stipulated time, should indicate the amt of u/w commitment & u/w commission rates. (Depending upon the bids submitted RBI decides on the commission rate & informs the PDs.) Multiple bids can be submitted. Successful ACU Auction bidders are paid as per Auction Rules. For MUC, those PDs who have won 4% or more of the notified amt in the ACU auction, will be paid @ the weighted average of all the winning bids; others would be paid @ the weighted average of 3 lowest bids in the ACU auction.

DEBT MARKETS

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U/w G-Secs of Central Govt.

#

#
#

It is expected that the PDs bid for an amt not less than their total u/w commitment. If two or more issues are floated on the same day, the minimum bid amt will be applied to each issue separately. U/w commission will be paid on the amt accepted for u/w by the RBI RBI is SUPREME. RBI reserves the right to accept any amt of u/w up to 100% of the notified amt or even reject all the bids tendered by PDs for u/w, without assigning any reason.

DEBT MARKETS

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U/w G-Secs of State Govts.

# #

# # #

PDs to collectively u/w 100% of the notified amt. PDs cannot bid for more than 30% of the notified amt of the issue. If two issues are floated at the same time, the limit of 30% is applied to the sum of notified amounts (i.e. both issues are treated separately). Bids within the stipulated time, should indicate the amt of u/w commitment & u/w commission rates. Multiple bids can be submitted. Depending upon the bids submitted RBI decides on the commission rate & the u/w amt up to which bids would be accepted & inform the PDs.) RBI is SUPREME. RBI reserves the right to accept any amt of u/w up to 100% of the notified amt or even reject all the bids tendered by PDs for u/w, without assigning any reason. U/w commission will be paid on the amt accepted for u/w by the RBI.

DEBT MARKETS

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UNDERWRITING PROCEDURE
1.

2. 3. 4. 5.

6.
7.

PDs tender their bids in a prescribed form in a sealed cover, so as to reach The Chief General Manager, Internal Debt Management Cell, RBI, Central Office, Mumbai. *(Bids have to be submitted during Banking hours on the working day immediately preceding the auction day.) Multiple bids can be tendered. PD, not wishing to participate has to tender a bid with nil commitment. Depending upon the bids, RBI decides the cut-off rate of fee and the u/w amount upto which bids have been accepted. All bids above the cut-off fee are rejected. RBI is supreme, bids for any amount can be accepted and any bid could be rejected, without assigning any reason. PDs have to invariably bid, at least to the extent of their u/w commitment accepted by the RBI.

DEBT MARKETS

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UNDERWRITING PROCEDURE
8. PDs can set-off the accepted bids against the total devolvement, if any, on account of their u/w commitment accepted by the RBI. 9. Devolvement of Secs, if any, takes place on pro-rata basis, depending upon the amt. of u/w obligation accepted by each PD after setting-off the successful bids in the auction. 10. U/w fee is paid on the entire amount accepted for u/w by the RBI, irrespective of the actual amount of devolvement. The fee is credited in the current account of PDs at the RBI, on the auction date itself.

DEBT MARKETS

Same system is followed for u/w of State Govt. Bond Auctions.

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OTHER OBLIGATIONS of PDs

Support to Primary Market
U/w commitment; bidding commitment & success ratios as prescribed by RBI Adequate infrastructure & skiled Man-Power

DEBT MARKETS

Market Making in G-Secs

2-way prices thru NDS Om, OTC market & recognized stock exchanges Has to deal in secondary market for G. Secs. & take principal positions.

Advice & Educate investors Efficient Internal Control System

Fair conduct of business Settlement of Trades Maintenance of accounts

To provide RBI, access to all records, books, information & documents as may be required. For transactions in G-Secs. Separate books; for self & for clients.

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OTHER OBLIGATIONS of PDs

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Annual Turnover in a FY should not be less than 5 times in Govt. Dated Secs. & 10 times in T-Bills of average month end stocks during the year. Of the total, turnover in respect of outright transactions should not be less than 3 times in Govt. Dated Secs. & 6 times in T-Bills of average month end stocks during the year. Should inform RBI about major complaints against them. Should have a pre-approved ceiling, from the BoDs, regarding borrowings from money market.

(Turnover ratio is computed as the ratio of total purchase & sales during the yr in the secondary market to avg month-end stocks).

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FACILITIES to PDs
LAF Liquidity support from RBI Current & SGL Accounts Access to Call Money Market Member of Electronic dealing, trading & settlement systems Favored access to OMO by RBI Funds thru CPs

DEBT MARKETS

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SECONDARY MARKET for G-Secs

Listed as soon as they are issued. Predominantly, wholesale markets; with negotiated trades. SGL holders need to report the trade within 24 hrs. (Time sequence of trade is not observed.) Hence Negotiated trades, therefore last traded price is not observed. G. Sec. transaction are to be settled on the same date or the next working day. Transactions done thru a broker of recognized stock exchange should be settled on a T + 2 basis. In NDS, all trades between members of NDS have to be reported immediately. In such cases, the settlement is routed thru the CCIL.

DEBT MARKETS

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TRADE SETTLEMENT in G-Secs

* * * * * *

All trades reported to RBI-SGL for settlement. Trades settled on GROSS basis, thru DvP. Sec.s are held as dematerialized entries in SGL. PDO oversees the settlement of transactions. Gross settlement leads to occasional Grid Lock. Special Fund Facility undrawn collateralized lending & liquidity support facility from RBI.

DEBT MARKETS

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DEBT MARKET in INDIA

DEBT MARKETS

The Indian debt market is today one of the largest in Asia It includes securities issued by the Government (Central & State Governments), PSUs, other government bodies, financial institutions, banks and corporates The Indian debt markets with an outstanding issue size of Government securities (Central and state) close to Rs.13,474 billion and a secondary market turnover of around Rs 56,033 billion (in the year 2007) is the largest segment of the Indian financial markets. (Source RBI & CCIL). The Government Securities (G-Secs) market is the oldest and the largest component of the Indian debt market in terms of market capitalization, outstanding securities and trading volumes. The G-Secs market plays a vital role in the Indian economy as it provides the benchmark for determining the level of interest rates in the country through the yields on the government securities which are referred to as the risk-free rate of return in any economy.

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DEBT MARKET in INDIA

DEBT MARKETS

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DEBT MARKET in INDIA

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DEBT MARKET in INDIA

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DEBT MARKET in INDIA

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DEBT MARKET in INDIA

DEBT MARKETS

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DEBT MARKET in INDIA

DEBT MARKETS