Debt Market

India setting up $4 bln fund to backstop corporate debt market

• https://www.reuters.com/world/india/india-setting-up-4-bln-fund-
backstop-corporate-debt-market-2023-02-17/
Debt market

• Generally, the smaller business and individuals rely on funding available from financial institutions
to meet their requirements. However, the appetite of the government and financial institutions may
not be satisfied solely by the other financial institutions. Hence, now we need to understand the
overall sources of funds available in the economy.

• The financial market is broadly divided into two categories, money market and capital market.
• the capital market, which forms the primary source of funds for major players in the economy, is
divided into two major categories – Equity Market and Debt Market.
Debt Market
• The capital market of an economy is considered to be well developed, only when a parallel
development is ensured both in the equity and the debt segment.
• A well developed debt market can bethe optimal alternative, not only to support the financing
requirement for infrastructural development, but also to relieve banks from all the problems of long-
term financing, and spreading out the huge financing risk to a wider investor base to strengthen
India’s bank-based financial system, to allow corporate borrowers to tap the low cost market, to
enable investors including FIIs to earn fixed but higher returns, and above all to ensure overall
growth of the economy. 
News
• Arnav Pandya on Indore Municipal Corporation’s green bonds &
what’s in it for investors

• https://economictimes.indiatimes.com/markets/expert-view/arnav-
pandya-on-indore-municipal-corporations-green-bonds-whats-in-it-
for-investors/articleshow/97999433.cms
Features
• The Debt Market is the market where fixed income securities of various types and features are issued and traded.

• Market for fixed income securities issued by Central and State Governments, Municipal Corporations, Government bodies and commercial
entities like Financial Institutions, Banks, Public Sector Units, Public Ltd. Companies, Private Ltd.

• Fixed Income securities offer a predictable stream of payments by way of interest and repayment of principal at the maturity of the
instrument. Companies and also structured finance instruments.

• Fixed Income securities offer a predictable stream of payments by way of interest and repayment of principal at the maturity of the instrument
depending on the issuer of fixed income securities, it can be classified as Government Securities ,i.e. bonds issued by the Central /State
Government of an economy,

• Corporate Bonds, i.e. bonds issued by private and public corporations. Debt instruments can also be categorised in terms of their maturity,
nature of interest, special features embedded init, etc. Short term debt instruments, issued by the Central Government and by corporates ,are
respectively known as Treasury Bills and Commercial Papers.

• Similarly, securities issued with a maturity of more than one year are known as dated securities. The original maturity of a debt security may
range from 1 year to 30 years. The instruments with short term maturities or quasi-money instruments form part of the money market. The
Instruments traded in the money-market are Treasury Bills, Certificates of Deposits (CDs), Commercial Paper (CPs), Bills of Exchange, Call
Money, Repo/Reverse Repo, Collateralised Borowing and Lending Obligation (CBLO) and other such instruments of short-term maturities (i.e.
not exceeding 1 year with regard to the original maturity). The other instruments with maturity of more than 1 year form part of the debt market.
Types of securities
 G-Sec (government securities): G-Secs in India currently have a face value of ` 100/- and are issued
by the RBI on behalf of the Government of India. All G-Secs are normally coupon (Interest rate)
bearing and have semi annual coupon or interest payments with tenure of
between5to30years.This may change according to the structure of the Instrument.

 SDLs (State Development Loans): SDLs are issuance of respective states in order to manage
finances of their own state. All the features of SDLs are similar to G-Sec except that normally they
are issued for maximum maturity of 10 Years and their pricing considers fiscal health of the
respective states and risk element associated therein. For this reason SDLs are issued/traded at
market determined spread above the corresponding benchmark G-Sec. 
Types of securities
 benchmark G-Sec.  Treasury Bills/Cash Management Bills (CMB): Treasury Bills are for short-term
instruments issued by the RBI for the Government for financing the temporary funding
requirements and are issued for maturitiesof 91 Days, 182 Days and 364 Days, whereas CMBs are
issued for maturity below 91 days. T-Bills/ CMBs have a face value of ` 100 but have no coupon (no
interest payment). T-Bills are instead issued at a discount to the face value (say @ ` 95) and
redeemed at par (` 100). The difference of ` 5 (100 - 95) represents the returnto the investor
obtained at the end of the maturity period.

 Commercial Paper: Commercial Paper (CP) is an unsecured money market instrument issued by
corporates in the form of a promissory note.

 Certificate of Deposit: Certificate of Deposit(CD) is a negotiable money market instrument issued

by banks in dematerialised form or as Usance Promissory Note in the form of a promissory note.
Types of securities
 Fixed Rate Bonds: This is the most popular type of corporate bond traded in
mostofthemarkets,paying a semiannual but fixed coupon over their life and the principal at the end
of the maturity. 

 Floating Rate Bonds: Thesearethebonds, even if the coupon of which are usually paid
semiannually,thecouponrate is not fixed throughout the life and varies over time with reference to
some benchmark rate. These types of bonds may have some Floor orCap attached on it,
representing that even ifthe benchmark rate changes by any value, the couponrateeveniffloating but
will always lie within the range of Floor and Cap rate. Some of the well known benchmark rates used
in Indian market are MIBOR, Call Rate, T-bill rate, PLR, etc.

 Debentures: Debentures are also fixed interest debt instruments with different maturity, but is
usually secured innature andthereforeofferslower interest comparative to bonds. Debentures, based
on their convertibility to the form of equity, can be of three types: Non Convertible (NCD), Partially
Convertible (PCD), and Fully Convertible Debenture (FCD).
Types of securities
 Tax-saving infrastructure Bonds:Inordertofacilitate infrastructure financing through the bond route,
some special types of taxfreebonds, issued bysome infrastructure companies, areofferedtothe
investors.

 ZeroCouponBonds: Zero Coupon Bonds (ZCBs) are issued at a discount to their face value and the
principal/face value is repaid to the holders at the time of maturity. Instead of paying any periodic
coupons, the ZCB holder gets the price discount in the beginning itself. Therefore, ZCBs are
alternatively known as Deep Discount Bonds. Treasury Bills and CMBs are example of Zero
Coupon Bonds.

 Market Linked Debentures (MLD): MLDs have an underlying principal component in the form of
debt securities and where the returns are linked to market returns on other underlying securities/
indices such as Nifty or a 10-year government security paper. MLDs can beoftwotypes:principal
protected and principal non-protected.
News
• Indian debt markets will emerge 'Bold and Beautiful' in FY23-24 post
Budget 2023

• https://economictimes.indiatimes.com/markets/stocks/news/indian-
debt-markets-will-emerge-bold-and-beautiful-into-fy-2023-24-post-
budget-2023/articleshow/97618284.cms
Indian debt market in review: A year of changing narratives

https://gulfnews.com/world/asia/india/indian-debt-market-in-review-a-
year-of-changing-narratives-1.1674737171744
Issuers of securities
 Central Government

 State Governments

 Government Agencies/ Statutory Bodies

 Public Sector Units

 Corporate

 Banks

 Financial Institutions

 NBFCs 
Platform for issue of securities Corporate Bonds

• Similar to equity market, debt market also has primary market and secondary market.

• The primary market can be further divided into private placements and public issue.

• A private placement is defined as an issue of securities by a company to a selected group of persons.

• On the other side, a public issue is an offer made to the public in general to subscribe to the bonds. In a public issue, the
company has to issue a prospectus before issuing the bonds. After the public issue, these bonds are listed on a
recognised stock exchange in India.

• Unlike equities, the debt securities which are privately placed can be listed on a recognised stock exchange. Hence, both
the privately placed and public issue based securities can be traded on a recognised stock exchange. Even though any
securities including corporate bonds are primarily issued in the primary market, either through public or private
placements, the secondary market plays a number of important function, including: providing effective price discovery;
shifting risk; pricing new issues; offering an alternative mode of investment; aiding management of resources; and
enforcing discipline on the issuer.

• A private placement is defined as an issue of securities by a company to a selected group of persons   

secondary debt market

 Wholesale Debt Market - where the investors are mostly Banks, Financial Institutions, the RBI,
Primary Dealers, Insurance companies, MFs, Corporates and FIIs.

 Retail Debt Market involving participation by individual investors, provident funds,pension funds,
private trusts, NBFCs and other legal entities in addition to the wholesale investor classes.
Government Securities (G-Sec & SDLs)

• There is an active secondary market for G-Sec also. The securities acquired through auction are
bought/sold in secondary market either through Negotiated Dealing System – Order Matching 

• With this understanding the investors many times treat investment in a debt market security as a
risk free investment. However, the recent turmoil in the debt market triggered by the securities of
major players such as IL&FS, DHFL etc. was an eye opener for all investors.

• (NDS-OM) – an anonymous electronic trading platform or traded over the counter and subsequently
reported on NDSOM. Some secondary market activity in G-Sec is carried through stock exchange
also.
risks associated with debtsecurities:

 Interest Rate Risk: The primary risk of investing in any debt security, irrespective ofthenature ofthe security, is the
Interest Rate Risk. Price of a debt instrument is inversely related to the movement in risk-free rate of interest, say
yield of Government securities. Therefore, as and when interest rate increases, the price ofbondis expectedto
fall,leading to a loss for the holder of thesecurity. 

 Default Risk/Credit Risk: This can be defined as the risk that an issuer of a bond may be unable to make
timelypaymentofinterestor principal on a debt security or to otherwise comply with the provisions of a bond
indenture and is also referred to as credit risk. Credit risk inbondinvestmentincludes Credit Spread Risk and
DefaultRisk.Credit spreads reflects the credit worthiness of corporateborrowers,and dependuponthecreditrating
provided to the corporates by external rating agencies. Thevalueofacorporatebond not only depends upon the risk-
free rate,but alsoonthe credit spread of respective securities. Poorer the credit quality of a corporate bond
issueras reflectedthrougha lower credit rating, greater would be the credit spread, leading to fall in bond price.
Therefore,creditspreadrisk is the riskoffallinbondprice due to migration of issuers’ credit rating from higher to
lower level, say from AAA to A, and therefore rise in risk premium.

 Reinvestment Rate Risk: This can be defined as the probabilityofafallinthe interestrateresultinginalack

ofoptionstoinvesttheinterest receivedat regular intervals at higher rates at comparable rates in the market.
Debt trading risk
 Counter Party Risk: is the normal risk associated with anytransactionandrefers to the failure or
inability ofthe oppositepartytothecontract to deliver either the promised security or the sale-value
at the time of settlement.

 Price Risk: refers to the possibilityofnotbeingable to receive the expected price on any order due to
anadversemovementinthe prices.

 Liquidity Risk: Liquidity Risk is another type of risk that bond investors may face.
Liquidityriskarisesfromthe illiquidity of a debt issue in the secondary bond market.
Inotherwords,wheneveran investor fails tosellasecurity at a fair price due to lack of sufficient
demand, themarket is said to be illiquid for that security, and creates liquidity risk for the
investors. 
Pricing of a bond 

• Pricingofabondisessentially determination of yieldon that debt instrument and resultant absolute

price. From an investor perspective it is important to understand how the yield (corresponding
price) is determined in the debt market. Theyieldofabondinthemarkets is determined by the forces
of demandandsupply,asis the case inanymarket
Factors affecting yield of Bonds
 Macro Economic conditions, both domestic and relevant global ones.

 General money market conditions including the stateofmoneysupplyin the economy.

 Risk On or Risk Off situation. Interestrates prevalent in the market and the rates of new issues.

 Future InterestRate Expectations.

 Inflation expectation based on both domestic prices and global commodity prices viz. Crude etc.

 Creditqualityofthe issuer.
Bonds yield
• Yield To Maturity(YTM)is the most popular measure of yield intheDebt Markets and is the
percentage rate of return paid on a bond, note or other fixed income security if you buy and hold the
security till its maturity date. Current Yield is the coupon divided by the Market Price and gives a fair
approximation of the present yield.

• Therefore, Current Yield = Coupon of the Security (in%)x FaceValueoftheSecurity (viz. 100incaseofG-
Secs.)/Market Price of the Security

• Eg: Suppose the market price for a10.18%G-Sec2012is ` 120.The current yieldonthe securitywill be
(0.1018x 100)/120=8.48%
Regulators
• RBI :

 Master Direction on Money Market Instruments: Call/ Notice Money Market, Commercial Paper, Certificates
of Deposit and Non-Convertible Debentures (originalmaturityupto one year).

 Master Direction - NonBankingFinancialCompanies Acceptance of Public Deposits (Reserve Bank)

Directions, 2016 (Updated as on February 22,2019).

 RBI Guidelines onPrivate Placement of NCDs for NBFCs.

• SEBI : 

 Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008.

 SEBI(IssueandListing of Debt Securities by Municipalities) Regulations, 2015.

• MCA: The Ministry of Corporate Affairs regulates the unlisted debt securities issuedbya corporate.
FAQ about Debt Market
• https://www.bseindia.com/static/markets/debt/FaqsdebtSegment.as
px#8
YTM
• https://www.khanacademy.org/economics-finance-domain/core-
finance/stock-and-bonds/bonds-tutorial/v/introduction-to-the-yield-
curve