BOND MARKET IN INDIA

BOND
A bond is a security that is issued in connection with a
borrowing arrangement.
The bond is IOU (I owe you) of the borrower.
It implies that the issuer of bond, usually a company or
government, has an obligation to pay some periodic amount
(say interest) as well as the borrowed amount (principal
amount) to the holder of the bond.

Is there any Difference

between debenture and
bond?

TYPES OF BONDS
1) Based on Maturity Period
Short Term Maturity: - Security with maturity period less than
one year.
Medium Term: - Security with maturity period between 1year
and 5 year.
Long Term Maturity: -Such securities have maturity period
more than 5 years
Perpetual: - Security with no maturity. Currently, in India
Banks issue perpetual bond.
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2) Based on Coupon
Fixed Rate Bonds:-Have a coupon that remains
constant throughout the life of the bond.
Floating Rate Bonds: - Coupon rates are reset
periodically based on benchmark rate.
Zero-coupon Bonds : -No coupons are paid. The bond
is issued at a discount to its face value, at which it will
be redeemed. There are no intermittent payments of
interest.
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3)Based on Option
Bond with call option: - This feature gives a bond
issuer the right, but not the obligation, to redeem his
issue of bonds before the bond's maturity at
predetermined price and date.
Bond with put option: - This feature gives
bondholders the right but not the obligation to sell
their bonds back to the issuer at a predetermined price
and date. These bonds generally protect
investors from interest rate risk.
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4)Based on redemption
Bonds with single redemption: - In this
case principal amount of bond is paid at
the time of maturity only.
Amortising Bonds: - A bond, in which
payment made by the borrower over the
life of the bond, includes both interest and
principal, is called an amortizing bond.
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The Debt Market What is it?

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.
The debt market in India is also considered a useful substitute to
banking channels for finance.

Why do we need a Debt Market?

Ensuring financial system stability

A liquid corporate bond market can play a critical role because it supplements
the banking system to meet the requirements of the corporate sector for longterm capital investment and asset creation.
Enabling meaningful coverage of real sector needs
The financial sector in India is too small to cater to the needs of the real
economy.
The debt markets is required to grow manifold to ensure that the financial
sector becomes adequate for an economy as large and as ambitious as Indias.

Conti.

Creating new classes of investors

Financial institutions like insurance
companies and provident funds have longterm liabilities and do not have access to
adequate high quality long-term assets to
match them.

CLASSIFIACTION OF INDIAN DEBT MARKET

Government Securities Market (G-Sec Market):
It consists of central and state government securities. It means
that, loans are being taken by the central and state government. It
is also the most dominant category in the India debt market.
Bond Market:
It consists of Financial Institutions bonds, Corporate bonds and
debentures and Public Sector Units bonds. These bonds are
issued to meet financial requirements at a fixed cost and hence
remove uncertainty in financial costs.

DEBT INSTRUMENTS
Government Securities
Corporate Bonds

Certificate of Deposit

Commercial Papers

Government Securities
It is the Reserve Bank of India that issues Government
Securities or G-Secs on behalf of the Government of
India.
These securities have a maturity period of 1 to 30
years. G-Secs offer fixed interest rate, where
interests are payable semi-annually.
For shorter term, there are Treasury Bills or T-Bills,
which are issued by the RBI for 91 days, 182 days and
364 days

Corporate Bonds
These bonds come from PSUs and private
corporations and are offered for an extensive range
of tenures up to 15 years.
Comparing to G-Secs, 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

Certificate of Deposit
Certificate of Deposits (CDs), which usually offer
higher returns than Bank term deposits, are issued
in demat form
Banks can offer CDs which have maturity between 7
days and
1 year.
CDs from financial institutions have maturity
between 1 and 3 years

Commercial Papers
There are short term securities with maturity of 7 to 365
days.

Introduction to Indian Debt

Market

The Debt Market is the market where fixed

income securities of various types and features
are issued and traded.
As of end 2012, the outstanding amount of
bonds in India stood at Rs 55.8 trillion ($1
trillion approx.)
Indian
Bond
Market
is
dominated
by
Government Securities. At the end of 2012
approx. 79% of Outstanding Bonds were
Government Bonds.

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

Position of Indian Bond Market in

Asia
Indias bond market is roughly
equivalent to :
27 % of Chinas bond
market
69% of Koreas bond
Market
94% of combined bond
market of ASEAN-6

Corporate debt market can be classified into:-

Primary market
Secondary market
Primary market for corporate debt:The corporate sector can raise debt funds either through prospectus or private
placement. It is a market wherein debt securities of corporates i.e, debentures,
bonds , commercial papers , certificate of deposits, etc . of private &public
sectors are issued for the first time.

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Secondary market for corporate debt:It is a market where the corporate debt securities of both
private sector & public sector undertakings are traded. These
securities are traded on Wholesale Debt Segment(WDM)
segment of NSE , OTCEI & BSE.

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Corporate bonds can be issued in two

ways:Public issue
In public issue, corporations issue bonds to the market as a
whole. Institutions as well as retail investors can participate in
this issue. The cost of borrowing is little high in case of public
issue.
Private placement
In private placement corporate, generally park the bond
issuance with few institutions. In India, more than 90% of the
corporate bonds are issued through private placement. It is an
easiest and cheapest way of borrowing corporate bonds.
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TRENDS OF CORPORATE DEBT MARKET

In India the long-term debt market largely consists of
government securities. The market for corporate debt papers in
India primarily trades in short term instruments such as
commercial papers and certificate of deposits issued by Banks
and long term instruments such as debentures, bonds, zero
coupon bonds, step up bonds etc. In 2011, the outstanding issue
size of Government securities (Central and State) was close to
Rs. 29 lakh crores (USD 644.31 billion) with a secondary market
turnover of around Rs. 53 lakh crores (USD 1.18 trillion). In
contrast, the outstanding issue size of corporate bonds was close
to Rs. 9 lakh crores (USD 200 billion). Moreover, the turnover in
corporate debt in 2011 was roughly Rs. 6 lakh crores (USD 133
billion)
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Issuers of Corporate Bonds can be broadly

classified in following classes:
Bonds issued by Public Sector Units
Bonds issued by Financial Institutions
Bonds issued by Banks
Bonds issued by Corporates
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IMPORTANCE OF CORPORATE DEBT MARKET

Aids in economic growth by providing long-term capital.
Reduces the cost of raising capital for corporates.
Fosters market discipline & nurtures credit culture.
Enables investors to hold a diversified portfolio.
Promotes financial inclusion for the Small and Medium
Enterprises (SMEs) and the retail investors.

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CONCLUSION
The criticality of corporate bond market in the economy as it
allocates resources efficiently and enables long-term resource
raising to sectors, such as, infrastructure. A vibrant corporate
bond market provides an alternative to conventional bank
finances and also mitigates the vulnerability of foreign currency
sources of funds. From the perspective of financial stability,
there is a need to strengthen the corporate bond market.
Limited investor base, limited number of issuers and preference
for bank finance over bond finance are some of the other
obstacles faced in development of a deep and liquid corporate
bond market. Some of the issues and challenges faced by this
market and the approach to be adopted to address them in
order to enable the market to reach its potential.

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