Indian Debt Capital Market
November 2011
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Structure of Indian Debt Market Regulators SEBI, RBI, DCA Market Segment The Sovereign Issuer
Issuers Central Govt. State Govt. Govt. Agencies & Stat. Bodies
The Public Sector
PSUs Comm. Banks /DFIs
Corporates
The Private Sector Pvt. Banks
Instruments GOI dated securities, Treasury Bills, State Govt. securities Index bonds, zero coupon bonds Govt. Guaranteed Bonds/ Debentures
Investors RBI DFIs Banks Pension Funds
PSU Bonds, Debentures, CP
FIIs
CD, Debentures, Bonds
Corporates
Bonds, Debentures, Commercial Paper (CP), Floating Rate Notes FCDs, PCDs, ZCBs Bonds, Debentures, CPs and CDs
Individuals Provident Funds
Insurance Companies, Trusts &Mutual Funds
Indian Debt Capital Market – International Comparison 200% 177%
180% 160% 140%
140% 121%
GDP (% )
120%
108%
100%
93% 76%
80%
68%
60%
48%
49%
54%
34%
40% 22% 20% 0%
Chile
India
UK
China Singapore Brazil
Germany Malaysia
India's DCM Market as % of GDP
France
Spain
Italy
USA
Government Securities Market… India’s Government Bond Market vs. International Bond Markets 90% 80%
80% 70%
% of GDP
60% 50% 40% 30%
30%
31%
32%
32%
India
Spain
China
UK
36%
39%
47%
49%
USA
Brazil
51%
40%
20% 10%
7%
0%
Chile
Malaysia Singapore Germany
France
Italy
Public Bond Market Capitalization as % of GDP
Indian Government Bond Markets is not much out of the line with the rest of the world. Source: RBI
…Government Securities Market Investor Base in Government Securities Mutual Funds 1% Corporates Co-operative Banks 3% 3% Provident Funds 7%
FII's Fiancial Institutions 1% 0% Others 4%
Non-Bank Primary Dealers 0%
Commercial banks 38%
Bank - Primary Dealers 9%
RBI 12%
Insurance Companies 22%
Source: RBI
Corporate Bond Market… India’s Corporate Bond Market vs. International Bond Markets 140%
130%
120%
GDP (%)
100%
89%
80% 57%
60%
58%
36%
40% 15%
20%
16%
16%
16%
19%
4% 0%
Source: RBI
Private Bond Market Capitalization as % of GDP
59%
…Corporate Bond Market… Share of Corporate Bonds in Total Debt 18
17
16 14
15 13
13
12
(%)
12
12
11
10 8 6
8
8 5
8
7
6
5
11
10
4 2
1
2
1
7
6
4
3
2
0 2005-06 Source: RBI
2006-07
2007-08 United States
Japan
2008-09 China
2009-10
2010-11
India
Post Crisis the share of Corporate Debt has been declining in the developed countries like U.S. and Japan where the economies are being supported by additional government borrowing. On the other hand, its share in the EMEs of China and India is gradually increasing as more and more corporates approach the market and the market actually open up.
…Corporate Bond Market…
Too few public issuances - Private placement completely dominate the primary segment of the corporate
debt market - High stamp duty (expensive public issuance process) - Cumbersome TDS process Source: SEBI
Resources raised in Debt Market (Rs. Cr) Year 2007-08 2008-09 2009-10 2010-11 (upto Dec'10)
Public Issues
Private Placement
Total
1603
118485
120088
1500
173281
174781
2500
212636
215136
2197
164210
166407
…Corporate Bond Market…
Trading dominated by the AAA rated securities, which are perceived to have the least probability of default Share of Top 5 Ratings (%) 2008-09
2009-10
2010-11
2011-12 (upto June'11)
Rating
Share Rating
Share Rating
Share Rating
Share
AAA
78.15 AAA
72.06 AAA
63.69 AAA
76.16
AA+
6.4
AA+
6.09
AA+
9.33 AA
4.35
AA
3.76
AAA(SO)
5.93
AA-
5.07 AA+
3.96
A(so)
1.47
AA
2.72
AAA(so)
4.2
2.42
A-(so)
0.64
AAA(ind) Fitch
2.17
AA
2.37 AAA(so)
1.99
Unrated Securities
8.25
Unrated Securities
4.12
Unrated Securities
5.43 Unrated Securities
4.17
Illiquidity
AA-
Source: FIMMDA, NSE, BSE
- No market maker - Institutional investors typically to hold securities to maturity which results in lack of exit options and result in NO LIQUIDITY
…Corporate Bond Market… Key Growth Factors
Widen investor base - Tap latent investors – growing pension sector
Innovative Product Structuring IFRS Norms – Similar treatment to loans and bonds
Develop and enhance related derivatives product -
Credit Default Swap , Interest rate derivatives etc.
Reform in Stamp Duty & TDS process -
Standard Stamp duty rate across nation, and that the maximum payable should be capped
-
Removal of cumbersome TDS on corporate bonds
…Corporate Bond Market…
Less rigid Investment Mandate for Insurance Companies and Pension Funds - Controlled and phased relaxation for these institutions
Presence of retail investors in the market - Essential for deepening of Bond market
Facilitating Liquidity in the market:
Active Market Making
Credible Credit Rating
Degree of Standardization with respect to bond covenants
…Corporate Bond Market Recent Developments
The 12th Plan aspires for a planned infrastructure expenditure of around $1 trillion - around 11% of GDP -
Government can only meet 50% funding requirement
-
The 50% funding gap is expected to be met by developing Corporate Bond Market (Private sector)
The Government is mulling tax incentives such as reduction in Securities Transaction Tax (STT) and Stamp Duty, besides withdrawal of withholding tax, to help companies raise funds at competitive rates.
Increased FII’s investment limit to invest in infra bonds
Government is set to take measures to improve liquidity to develop a vibrant Corporate bond market to support growing Infra sector
IIFCL, IDFC & LIC have signed a MOU to undertake take-out financing of infrastructure projects worth up to Rs. 300 billion
Key factors for FIIs to invest in India Government Bond Market •
Government has raised the investment limit for FIIs from US $5bn to US $10bn in government securities
Corporate Bond Market •
Infrastructure Sector to play an catalyst for innovation and growth in Corporate Bond Market in India
•
FIIs can invest $20bn in Indian Corporate Bond market (Non-Infra)
•
Government has raised the investment limit for FIIs in long-term infra bonds from additional $5bn to $25billion
•
Government allowed Qualified Foreign Investors (QFIs) to subscribe to mutual fund debt schemes in infrastructure sector, subject to a ceiling of $3 billion within the existing ceiling of $25 billion.
•
$5 billion (lock in period 1 year) is carved out of the remaining $22 billion for FII investments in
Longterm infra bonds •
Remaining $17billion (3 years lock – in period) can be invested in long-term infra bonds which have an initial maturity of five years or more at the time of issue and residual maturity of three years at the time of first purchase by FIIs.
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