Debt Market

1. CHAPTER 1.
1.1INTRODUCTION TO DEBT MARKET
MEANING AND DEFINITON:
Debt market refers to the financial market where investors buy and sell debt securities,
mostly in the form of bonds. 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 Governments), public sector undertakings, other
government bodies, financial institutions, banks and corporate. The debt market is any
market situation where trading debt instruments take place. Examples of debt instruments
include mortgages, promissory notes, bonds, and Certificates of Deposit. A debt market
establishes a structured environment where these types of debt can be traded with ease
between interested parties. The debt market often goes by other names, based on the types of
debt instruments that are traded. In the event that the market deals mainly with the trading of
corporate bond issues, the debt market may be known as a bond market. If mortgages and
notes are the main focus of the trading, the debt market may be known as a credit market.
When fixed rates are connected with the debt instruments, the market may be known as
a fixed income market. A debt is an obligation owed by one party (the debtor) to a second
party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the
term can also be used metaphorically to cover moral obligations and other interactions not
based on economic value. A debt is created when a creditor agrees to lend a sum of assets to
a debtor. Debt is usually granted with expected repayment; in modern society, in most cases,

2. this includes repayment of the original sum, plus interest. In finance, debt is a means of using
anticipated income and future purchasing power in the present before it has actually been
earned. Some companies and corporations use debt as a part of their overall corporate
finance strategy.
DEFINITION:
 According BUSINESS DICTIONARY,
“A market that
is
involved
in
the trading of debt
instruments such
as government and corporate bonds, as well as has an involvement with the trading of
packaged loan products that are sold to investors.”
 According NASDAQ,
“The market for trading debt instruments.”
 According QFINANCE,
“A market in which corporate or municipal, government, or public debts are bought and
sold”

3. 1.2 CLASSIFICATION OF DEBT MARKET.
1.GOVERNMENT SECURITIES 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.The government debt market is the market for bonds and securities issued by the
central government, state government and the semi government authorities which includes
local government authorities like city corporations, metropolitan authorities public sector
corporations and other government agencies such as IDBI ,IFCI ,SFCs .
2. CORPORATE BONDS 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. In broader terms Corporate bonds are fixed income
securities issued by corporate i.e. entities other than Government.

4. 2.A TYPES OF CORPORATE BONDS:
1. Based on Maturity Period
2. Based on Coupon
3. Based on Option
4. Based on redemption
1.BASED ON MATURITY PERIOD:
SHORT TERM MATURITY: - Security with maturity period less than one year.
MEDIUM TERM MATURITY: - 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
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.

5. 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.
4. BASED ON REDEMPTION:
Bonds with single redemption: - In this case principal amount of bond is paid at thetime
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.

6. 1.3 STRUCTURE OF DEBT MARKET:

7. 1.4REGULATORS ASPECT IN DEBT MARKET.
1.RESERVE BANK OF INDIA(RBI)

Issuer Of Debt Instruments

Started the Banking Ombudsman Scheme.

Determines the investment of commercial banks in debt.
2. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

8. 
To require the Stock Exchange to amend by their laws.

Secondary Role In Regulatory Aspect

Determines the guidelines for raising money through public issues

SEBI is also the main regulator for Mutual Funds

9. CHAPTER 2.
2.1 MARKET SEGMENTS OF DEBT MARKET.
Market
Segment
Primary
market
A.PRIMARY MARKET
B. SECONDARY MARKET
Secondary
market

10. A. PRIMARY MARKET:
It is that market in which shares, debentures and other securities are sold for the first
time for collecting long term capital.
This market is concerned with new issues. Therefore the primary market is also called
“new issue market”.
In this market, the flow of funds is from savers to borrowers. Hence, it helps directing
in the capital formation of the country.
B. SECONDARY MARKET:
SECONDARY MARKET
NSE
BSE
BSE deal with debt market
NSE deal with debt market
Wholesale debt market
Retail debt market

11. 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.
2.2 MARKET PARTICIPANTS IN INDIAN DEBT MARKET
1. Central Government raises money through issuance of bonds and T-bill to fund budgetary
deficits and other short and long-term funding requirements through Reserve Bank of India
(RBI).
2. RBI participates in the market through open-market operations as well as through
Liquidity Adjustment facility (LAF) in the course of conduct of monetary policy. RBI also
regulates the bank rates and repo rates, and uses these rates as indirect tools of its monetary
policy. Changes in these benchmark rates directly impact debt markets and all participants in
the market as other interest rates realign themselves with these changes.
3. Primary Dealers (PDs), who are market intermediaries appointed by RBI, underwrite and
make market in government securities by providing two-way quotes, and have access to the
call and repo markets for funds. Their performance is assessed by RBI on the basis of their
bidding commitments and the success ratio achieved at primary auctions. They normally hold
most liquid securities in their portfolio.
4. State governments, municipal and local bodies issue securities in the debt markets to fund
their developmental projects as well as to finance their budgetary deficits.

12. 5. Public Sector Undertakings (PSU) and their finance corporations are large issuers of debt
securities. They raise funds to meet the long term and working capital needs. These
corporations are also investors in bonds issued in the debt markets.
6. Corporates issue short and long-term paper to meet their financial requirements. They are
also investors in debt securities issued in the market.
7. DFIs regularly issue bonds for funding their financing requirements and working capital
needs. They also invest in bonds issued by other entities in the debt markets. Most FIs hold
government securities in their investment and trading portfolios.
8. Banks are the largest investors in the debt markets, particularly in the government
securities market due to SLR requirements. They are also the main participants in the call
money market. Banks arrange CP issues of corporates and are active in the inter-bank term
markets and repo markets for their short term funding requirements. Banks also issue CDs
and bonds in the debt markets. They also issue bonds to raise funds for their Tier-II capital
requirement.
9.The investment norms for insurance companies make them large participants in
government securities market.
10. MFs have emerged as important players in the debt market, owing to the growing number
of debt funds that have mobilised significant amounts from the investors. Most mutual funds
also have specialized debt funds such as gilt funds and liquid funds. They participate in the
debt markets pre-dominantly as investors, and trade on their portfolios quite regularly.
11. Foreign Institutional Investors (FIIs) are permitted to invest in Dated Government
Securities and Treasury Bills within certain limits.

13. 12. Provident and pension funds are large investors in the debt markets. The prudential
regulations governing the deployment of the funds mobilised by them mandate investments
pre-dominantly in treasury and PSU bonds. They are, however, not very active traders in
their portfolio, as they are not permitted to sell their holdings, unless they have a funding
requirement that cannot be met through regular accruals and contributions.
13. Charitable institutions, trusts and societies are also large investors in the debt markets.
They are, however, governed by their rules and bye-laws with respect to the kind of bonds
they can buy and the manner in which they can trade on their debt portfolios.
14. Since January 2002, retail investors have been permitted to submit noncompetitive bids at
primary auction through any bank or PD. They submit bids for amounts of Rs. 10,000 and
multiples thereof, subject to the condition that a single bid does not exceed Rs. 1 crore. The
noncompetitive bids upto a maximum of 5% of the notified amount are accepted at the
weighted average cut off price/yield.
15. NDS, CCIL and WDM segment of NSEIL are other important platforms for the debt
market which are discussed in greater detail in subsequent sections.

14. CHAPTER 3.
3.1 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 long-term
capital investment and asset creation.
 Enabling meaningful coverage of real sector needs
 The financial sector in India is much too small to cater to the needs of the real
economy.
 The debt markets need to grow manifold to ensure that the financial sector
becomes adequate for an economy as large and as ambitious as India’s.
 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.
 Creation of a deep corporate bond market can enable them to invest in long-term
corporate debt, thus serving the twin goals of diversifying corporate risk across
the financial sector and enabling these institutions to access high quality longterm assets.
 Reduced Currency Mismatches
 These markets help reduce potential currency mismatches in the financial
system by allowing for the issue of local currency bonds.

15.  Therefore, well-developed and liquid bond markets can help firms reduce
their overall cost of capital by allowing them to tailor their asset and liability
profiles to reduce the risk of both maturity and currency mismatches.
 Term Structure and Effective transition of Monetary Policy
 The creation of long-term debt markets will also enable the generation of market
interest rates at the long end of the yield curve.
 A deeper, more responsive interest rate market would in turn provide the central
bank with a mechanism for effective transmission of monetary policy.

16. CHAPTER 4.
4.1 NEED FOR DEVELOPMENT.
In retrospect every Indian knows we cannot systematically ignore the role of slavery, the
absolutely central role of war and our fight for independence in creating and shaping the basic
institutions of what we now call “The Indian economy”. What’s more, origins matter. It’s
imperative that we look back at an important aspect in our history, slavery, whose role was
instrumental in shaping our outlook towards the market and in particular the Debt Market.
Slavery is seen as a consequence of war and if you surrender in war, what you surrender is your
life; your conqueror has the right to kill you, and often he will. And if he chooses not to, you
literally owe your life to him; a debt conceived as absolute, infinite, and irredeemable. And all
your responsibilities or obligations towards your loved ones are negated and now you are solely
indebted to him alone. This logic has an interesting consequence. Debt was hence looked upon as
being slave and equity as more participative or voluntary in India. Secondly Indians have always
looked at debt as Dakshina (fees paid to our gurus). Daskhina is a karmic debt-instrument, which
means you are obliged to pay. Charity or Daan on the other hand is an equity instrument where
you do it voluntarily; but doing so helps you earn good karma (shareholders support and brand
building). However, these logics are more relevant from the borrower’s perspective. Indian
investors on the other hand have been traditionally risk averse. It has perhaps something to do
with the monsoons of this land. Fear of droughts and floods is so ingrained in us that we prefer
being moneylenders to farmers. Interests are more secure than harvests. Read through reports
and you will know where the small Indian investor’s money is? Debt markets in India have

17. definitely suffered from chronic neglect on the part of policymakers, despite the fact that there is
clear evidence of fairly strong debt preference among households in their investment portfolios.
Capital markets in India are more synonymous with the equity markets – both on account of the
investors’ preferences and the capital gains it offers. But to add to its world class equity and
banking sector, the country needs to build its bond market. While they have grown in size, they
continue to remain illiquid. The corporate market, in addition, restricts participants and is largely
arbitrage-driven. In a developing economy such as India, the role of the public sector and its
financial requirements need no emphasis. Government securities markets have traditionally
dominated the Indian Bond market. The reason being the high government deficit and the need to
service it at an optimal cost, the predominance of bank lending in corporate financing and
regulated interest rate environment that protected the banks’ balance sheets on account of their
exposure to the government securities. While these factors ensured the existence of a big
Government securities market, the market was passive with the captive investors buying and
holding on to the government securities till they mature. The trading activity was conspicuous by
its absence.
The scenario’s completely changed since the nineties. The notable changes being gradual
deregulation of interest rates and the Government’s decision to borrow through auction
mechanism and at market related rates. This move towards a market-based economy meant now
resources are allocated based on the risk return profiles of alternative investments instead of
being guided by direct or indirect intervention of the Government. Also, the fact that the
monetary as well as government debt management functions are centralized in the RBI, it calls
for greater coordination between monetary and debt management policies. While the objective of

18. the debt management policy is to reduce the cost of debt servicing in the long term, the efficacy
of the monetary policy depends upon how efficiently the transmission mechanism works, the
basis of which is an efficiently determined interest rates structure. Also because the sovereign
paper will always acts as an benchmark for pricing corporate bonds, unless the prices of the
former reflects its intrinsic worth, markets will not be able to price the latter. All these once
again emphasize the importance of efficient price discovery mechanism.
Bond markets also had major disadvantages as opposed to bank financing. In the absence of
hedging avenues, it turned out be more risky and less flexible than bank financing. Risk
management was another issue, since the derivatives markets were not developed to enable both
issuers and investors to efficiently transfer the risks arising out of interest rate movements. There
were no exchange traded interest rate futures or options. The Mark to market regulations also
deterred banks from investing in corporate bonds and prefer traditional lending route to finance
corporates. Most issues were not Corporate Bonds but Private Placements.TDS was also viewed
as a major impediment to the development of the Government securities market. Stamp duties
also acted as a deterrent to the development of the bond markets. The stamp duty applicable for a
security differed on the basis of the class of investor and this discouraged corporates from
issuing bonds to certain class of investors like retail investors and to long-term investors like
insurance companies, provident and pension funds. Fragmentation did not further help the
development of a liquid bond market. Information and low investor base were among the other
problems faced.
Today, having addressed most of the problems mentioned above( investor base is being
broadened, issuer base is now widened, derivative markets are being developed, price distortion

19. issues are being addressed , listing norms are being eased, reforming stamp duty) the idea is to
look ahead at the bigger picture of bond market. The bond market should witness exponential
growth with the growing infrastructure development, budding mutual fund industry, new pension
system, developing market for securitized products, rising concerns about the asset liability
management on the part of banks along with the development of derivatives market.
India has aggressive targets for GDP growth rate at 8-10 % p.a. Investment in infrastructure by
both the government and the private sector has been relatively low in the past. Given the
quantum of funds required and long gestation periods, achieving financial closure for large
infrastructure projects has often been difficult. Banks continue to be exposed to problems of
asset / liability mismatches when they lend long tenor as such long term assets are inevitably
funded through significantly shorter tenor liabilities.
The Indian debt market and the government securities market in particular, is definitely at a
turning point in India with significant changes taking place in the domestic economic
environment .And hence this is an opportune time to reflect on future debt market development.
The economy is estimated to be growing at about 8 % this year with modest inflation and if
similar conditions prevail, we can expect growth and inflation next year to also be on a similar
path and if it’s to be maintained and accelerated in the long run, financial intermediation will
have to further improve the debt market. Needless to say the sustenance of such growth will
heavily rely on investments in both infrastructure and industry. Bond financing also has to
supplement traditional bank financing to take care of the growing credit needs of the economy.
In a very stylized sense, the requirement of investment funds for productive investment can be
divided into three broad categories – equity, long-term debt, and medium to short-term debt.

20. If the financial sector is unable to provide funds as required by the demand, there would
simultaneously exist excess demand and excess supply in different segments of the financial
market. In such a situation, one of two outcomes is possible. The investing entities could meet
their funds need in whatever form available; and thereby expose themselves to needless risk. As
a consequence, the over-all risk profile of the economy would tend to go up. Alternatively, if
they adhered to norms of prudence, the segment of the financial sector facing the highest level of
excess demand would prove to be the binding constraint to investment activity and effectively
determine the actual level of investment in the economy. Think about it! It’s possible that ex-post
investment may fall short of ex-ante savings, not because of a lack of investment demand, but
because of a mismatch between the structures of the demand for and supply of investment funds.
In addition, the excess supply of funds in one segment of the financial sector carries the danger
that such funds may be used for speculative purposes in foreign exchange, real estate or
commodities, which create their own problems in economic management. The net result can be
an economy which is performing well below its potential and with high levels of systemic risk.
Clearly, progress has to be made in creating the infrastructure and implementing the policy
regime that is needed to facilitate the evolution of the Indian debt capital market into a global
participant. Further progress in this regards, would only facilitate greater access to credit by
enabling risks to be shared by banks and other investors.

21. 4.2 GROWTH OF INDIAN DEBT MARKET
The growth of corporate bond market in India has been aided by existence of a well-developed
G-sec market which provides a benchmark yield curve for bond pricing, a well-functioning
depository system, credible system of rating agencies and adequate legal framework. Measures,
such as, rationalising the listing norms, standardisation of market conventions, reduction in the
shut period, setting up of reporting platforms, and implementation of DvP settlement of
corporate bond trades have had an encouraging impact on the market resulting in considerable
increase in issuance as well as secondary market trading of corporate bonds.
Volumes climb to Rs63,782.46 crore in July compared to Rs54,404 crore in June; further upward
momentum expected due to increased FII activity. According to data released by the Securities
and Exchange Board of India (SEBI), corporate bond trading volumes have climbed 17% at Rs
63,782.46 crore in July 2010 compared to Rs54,404 crore the month before. There were 4,446
combined trades on the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and
The Fixed Income Money Market and Derivatives Association of India (FIMMDA) platforms.
Total issuance has increased from `1,747.81 billion in 2008-09 to `2,968.94 billion in 2011-12.
Similarly trade volume has increased from `1,481.66 billion in 2008-09 to ` 5,937.83 billion in
2011-12. During the current fiscal year upto September 2012, the trade volumes have
been ` 3261.14 billion. The share of bonds issued through public issues has increased from 0.86
per cent in 2008-09 to 7.3 per cent in 2011-12. Out of the four modes of resource mobilisation
namely, IPOs, FPOs, bonds and rights issues, the share of bonds have increased from 9.2 per
cent in 2008-09 to 73.5 per cent in 2011-12 indicating greater reliance of entities on bonds for
resource mobilisation in the recent period.

22. Recommendations of various committees have been implemented by the respective regulators to
promote debt market in India. The growth of corporate bond market in India has been aided by
existence of a well-developed G-sec market which provides a benchmark yield curve for bond
pricing, a well-functioning depository system, credible system of rating agencies and adequate
legal framework. Measures, such as, rationalising the listing norms, standardisation of market
conventions, reduction in the shut period, setting up of reporting platforms, and implementation
of DvP settlement of corporate bond trades have had an encouraging impact on the market
resulting in considerable increase in issuance as well as secondary market trading of corporate
bonds. Total issuance has increased from `1,747.81 billion in 2008-09 to `2,968.94 billion in
2011-12. Similarly trade volume has increased from `1,481.66 billion in 2008-09 to ` 5,937.83
billion in 2011-12. During the current fiscal year upto September 2012, the trade volumes have
been ` 3261.14 billion. The share of bonds issued through public issues has increased from 0.86
per cent in 2008-09 to 7.3 per cent in 2011-12. Out of the four modes of resource mobilisation
namely, IPOs, FPOs, bonds and rights issues, the share of bonds have increased from 9.2 per
cent in 2008-09 to 73.5 per cent in 2011-12 indicating greater reliance of entities on bonds for
resource mobilisation in the recent period.

23. CONCLUSION.
The debt markets play an important role in efficient mobilization and allocation of resources in
the economy, financing the development activities of the Government, transmitting signals for
implementation of the monetary policy, facilitating liquidity management in tune with overall
short term and long term objectives.
The debt market is one of the most critical components of the financial system of any economy
and acts as a leverage tool in a financial system. The debt market comprises of two segments:
government securities market and corporate debt market. Indian debt market is dominated by
government securities as compared to corporate debt securities. Indian corporate bonds market is
very underdeveloped and illiquid in comparison with the Government securities market and
mostly depends on highly safe AAA rated bonds for both issuance and trading. This paper
presents an overview of the corporate debt market in India. It is concluded that Indian corporate
debt market has shown growth trend in primary market and secondary market as well. There are
a lot of challenges available in the market which are major obstacles in the development of the
market like lack of information among the investors, high stamp duty charges, lack of innovative
debt instruments etc.

24. BIBLIOGRAPHY.
BOOKS.
 Debt Markets and Analysis
-by R. Stafford Johnson
WEBSITES.
 www.investopedia.com
 www.nseindia.com
 www.bseindia.com
 www.slideshare.com
 www.sebi.gov.in
 www.rbi.org.in