Corporate Debt Market In India

A Project Submitted to
University of Mumbai for completion of the degree of
Bachelor of Management Studies
Under the Faculty of Commerce

By

SHRIDHAR RABINDRANATH SAHU

Under the Guidance of

Ms. Asha Varma

Ramji Assar Vidyalaya Wadi Trust’s

Laxmichand Golwala College of Commerce & Economics
M.G. Road, Ghatkopar (East) - 400 077

March 2024

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 Ramji Assar Vidyalaya Wadi Trust’s
Laxmichand Golwala College of Commerce & Economics
M.G. Road, Ghatkopar (East) - 400 077

CERTIFICATE

This is to certify that Ms./Mr. SHRIDHAR RABINDRANATH SAHU has

worked and duly completed her/his Project Work for the degree of Bachelor of
Management Studies under the Faculty of Commerce in the subject of Accounts and
Finance and her/his project is entitled “CORPORATE DEBT MARKET IN INDIA”
under my supervision.
I further certify that the entire work has been done by the learner under my guidance and
that no part of it has been submitted previously for any Degree or Diploma of any University.
It is her/ his own work and facts reported by her/his personal findings and investigations.

Project Guide
Ms. Asha Varma
Seal of
the College

Date of submission

3
 On separate page

DECLARATION BY LEARNER

I the undersigned Miss / Mr. SHRIDHAR RABINDRANATH SAHU

here by, declare that the work embodied in this project work titled “
CORPORATE DEBT MARKET IN INDIA ”, forms my own contribution to the
research work carried out under the guidance of Ms. Asha Varma is a result of my own
research work and has not been previously submitted to any other University for any
other Degree/ Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

SHRIDHAR RABINDRANATH
SAHU

Certified by
Ms. Asha Varma

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 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so numerous and the depth is
so enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in
the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me the chance to
do this project.

I would like to thank my Principal for providing the necessary facilities required for
completion of this project.

I take this opportunity to thank our Coordinator, for her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

Ms. Asha Varma whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books
and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me
in the completion of the project especially my Parents and Peers who supported me
throughout my project.

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 INDEX

Sr no topic Page
no

1 introduction 7--56
2 Review of literature 57--61
3 Research methodology 62--67
4 Data analysis interpretation and presentation 68--73
5 conclusions 74--80

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CHAPTER NO:-1
INTRODUCTION

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INTRODUCTION:-
The Capital Market comprises of equities market and debt market. The Debt market is a market
for the issuance, trading and settlement in debt instruments of various types. Debt instruments,
called fixed income securities, are issued by a wide range of organizations, like the Central and
State Governments, statutory corporations or bodies, banks, financial institutions and corporate
bodies. Fixed Income Securities Fixed Income securities are one of the most innovative and
dynamic instruments evolved in the financial system ever since the inception of money. Based as
they are on the concept of interest and time-value of money, Fixed Income securities personify the
essence of innovation and transformation, which have fueled the explosive growth of the financial
markets over the past few centuries. Fixed Income securities offer one of the most attractive
investment opportunities with regard to the safety of money invested, adequate liquidity, and
flexibility in structuring a portfolio, easier monitoring, long term reliability, and certainty of
returns from investment made. They are an essential component of any portfolio of financial and
real assets, whether in the form of pure interest-bearing bonds, varied type of debt instruments, or
asset-backed mortgages, and securitised instruments. Fixed Income Markets - the World The
Fixed Income Securities market was the earliest of all the securities markets in the world and has
been the forerunner in the emergence of the financial markets as the engine of economic growth
across the globe. The Fixed Income Securities Market, also known as the debt market or the bond
market, is easily the largest of all the financial markets in the world today in terms of market
capitalisation. The Debt Market has, as such, a very prominent role to play in the efficient
functioning of the world financial system, and in catalyzing the economic growth of nations
across the globe. Indian Debt Market - Pillars of the Indian Economy The Debt Market plays a
very critical role for any growing economy which needs to employ a large amount of capital and
resources for achieving the desired industrial and financial growth. The Indian economy which
has grown at more than 7% p.a. in the last decade and is on the take off stage for double digit
growth would have to meet its resources requirements from a robust and an active debt market in
India. The Government Securities market, called 'G-Sec' 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.
Besides G-Sec market, there is an active market for corporate debt papers in India which 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 and step up bonds.
Wholesale Debt Market Segment (WDM) Government securities market, the largest and oldest
component of Indian debt market, was a very active segment on BSE since the beginning of the

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19th century. Government papers were traded actively at BSE. However, wholesale debt market
segment for the government securities for institutional investors was further introduced by BSE
pursuant with following notifications issued by RBI. • DBOD. FSC. BC. No. 39 /24.76.002/2000
dated October 25, 2000. • IDMC. PDRS. PDS. No PDS-2 /03.64.00/2000-01 dated November 13,
2000. • DBS. FID No. C 10 / 01.08.00 / 2000-0122 dated November, 2000 The above
notifications permitted Banks, Primary Dealers and Financial Institutions in India to undertake
transactions in debt instruments among themselves or with non- bank clients through the members
of BSE Limited. The Wholesale Debt Market Segment of BSE commenced its operations on June
15, 2001. All existing cash market members of the Exchange who fulfill the networth criteria of
Rs. 30 Lacs are eligible for Wholesale Debt Market (WDM) membership. Growth in the WDM
The BSE WDM Debt Segment has shown a gradual but consistent growth in its turnover in the
past few years, with increased participation from the mainstream banking and institutional players.
This Segment expects a sustained rise in its turnover and participation, in the coming years, with
the initiation of activity by the new members and continued support and participation of major
Banks, Primary Dealers and financial institutions. Retail Debt Market Segment (RDM) The Retail
Debt Market, in the new millennium, presents a vast kaleidoscope of opportunities for the Indian
investor whose knowledge and participation hitherto has been restricted to the equity market. The
development of the Retail Debt Market has engaged the attention of policy makers, regulators and
the Government in the past few years. The potential of the Retail Debt Market can be gauged from
the investor strength which is more than 40 million in the Indian equity market, has powered the
tremendous growth and transformation of the stock markets in recent times. Recognizing this
opportunity at a very early stage, BSE has consistently been in the forefront of the campaign for
the creation of a Retail Debt Market, and has expounded the potential and need for retail trading in
G-Secs in the past few years in various important forums and to the key regulatory authorities.
Emergence of Retail Debt Market It would surprise many to know that a retail debt market was, at
one point of time, very much present in India. Right through the forties and fifties and until the
early sixties, a good proportion of the holdings of Government securities were concentrated in
individual investors; available statistics indicate that more than half of the holdings in
Government securities were concentrated in retail investors in the early 50s.Today, there exists an
inherent need for households to diversify their investment portfolio so as to include various debt
instruments, including Government securities. Retail investors would have a natural preference for
fixed income returns and especially so in the current situation of increasing volatility in the
financial markets. The Government Securities (G-Secs) are the one of the best investment options
for an individual investor today in the financial markets due to the following factors: • Zero
default risk – because of their sovereign guarantee, they ensure total safety of all investments in
G-Secs. • Lower average volatility in bond prices • Greater returns as compared to the
conventional safe investment avenues, like Bank Deposits and Fixed Deposits, though they also
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contain credit risk • Higher leverage -Greater borrowing capacity against G-Secs due to their zero
risk status • Wider range of innovations in the nature of securities, like T-Bills, Index linked
Bonds, Partly Paid Bonds and others, like STRIPS and securities with call and put options. •
Better and greater features to suit a large range of investment profiles and investor requirements •
Growing liquidity and an increased turnover in recent times in the Indian Debt Markets Retail
Trading in G-Secs The Government of India and RBI, recognizing the need for retail participation,
had in early 2000 announced a scheme to enable retail participation through a non- competitive
bidding facility in the G-Sec auctions with a reservation of 5% of the issue amount for non-
competitive bids by retail investors. The Retail Trading in G-Secs commenced on January 16,
2003 in accordance with the SEBI Circular bearing ref. no. SMD/Policy/GSEC/776/2003 dated
January 10, 2003. The Indian Fixed Income Markets, which until some time ago, was the
mainstay of the wholesale investors, were made accessible to the retail investors, thanks to some
path-breaking initiatives taken by the Government of India - Ministry of Finance, RBI and SEBI-
to enable retail trading in G-Secs through stock exchanges. BSE has, for long, been an ardent
advocate of the need to enable the participation of the 28 million Indian investor multitude in the
Indian Fixed Income Markets. The Retail Debt Market Module of BSE aims at providing an
efficient and reliable trading system for Gsec. The key features of the system are: • Trading: By
electronic order matching, based on price-time priority through the BOLT (BSE OnLine Trading)
System with the continuous trading sessions from 9.00 a.m. to 3.30 p.m, as is operational in the
Equities Segment. Retail Trading in G-secs is on a Rolling Settlements basis with a T+2 Delivery
Cycle. • Clearing and Settlement: The Clearing and Settlement mechanism for the Retail trading
in G-Secs is based on the existing institutional mechanism available at BSE. The trades executed
throughout the continuous trading sessions are netted out at the end of the trading hours through a
process of multilateral netting. The transactions are netted out memberwise and then securitywise,
so as to determine the net settlement and payment obligations of the members. The Delivery
obligations and the payment orders in respect of these members are generated by the Clearing and
Settlement system of BSE. These statements indicate the pay-in and pay-out positions of the
members for securities and funds, who then give the necessary instructions to their Clearing
Banks and depositories. The entire risk management, and the clearing and settlement activities for
the trades executed in the Retail Debt Market System are undertaken by BSE Exchange Clearing
House. • Holding and Transfer of G-Secs: For retail trading through BSE, the G-secs can be held
by investors in the same Demat account as is used for equity at the Depositories. NSDL and
CDSL hold the combined quantity of G-Secs in their SGLII A/cs of RBI, meant only for client
holdings. Indian Corporate Debt Market (ICDM) Former Finance Minister Mr. P. Chidambaram,
in his 2006 budget speech, had announced the intention of the Government to create a single,
unified exchange-traded market for corporate bonds in India. Subsequently, the Securities and
Exchange Board of India (SEBI) vide its circular, dated December 12, 2006, entrusted the
10
responsibility of setting up a reporting platform for all corporate debt transactions executed in the
country to BSE Limited. BSE developed a reporting platform - Indian Corporate Debt Market
(ICDM) for reporting all corporate deals done in respect of debt that is listed on any Indian stock
exchange , are in demat form, and are over Rs. 1 lakh in face value as prescribed by SEBI. The
platform, implemented through Internet, called ICDM, was being used by large over 400
participants, as on March 2010, in the Debt Market. On observing wide participation and depth in
the Corporate Bond market, SEBI vide its circular dated April 13, 2007, granted permission to
BSE to launch a trading platform. In compliance to the circular BSE launched the platform with
essential features of an Over the Counter (OTC) Market in July 2008. ICDM shall gradually
migrate into an anonymous order matching system. FREQUENTLY ASKED QUESTIONS ON
DEBT MARKETS 1. What is the Debt Market? The Debt Market is the market where fixed
income securities of various types and features are issued and traded. Debt Markets are therefore,
markets for fixed income securities issued by the Central and State Governments, Municipal
Corporations, Govt. bodies and commercial entities, like Financial Institutions, Banks, Public
Sector Units, Public Ltd. companies and also structured finance instruments. 2. What is the Money
Market? The Money Market is basically concerned with the issue and trading of securities with
short term maturities or quasi-money instruments. The Instruments traded in the money-market
are Treasury Bills, Certificates of Deposits (CDs), Commercial Paper (CPs), Bills of Exchange
and other such instruments of short-term maturities (i.e., not those exceeding 1 year with regard to
the original maturity) 3. Why should one invest in fixed income securities? Fixed Income
securities offer a predictable stream of payments by way of interest and repayment of principal at
the maturity of the instrument. The debt securities are issued by the eligible entities against the
moneys borrowed by them from the investors in these instruments. Therefore, most debt securities
carry a fixed charge on the assets of the entity and generally enjoy a reasonable degree of safety
by way of the security of the fixed and/or movable assets of the company. • The investors benefit
by investing in fixed income securities since they preserve and increase their invested capital, and
are also ensured about the receipt of regular interest income. • The investors can even neutralize
the default risk on their investments by investing in Govt. securities, which are normally referred
to as risk-free investments, due to the sovereign guarantee on these instruments. • The prices of
Debt securities display a lower average volatility as compared to the prices of other financial
securities, and ensure the greater safety of accompanying investments. • Debt securities enable
wide-based and efficient portfolio diversification, and thus assist in portfolio risk-mitigation. 4.
What are the advantages of investing in Government Securities (G-Secs)? The Zero Default Risk
of the G-Secs. offers one of the best reasons for investments in them. Hence, it enjoys the greatest
amount of security possible. The other advantages of investing in G- Secs are: • Greater safety
and lower volatility as compared to other financial instruments • Variations are possible in the
structure of instruments, like Index linked Bonds, STRIPS • Higher leverage available in case of
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borrowings against G-Secs. • No TDS on interest payments • Tax exemption for interest earned
on G-Secs. up to Rs.3000/- over and above the limit of Rs.12000/- under Section 80L (as amended
in the latest Budget) • Greater diversification opportunities • Adequate trading opportunities with
continuing volatility expected in interest rates the world over 5. Who can issue fixed income
securities? Fixed income securities can be issued by almost any legal entity like Central and State
Govts., Public Bodies, Banks and Institutions, statutory corporations and other corporate bodies.
There may be legal and regulatory restrictions on each of these bodies on the type of securities
that can be issued by each of them. 6. What are the different types of instruments, which are
normally traded in this market? The instruments traded can be classified into the following
segments based on the characteristics of the identity of the issuer of these securities: Market
Segment Issuer Instruments Government Securities Central Government Zero Coupon Bonds,
Coupon Bearing Bonds, Treasury Bills, STRIPS State Governments Coupon Bearing Bonds
Public Sector Bonds Government Agencies / Statutory Bodies Govt. Guaranteed Bonds,
Debentures Public Sector Units PSU Bonds, Debentures, Commercial Paper Private Sector Bonds
Corporates Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds,
Inter-Corporate Deposits Banks Certificates of Deposits, Debentures, Bonds Financial Institutions
Certificates of Deposits, Bonds The G-secs are referred to as SLR securities in the Indian markets
as they are eligible securities for the maintenance of the SLR ratio by the banks. The other non-
Govt securities are called Non-SLR securities. 7. What is the importance of the Debt Market to the
economy? The key role of the debt markets in the Indian Economy stems from the following
reasons: • Efficient mobilization and allocation of resources in the economy • Financing the
development activities of the Government • Transmitting signals for the implementation of the
monetary policy • Facilitating liquidity management in tune with overall short term and long term
objectives Since the Government Securities are issued to meet the short term and long term
financial needs of the government, they are not only used as instruments for raising debt, but have
also emerged as key instruments for internal debt management, monetary management and short
term liquidity management. The returns earned on the government securities are normally taken as
the benchmark rates of returns and are referred to as the risk free return in financial theory. The
Risk Free rate obtained from the G-sec. rates is often used to price the other non-govt. securities in
the financial markets. 8. What are the benefits of an efficient Debt Market to the financial system
and the economy? • Reduction in the borrowing cost of the Government and easy mobilization of
resources at a reasonable cost • Provides greater funding avenues to public-sector and private
sector projects, and reduces the pressure on institutional financing • Enhanced mobilization of
resources by unlocking illiquid retail investments like gold • Development of heterogeneity
among market participants • Assistance in the development of a reliable yield curve and the term
structure of interest rates. 9. What are the different types of risks with regard to debt securities?

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The following are the risks associated with debt securities: • Default Risk: This can be defined as
the risk when an issuer of a bond may be unable to make timely payment of interest or principal
on a debt security, or to otherwise comply with the provisions of a bond indenture; and is also
referred to as credit risk. • Interest Rate Risk: This can be defined as the risk emerging from an
adverse change in the interest rate prevalent in the market so as to affect the yield on the existing
instruments. A good case would be an upswing in the prevailing interest rate scenario leading to a
situation where the investors' money is locked at lower rates, whereas if he had waited and
invested in the changed interest rate scenario, he would have earned more. • Reinvestment Rate
Risk: This can be defined as the probability of a fall in the interest rate resulting in a lack of
options to invest the interest received at regular intervals at higher rates than the comparable rates
in the market. The following are the risks associated with trading in debt securities: • Counter
Party Risk: This is the normal risk associated with any transaction and refers to the failure or
inability of the opposite party to deliver either the promised security or the sale-value at the time
of settlement as per the contract. • Price Risk: This refers to the possibility of not being able to
receive the expected price on any order due to adverse movement in the prices. MARKET
STRUCTURE 10 What is the trading structure in the Wholesale Debt Market? The Debt Markets
in India and all around the world are dominated by Government Securities, which account for
between 50 - 75% of the trading volumes and the market capitalization in all markets.
Government Securities (G-Secs) account for 70 - 75% of the outstanding value of issued securities
and 90-95% of the trading volumes in the Indian Debt Markets. State Government securities &
Treasury Bills account for around 3-4 % of the daily trading volumes. The trading activity in the
G-Sec. Market is also very concentrated currently (in terms of liquidity of the outstanding G-
Secs.) in the top 10 liquid securities, accounting for around 70% of the daily volume. 11 Who are
the main investors of Govt. Securities in India? Traditionally, the banks have been the largest
category of investors in G-secs accounting for more than 60% of the transactions in the Wholesale
Debt Market. The banks are a prime and captive investor base for G-secs as they are normally
required to maintain 25% of their net time and demand liabilities as SLR, But it has been observed
that the banks normally invest 10% to 15% more than the normal requirement in Government
Securities because of the following requirements:- • Risk Free nature of the Government
Securities • Greater returns in G-Secs as compared to other investments of comparable nature 12
Who regulates the fixed income markets? The issue and trading of fixed income securities by each
of these entities are regulated by different bodies in India. For example: Government Securities
and issues by Banks and Institutions are regulated by the RBI. The issue of non- government
securities comprising basically of Corporate Debt issues is regulated by SEBI. 13 What are the
main features of G-Secs and T-Bills in India? All G-Secs. in India currently have a face value of
Rs.100/- and are issued by the RBI on behalf of the Government of India. All G-Secs are normally
coupon- bearing (Interest rate) bearing and have semi-annual coupon or interest payments with
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tenure of 5 to 30 years. This may change according to the structure of the Instrument. Example: A
11.50% GOI 2014 security will carry a coupon rate(Interest Rate) of 11.50% p.a. on a face value
per unit of Rs.100/- payable semi-annually and maturing in the year 2014. Treasury Bills are for
short-term instruments issued by the RBI for the Govt. to finance the temporary funding
requirements and are issued with maturities of 91 Days and 364 Days. T-Bills have a face value of
Rs.100 but have no coupon (no interest payment). T-Bills are instead issued at a discount to the
face value (say @ Rs.95) and redeemed at par (Rs.100). The difference of Rs. 5 (100 - 95)
represents the return to the investor obtained at the end of the maturity period. State Government
Securities are also issued by the RBI on behalf of each of the state governments and are coupon-
bearing bonds with a face value of Rs.100 and a fixed tenure. They account for 3-4 % of the daily
trading volumes. 14 What are the segments in the secondary debt market? The segments in the
secondary debt market based on the characteristics of the investors and the structure of the market
are: • 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. 15 What is the
structure of the Wholesale Debt Market? The Debt Market is today in the nature of a negotiated
deal market where most of the deals take place through telephones and are reported to the
Exchange for confirmation. It is therefore in the nature of a wholesale market. 16 Who are the
most prominent investors in the Wholesale Debt Market in India? The Commercial Banks and the
Financial Institutions are the most prominent participants in the Wholesale Debt Market in India.
During the past few years, the investor base has been widened to include Co- operative Banks,
Investment Institutions, cash rich corporates, Non-Banking Finance companies, Mutual Funds and
high net-worth individuals. FIIs have also been permitted to invest 100% of their funds in the debt
market, which is a significant increase from the earlier limit of 30%. The government also allowed
in 1998-99 the FIIs to invest in T-bills with a view towards broadbasing the investor base of the
same. 17 What is the issuance process of G-secs.? G-secs. are issued by the RBI on either a yield-
based (participants, bid for the coupon payable) or a price-based (participants bid a price for a
bond with a fixed coupon) auction basis. The Auction can be either a Multiple price (participants
get allotments at their quoted prices/yields) or a Uniform price Auction (all participants get
allotments at the same price). The RBI has recently announced a non-competitive bidding facility
for retail investors in G-Secs. through which non-competitive bids will be allowed up to 5 percent
of the notified amount in the specified auctions of dated securities. 18 What are the types of trades
in the Wholesale Debt Market? There are normally two types of transactions, which are executed
in the Wholesale Debt Market : • An outright sale or purchase, and • A Repo trade 19 What is a
Repo trade and how is it different from a normal buy or sell transaction? An outright Buy or sell
transaction is the one where there is no intended reversal of the trade at the point of execution of
14
the trade. The buy or sell transaction is an independent trade and is in no way connected with any
other trade at the same or a later point of time. A Ready Forward Trade (which is normally
referred to as a Repo trade or a Repurchase Agreement) is a transaction where the said trade is
intended to be reversed at a later point of time at a rate which will include the interest component
for the period between the two opposite legs of the transactions. So, in such a transaction, one
participant sells securities to the other with an agreement to purchase them back at a later date.
The trade is called a Repo transaction from the point of view of the seller and a Reverse Repo
transaction from point of view of the buyer. Repo, therefore, facilitate creation of liquidity by
permitting the seller to avail of a specific sum of money (the value of the repo trade) for a certain
period in lieu of payment of interest by way of the difference between the two prices of the two
trades. Repos and reverse repos are commonly used in the money markets as instruments of short-
term liquidity management and can also be termed as a collateralised lending and borrowing
mechanism. Banks and Financial Institutions usually enter into reverse repo transactions to
manage their reserve requirements or to manage liquidity. BOND ANALYTICS 20 What is
Yield? Yield refers to the percentage rate of return paid on a stock in the form of dividends, or the
effective rate of interest paid on a bond or note. There are many different kinds of yields
depending on the investment scenario and the characteristics of the investment. Yield To Maturity
(YTM) is the most popular measure of yield in the Debt 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 it gives a fair
approximation of the present yield. Therefore, Current Yield = Coupon of the Security(in %) x
Face Value of the Security (viz. 100 in case of G-Secs.)/Market Price of the Security. Eg: Suppose
the market price for a 10.18% G-Sec 2012 is Rs.120. The current yield on the security will be
(0.1018 x 100)/120 = 8.48% The yield on the government securities is influenced by various
factors, such as level of money supply in the economy, inflation, future interest rate expectations,
borrowing program of the government and the monetary policy followed by the government. 21
How is the Yield to Maturity computed? The calculation for YTM is based on the coupon rate,
length of time to maturity, and market price. It is the Internal Rate of Return on the bond and can
be determined by equating the sum of the cash-flows throughout the life of the bond to zero. A
critical assumption underlying the YTM is that the coupon interest paid over the life of the bond is
assumed to be reinvested at the same rate. The YTM is basically obtained through a trial and error
method by determining the value of the entire range of cash-flows for the possible range of YTMs
so as to find one rate at which the cash-flows sum up to zero. So, say, a G-Sec - 8.00% GOI Loan
2014 with only 2 cash flows remaining to maturity as under: Maturity Date: 30th January 2014
Interest Payment Dates: 30th January, 30th July and trading currently at Rs. 115 for 1 Unit, will
have a YTM as follows: Settlement Date: 17th March 2013 (Date at which ownership is
transferred to the Buyer) Frequency of Interest Payments: 2 Day Count Convention: 30/360
15
(which in MS- EXCEL is taken as Basis 4) Yield To Maturity: 4.8626% The same can be
computed from MS-EXCEL through the YIELD Formula by input of the parameters given above.
It can be checked by discounting the said cash-flows, i.e., the two coupons of Rs. 8.00 each and
the principal repayment of Rs.100/- from the interest payment dates and maturity dates to the date
of settlement. 22 How the price is determined in the Debt Markets? The price of a bond in the
Debt Markets is determined by the forces of demand and supply, as is the case in any market. The
price of a bond in the marketplace also depends on a number of other factors and fluctuates
according to changes in • Economic conditions • General money market conditions including the
state of money supply in the economy • Interest rates prevalent in the market and the rates of new
issues • Future Interest Rate Expectations • Credit quality of the issuer There is, however, a
theoretical underpinning to the determination of the price of the bond in the market based on the
measure of the yield of the security. 23 How is Yield related to the price? Yields and Bond Prices
are inversely related. So a rise in price will decrease the yield and a fall in the bond price will
increase the yield. There will be an immediate and mostly predictable effect on the prices of bonds
with every change in the level of interest rates.(The predictability here however refers to the
direction of the price change rather than the quantum of the change) When the prevailing interest
rates in the market rise, the prices of outstanding bonds will fall to equate the yield of older bonds
with higher-interest rates of new issues. This will happen as there will be very few takers for the
lower coupon bonds resulting in a fall in their prices. The prices would fall to an extent where the
same yield is obtained on the older bonds as is available for the newer bonds. When the prevailing
interest rates in the market fall, there is an opposite effect. The prices of outstanding bonds will
rise, until the yield of older bonds is low enough to match the lower interest rate on the new bond
issues. These fluctuations ensure that the value of a bond will never be the same throughout the
life of the bond and is likely to be higher or lower than its original face value depending on the
market interest-rate, the time of maturity (or call as the case may be), and the coupon rate on the
bond. MARKET STRUCTURE AND TRADING METHODOLOGY IN WDS 24 What is the
concept of the broken period interest as regards the Debt Market? The concept of the Broken
period interest or the accrued interest arises as interest on bonds are received after certain fixed
intervals of time to the holder, who enjoys the ownership of the security, at that point of time.
Therefore, an investor who has sold a bond which makes half-yearly interest payments three
months after the previous interest payment date would not receive the interest due to him for these
three months from the issuer. The interest on these previous three months would be received by
the buyer who has held it for the next three months only but received interest for the entire six
month period, as he happens to be holding the security at the interest payment date. Therefore, in
case of a transaction in bonds occurring between two interest payment dates, the buyer would pay
interest to the seller for the period from the last interest payment date up to the date of the
transaction. The interest thus calculated would include the previous date of interest payment, but
16
would not include the trade date. 25 What are the conventions followed for the calculation of
Accrued Interest? The Day Count Convention to be followed for the calculation of Accrued
Intetest in case of transactions in G-Secs. is 30/360, i.e, each month is to be taken as having 30
days and each year is to be taken as having 360 days, irrespective of the actual number of days in
the month. So, months like February, March, January, May, July, August, October and December
are to be taken as having 30 days. 26 What is the Clean Price and the Dirty Price in reference to
trading in G- Secs? G-Secs. are traded on a clean price (Trade price), but settled on the dirty price
(Trade price + Accrued Interest). This happens, as the coupon payments are not discounted in the
price, as is the case in the other non-govt. debt instruments. 27 How are the Face Value, Trade
Value and the settlement value different fromone another? The Cumulative face Value of the
securities in a transaction is the face Value of the Transaction, and is normally the identifiable
feature of each transaction. Say, a transaction of Rs.500,000 worth of G-Secs will comprise a trade
of 5000 G-Secs. of Rs.100 each. The Trade value is the cumulative price of the traded G- Secs
(i.e. no. of securities multiplied by the price) Say, the G-Secs referred to above may be traded at
Rs.102 each so that the Trade Value is Rs.5,10,000 (102 x 5000). The Settlement value will be the
trade value plus the Accrued Interest. The Accrued Interest per unit of the Bond is calculated as =
Coupon of Bond x Face Value of the G-Sec. (100) x (No. of Days from Interest Payment Date to
Settlement Date)/360. In computing the number of days between the Interest Payment Date and
the Settlement Date of the trade, only one of the two days is to be included. 28 How can investors
in India hold G-Secs.? G-Secs. can be held in either of the following forms: • Physical Security
(which is mostly outdated and not used much) • SGL (Subsidiary General Ledger) A/c with the
Public Debt Office of the RBI. The SGL A/cs are, however, restricted only to few entities like the
Banks & Institutions. • Constituent SGL A/c with Banks or PDs who hold the G-secs on behalf of
the investors in their SGL-II A/cs of the RBI, are meant only for client holdings. • Same Demat
A/c as is used for equities at the Depositories. NSDL and CDSL will hold them in their SGL-II
A/cs of the RBI, meant only for client holdings. 29 What are the types of transactions which take
place in the market? The following two types of transactions take place in the Indian markets: •
Direct transactions between banks and other wholesale market participants which account for
around 25% of the Wholesale Market volumes: Here the Banks and the Institutions trade directly
between themselves either through the telephone or the NDS system of the RBI. • Broker
intermediated transactions which account for around 70-75% of the trades in the market. These
brokers need to be members of a Recognized Stock Exchange for the RBI to allow the Banks,
Primary Dealers and Institutions to undertake dealings through them. 30 What is the role of the
Exchanges in the WDS? BSE and other Exchanges offer order-driven screen based trading
facilities for Govt. Securities. The trading activity on the systems is, however, restricted with most
trades today being put through in the brokers’ offices and reported to the Exchange through their
electronic systems which provide for reporting of "Negotiated Deals" and "Cross Deals". BSE
17
WHOLESALE DEBT SEGMENT (WDS) 31 When was the BSE accorded regulatory permission
for the WDS? The Reserve Bank of India, vide it's circular DBOD.FSC.BC.No.39/24.76.002/2000
dated October 25, 2000 permitted the Banks and the Financial Institutions in India to undertake
transactions in debt instruments among themselves or with non-bank clients through the members
of BSE Ltd. (BSE). This notification paved the way for the Exchange to commence trading in
Government Securities and other fixed income instruments. 32 How is the settlement carried out
in the Wholesale Debt Market? The settlement for the various trades is finally carried out through
the Clearing Corporation of India. As far as the Broker Intermediated transactions are concerned,
the settlement responsibility for the trades in the wholesale market is primarily on the clients, i.e.
the market participants and the broker have no role to play in the same. The member only has to
report the settlement details to the Exchange itself for monitoring purposes. The Exchange reports
the trades to the RBI regularly and monitors the settlement of these trades. 33 What are the trading
and reporting facilities offered by the BSE Wholesale Debt Segment? The BSE Wholesale Debt
Segment offers reporting facilities through the ICDM System, a brower based system, which is an
efficient and reliable reporting system for all the debt instruments of different types and
maturities, including Central and State Govt. Securities, T-Bills, Institutional Bonds, PSU Bonds,
Commercial Paper, Certificates of Deposit, Corporate Debt instruments, and the new innovative
instruments, Repos. 34 What are the three modules in the ICDM G-Sec system? The system
permits trading in the Wholesale Debt Market through the two following avenues: • Negotiated
Deal Module - which permits the reporting of trades undertaken by the market participants
through the members of the Exchange • Cross Deal Module - permitting reporting of trades
undertaken by two different market participants through a single member of the Exchange 35
What is the membership criteria and charges for the membership of the BSE Wholesale Debt
Segment? The membership of the Debt Market Segment is being granted only to the Existing
Members of the Exchange. The members need to have a minimum net worth of Rs.30 lacs for
admission to undertaking dealings on the debt segment. No security deposit is applicable for the
membership of the Debt Segment as on other Exchanges. The annual approval/renewal charges at
present Rs.25,000/- have been waived off at present. 36. What is the settlement mode allowed in
GILT? The settlements mode allowed in GILT is on T+1 basis, as mandated by the Reserve Bank
of India. 37 What are the aspects for settlement of trades in G-secs. in GILT? The settlement for
the securities traded in the Debt Segment would be on a Trade by Trade DVP basis. The primary
responsibility of settling trades concluded in the wholesale segment rests directly with the
participants who would settle the trades executed in the GILT system on their behalf through the
Subsidiary Ledger Account of the RBI. Each transaction is settled individually, and netting of
transaction is not allowed. The Exchange would monitor the Clearing and Settlement process for
all the trades executed or reported through the 'GILT' system. The Members need to report the
settlement details to the Exchange for all the trades undertaken by them on the GILT system.
18
CORPORATE DEBT MARKET 38 What is the structure of the Corporate Debt Market in India?
The Indian Primary market in Corporate Debt is basically a private placement market with most of
the corporate bond issues being privately placed among the wholesale investors, i.e., the Banks,
Financial Institutions, Mutual Funds, Large Corporates & other large investors. The proportion of
public issues in the total quantum of debt capital issued annually has decreased in the last few
years. The Secondary Market for Corporate Debt can be accessed through the electronic order-
matching platform offered by the Exchanges. BSE offers trading in Corporate Debt Securities
through the automatic BOLT system of the Exchange. The Debt Instruments issued by
Development Financial Institutions, Public Sector Units and the debentures, and other debt
securities issued by public limited companies are listed in the 'F Group' at BSE. 39 What are the
various kinds of debt instruments available in the Corporate Debt Market? The following are some
of the different types of corporate debt securities issued: • Non-Convertible Debentures • Partly-
Convertible Debentures/Fully-Convertible Debentures (convertible into Equity Shares) • Secured
Premium Notes • Debentures with Warrants • Deep Discount Bonds • PSU Bonds/Tax-Free
Bonds 40 How is the trading, clearing, and settlement in Corporate Debt carried out at BSE? The
trading in corporate debt securities in the F Group is done on the BOLT order-matching system
based on price-time priority. The trades in the 'F Group' at BSE are to be settled on a rolling
settlement basis with a T+2 Cycle, with effect from 1st April 2003. Trading continues from
Monday to Friday during the week. The Trade Guarantee Fund (TGF) of the Exchange covers all
the trades in the 'F' Group undertaken on the electronic BOLT system of the Exchange. BSE
RETAIL DEBT SEGMENT (REDS) 41 What are the securities/instruments traded in the Retail
Debt Segment (REDS) at the Exchange? The Retail trading in Central Government Securities
commenced on January 16, 2003, through the BOLT System of the Exchange. Central
Government Securities (G-Secs.) are currently listed at the Exchange under the G Group. The
Exchange may introduce, in due course of time, retail trading in other debt securities, like the
following, subject to the receipt of regulatory approval for the same: • State Government
Securities • Treasury Bills • STRIPS • Interest Rate Derivative products 42 Which are the
participants in the Retail Debt Market? The following are the main investor segments which could
participate in the Retail Debt Market: • Mutual Funds • Provident Funds • Individual Investors •
Pension Funds • Private Trusts • Religious Trusts and charitable organizations having large
investible corpus • State Level and District Level Co-operative Banks • Housing Finance
Companies • NBFCs and RNBCs • Corporate Treasuries • Hindu-Undivided Families (HUFs) 43
What is the membership criteria and procedure at the BSE Retail Debt Segment (REDS)?
Eligibility Criteria for Members: The Members of the Segment possessing a net-worth of Rs. 1
crore and above are eligible to trade in the Retail Debt segment. The members are required to
submit additional contribution of Rs. 5 lakhs as refundable contribution towards the separate

19
Trade Guarantee Fund for this Segment. This contribution of Rs.5 lakhs towards the Trade
Guarantee Fund can be submitted in terms of cash or FDR or Bank Guarantee. However, the
Exchange has permitted the Members to earmark Rs.5 lakhs from their additional capital for a
period of one month, or till the time they provide separate contribution for TGF,whichever is
earlier. 44 How are the Retail Transactions in G-Secs. executed at the Exchange? Retail Trading
in Government Securities takes place by electronic order matching based on price-time priority
through the BOLT (BSE OnLine Trading) System of the Exchange with the continuous trading
sessions from 9.55 a.m. to 3.30 p.m, as is operational in the Equities Segment. The Retail Trading
in G-secs. is to be settled on a rolling settlement basis with a T+2 Delivery Cycle with effect from
1st April 2003. 45 What is the listing procedure for G-Secs. in respect of the Retail Debt Market?
• Eligible Securities: All outstanding and newly issued Central Government Securities are eligible
to be traded on the automated, anonymous , order driven system of the eligible stock exchange.
The Rules, Bye-Laws and Regulations of the Exchange provide for the trading in Government
securities as all G-secs. are deemed to be admitted to dealings on the Exchange from the date on
which they are issued, as per Bye-Law 22(a) and 22(b) of the Exchange. • Group: The
Government securities have been introduced as a new group of securities - "G" Group in the
BOLT system. The G-secs. are allotted a 6-digit scrip code (in the 800000 series) and a 11
characters alpha-numeric scrip ID. The interpretation for the Scrip IDs of G-Secs. in BOLT is as
follows: • First 2 characters signify Central Government Security - CG • Next 4 Digits signify the
coupon or interest rate of the G-Sec • Next 1 character is a differentiator which would be 'S' in
case of a normal security and 'A' in case there exists another security with the same coupon and
maturity year • Next 2 Digits signify the Issue Year and the last 2 digits signify the Maturity Year
The date in the Scrip Name stands for the Maturity Date of the Security. The Exchange will
implement and monitor the suspension of trading during the shut down period so that no
settlements fall due in the no- delivery period which is on the T-3, T-2 and T-1 days for
Government Securities (where T is the interest payment date for the security). 46 What is the
trading methodology in case of the Retail trading in G-Secs.? • Trading Methodology: The G-
Secs. shall be traded on the system and settled at the same price, which will be inclusive of the
accrued interest, i.e., the Dirty Price as per the market parlance in the Wholesale Debt Market.
This is similar to the trading on the cum-interest price as is witnessed in the case of corporate
debentures. The minimum order size shall be 10 units of G-Secs. with a face value of Rs.100/-
each, equivalent to an order value of Rs. 1000/-, and the subsequent orders will be in lots of 10
securities each. • Trading & Exposure Limits: The members of the Retail Debt Segment are
permitted gross exposure in government securities along their gross exposure in equity segment
upto 15 times of their additional capital deposited by them with the Exchange. However, no gross
exposure is permitted to the members against their Base Minimum Capital + contribution of Rs.10
lakhs towards TGF in the cash segment. Transactions done by the members in this segment along
20
with their transactions in the equity segment would form part of their Intra-day Trading Limits
and are subject to a limit of 33.33 times of the capital deposited with the Exchange. However,
institutional business would not form part of these Intra-Day and Gross Exposure limits. 47 How
does the Clearing & Settlement of the Retail G-Sec. transactions take place in REDS? The
Clearing and Settlement mechanism for the Retail trading in G-Secs is based on the existing
institutional mechanism available at the Stock Exchanges for the Equity Markets. The trades
executed throughout the continuous trading sessions will be netted out at the end of the trading
hours through a process of multilateral netting. The transactions will be netted out member-wise
and then scrip-wise so as to determine the net settlement and payment obligations of the members.
The Delivery obligations and the payment orders in respect of these members are generated by the
Clearing and Settlement system of the Exchange. These statements indicate the pay-in and pay-out
positions of the members for securities and funds, who would then give the necessary instructions
to their Clearing Banks and depositories. Custodial confirmation of the retail trades in G-Secs. by
using 6A-7A mechanism as available in the Equity segment is also available. The schedule of
various settlement related activities, like obligation download, custodial confirmation, payin/pay-
out of funds and securities is similar to what is at present applicable in the equities segment. As
per an RBI Circular, the RBI regulated entities are to settle their transactions in the Retail Debt
Segment at the Exchange through a Custodian. 48 How are the security delivery shortages treated
in the Retail Debt Segment? In the event of failure/shortage in delivery of securities, the Exchange
would close-out such shortages at the ZCYC valuation for prices plus a 5% penalty factor which
would be debited to the account of the member who has failed to deliver the securities against his
sale obligation. The buyer in the event of non- delivery of securities by the seller would be eligible
to receive the compensation/consideration which would be computed at the higher of either the
highest trade price from the trade date to the date of closeout, or closing price of the security in the
normal market on the closeout date, plus interest calculated at the rate of overnight FIMMDA-
NSE MIBOR for the close-out date. The difference between the amount debited to the seller and
amount payable to the buyer on the basis discussed above would be credited to the Investor
Protection Fund of the Exchange. The Exchange has also set up a separate Trade Guarantee Fund
(Settlement Guarantee Fund ) for the Retail Trading in G-Secs, as was mandated by SEBI through
its circular. 49 How is the margining structure at the Exchange for the Retail Debt Market? •
Margining - Mark to Market : The positions in the Retail Debt segment are marked to market until
settlement, and mark to market margin on net outstanding position of the members is collected on
all open net positions. The mark to market margin is calculated based on the prices derived from
the Zero Coupon Yield Curve (ZCYC). This margin is to be collected on the T+1 day along with
the margin on the outstanding positions in cash segment. • Margin exemption to Institutional
business: Institutional business (i.e., business done by members on behalf of Indian Financial
Institutions, Foreign Institutional Investors, Scheduled Commercial Banks, Mutual Funds
21
registered with SEBI) would be exempted from margin, as is applicable in the case of transactions
in the equity segment since the institutions are required under the relevant regulations to transact
only on the basis of giving and taking delivery. The members would, however, be required to
mark client type 'FI' at the time of order entry for availing exemption from payment of margins,
and also exclusion of such trades from Intra-day Trading and Gross Exposure Limits. Custodial
trades on behalf of Provident Funds transacting through a SGL-II account (Constituent SGL a/c)
would also be eligible for margin exemption. • Margin Exemption against delivery: Margin
exemption for early payin of securities in case of sale transactions as applicable for the equities
segment would also be available for this segment. INVESTOR SAFEGUARDS 50 What are the
main points to be kept in mind by the investor while investing in the Debt Markets? The main
features which you need to check for any debt security is: • Coupon (or the discount implied by
the price as in the case of zero coupon bonds) and the frequency of interest payments. The
securities can also be chosen in such a manner so that the interest payments coincide with any
requirements of funds at that point time. • Timing of Cash Flows - In case, the interest and
redemption proceeds, at one single point or at different points of time, are planned to be used for
meeting certain planned expenses in the future. • Information about the Issuer and the Credit
Rating - It is essential to obtain enough information about the background, the business
operations, the financial position, the use of the funds being collected and the future projections to
satisfy oneself of the suitability of the investment. As per the regulations in force in the capital
markets, it is essential for any corporate debt security to obtain a credit rating from any of the
major credit rating agencies. A proper analysis of the background and the financials of the issuer
of any non-govt. debt instrument, and especially the credit rating, would lend greater safety to
your investments. • Other Terms of particular Issue - It is also advisable to check on certain terms
of the issue, like the use of the issue proceeds, the monitoring agency, the formation of trustees,
the secured or unsecured nature of the bonds, the assets underlying the security, and the credit-
worthiness of the organization. Most of the said information is available from the prospectus of
the said issue. Any required and relevant details can also be obtained on demand from the lead
manager of the issue. • Obtain all the relevant knowledge on the debt security like the coupon,
maturity, interest payments, put and call options (if any), Yield To Maturity (at the particular price
at which the trade is intended to be carried out), and the Duration of the Instrument. • Check the
Yield To Maturity (YTM) of the debt security with the YTMs of other comparable debt securities
of the same class and features. • Remember that the Yield and the Price are inversely related. So,
you will be able to obtain a higher yield at a lower price. • It is desirable to check on the liquidity
of any corporate debt instrument before investing in it so as to ensure the availability of
satisfactory exit options. • The Debt Markets are suited for investors who seek decent returns over
a longer time horizon with periodic cash flows. There is also a tax exemption for interest earned

22
on G-Secs. up to Rs.3000/- under Section 80L of the Income Tax Act. The investor should be well
aware of the set of risks associated with the Debt Markets, like the default risk (non-receipt or
delay in receipt of interest or principal), price risk, interest rate risk (risk of rates moving
adversely after investment), settlement risk (or risk of non-delivery of securities and funds in the
secondary market) and the reinvestment risk (interest payments fetching a lower return when
reinvested). Investors in the Debt Markets should follow a process of judicious investing after a
careful study of the economic and money market conditions, various instruments available for
investment, the desired returns and their compatibility with existing investment, opportunities,
alternative modes available for investments and the relevant transaction cost. 51 What will be the
future scenario of the Retail Debt Market in India? The Retail Debt Market is set to grow
tremendously in India with the broadening of the market participation and the availability of a
wide range of debt securities for retail trading through the Exchanges. The following are the
trends, which will impact the Retail Debt Market in India in the near future: • Expansion of the
Retail Trading platform to enable trading in a wide range of government and non-government debt
securities. • Introduction of new instruments like STRIPS, G-Secs. with call and put options,
securitised paper, etc. • Development of the secondary market in Corporate Debt. • Introduction
of Interest Rate Derivatives based on a wide range of underlying in the Indian Debt and Money
Markets. • Development of the Secondary Repo Markets. The BSE vision for the Indian Debt
Market foresees the markets growing in leaps and bounds in the near future, soon attaining global
standards of safety, efficiency and transparency. This will truly help the Indian capital markets to
attain a place of pride among the leading capital markets of the world.

23
Evolution of debt market in India

Existence of well-developed government (govt.) debt market is critical for investors, market
participants and policy makers. Administered interest rates, artificially low coupon rates were
some of the dominant features of the market until 1990. Starting 1992, Reserve Bank of India
(RBI) has taken several reform initiatives to build a vibrant liquid, competitive and integrated
govt. debt market with the purpose of: 1) providing a benchmark yield curve whose information
content could guide policymakers and investors; 2) making transmission mechanism of monetary
policy impulses effective; 3) making a constant source of government borrowing to finance the
fiscal deficit. Over the past two decades, the govt. debt market has demonstrated a steady
improvement in terms of liquidity and infrastructure enhancements which should convince the
investors that it does not function under the manipulation of RBI. The study by Kanjilal (2011)
shows that movements in govt. debt market are still a reflection of RBI’s policy change.
Separation of ‘debt management’ from ‘monetary management’, widening both domestic
andforeign investment . Debt market Debt market is where investors buy and sell debt securities,
mostly in the form of bonds. Debt market is where investors buy and sell debt securities, mostly in
the form of bonds. Debt market in India is one of the largest in Asia. Like all other countries,
Indian debt market is also considered a useful substitute to banking channels for finance. The debt
market in India consists of mainly two categories — the government securities or the G-Sec
markets comprising central government and state government securities, and the corporate bond
market. market in India is one of the largest in Asia. Like all other countries, Indian debt market is
also considered a useful substitute to banking channels for finance. The debt market in India
consists of mainly two categories — the government securities or the G-Sec markets comprising
central government and state government securities, and the corporate bond market. Money
market: Money market in India in India is a correlation for short-term funds with maturity ranging
from overnight to one year in India including financial instruments that are deemed to be close
substitutes of money.[1] Similar to developed economies the Indian money market is diversified
and has evolved through many stages, from the conventional platform of treasury bills and call
money to commercial paper, certificates of deposit, repos, forward rate agreements and most
recently interest rate swaps[2] The Indian money market consists of diverse sub-markets, each
dealing in a particular type of shortterm credit. The money market fulfills the borrowing and
investment requirements of providers and users of short-term funds, and balances the demand for
and supply of short-term funds by providing an equilibrium mechanism. It also serves as a focal
point for the central bank's intervention in the market. Instruments in debt market : Bonds Bonds
on the other hands are issued generally by the government, central bank or large companies are

24
backed by a security. Bonds also ensure payment of fixed interest rates to the lenders of the
money. On maturity of the bond, the principal amount is paid back Goverment securities :
government security is a bond or other type of debt obligation that is issued by a government with
a promise of repayment upon the security's maturity date. Government securities are usually
considered low-risk investments because they are backed by the taxing power of a government. In
fact, investment in U.S. treasury securities is probably the safest investment that can be made.
Government securities are usually issued for two different reasons. The primary reason that most
government securities are issued is to raise funds for government expenditures. The federal
government issues treasury securities to cover shortfalls (deficits) in its annual budget. Psus
bonds: PSU bond funds are mutual fund schemes that invest in bonds issued by commercial banks
and public sector undertakings (PSU). ... PSU bonds are seen as sovereign risk and mutual funds
typically restrict themselves to buying securities issued by financially sound banks with high
credit ratings Corporate bonds: corporate bond is a type of debt instrument that is issued by a firm
and sold to an investor. The company gets the cash it needs for capital and in return the investor is
paid a pre-established number of interest payments at either a fixed or variable interest rate. When
the bond expires, or "reaches maturity," the payments cease and the original investment is
returned. The backing for the bond is generally the ability of the company to repay, which
depends on its future revenues and profitability. In some cases, the company's physical assets may
be used as collateral. Primary dealers in goverment securities: primary dealer is a firm that buys
government securities directly from a government, with the intention of reselling them to others,
thus acting as a market maker of government securities. The government may regulate the
behaviour and number of its primary dealers and impose conditions of entry. Some governments
sell their securities only to primary dealers; some sell them to others as well. Governments that
use primary dealers Feature of bonds: Face value Corporate bonds normally have a par value of
$1,000, but this amount can be much greater for government bonds. Interest Most bonds pay
interest every 6 months, but it's possible for them to pay monthly, quarterly or annually. Coupon
or interest rate Fixed-rate bonds generate a constant interest rate. You receive the same amount
each year or month, depending on the interest payment schedule. There are also 2 types of
floating-rate bonds. The interest rate is either set in advance each year or tied to market rates.
Step-up bonds have yields that increase over a set period (e.g., 4% the first year, 4.5% the second
year, etc,). They can also be bought back at the issuer's choosing. Other bonds have an adjustable
floating rate, tied to market rates such as Treasury bills. If Treasury bill yields to up, the investor
wins out. The reverse also is true: if yields go down, the bond issuer wins out. Fixed-rate bonds
are therefore considered safer than floating-rate bonds, but their yield may be lower. Maturity
Maturities can range from as little as one day to as long as 30 years (though terms of 100 years
have been issued! A bond that matures in one year is much more predictable and thus less risky
than a bond that matures in 20 years. Therefore, the longer the time to maturity, the higher the
25
interest rate. Also, a longer term bond will fluctuate more than a shorter term bond. Issuers The
issuer's stability is your main assurance of getting paid back when the bond matures. For example,
the Canadian and U.S. governments are far more secure than any corporation. Their default risk–
the chance of the debt not being paid back–is extremely small, so small that they are considered
risk free assets. The reason behind this is that a government will always be able to bring in future
revenue through taxation. A company on the other hand must continue to make profits, which is
far from guaranteed. This means the corporations must offer a higher yield in order to entice
investors–this is the risk/return trade-off in action. Rating agencies The bond rating system helps
investors distinguish a company's or government's credit risk. Blue-chip firms, which are safer
investments, have a high rating while risky companies have a low rating. The chart below
illustrates the different bond rating scales from the major rating agencies: Methods of bonds :
Fixed rate bonds have a coupon that remains constant throughout the life of the bond. A variation
are stepped-coupon bonds, whose coupon increases during the life of the bond. Floating rate notes
(FRNs, floaters) have a variable coupon that is linked to a reference rate of interest, such as Libor
or Euribor. For example, the coupon may be defined as three-month USD LIBOR + 0.20%. The
coupon rate is recalculated periodically, typically every one or three months. Zero-coupon bonds
(zeros) pay no regular interest. They are issued at a substantial discount to par value, so that the
interest is effectively rolled up to maturity (and usually taxed as such). The bondholder receives
the full principal amount on the redemption dateHigh-yield bonds (junk bonds) are bonds that are
rated below investment grade by the credit rating agencies. As these bonds are riskier than
investment grade bonds, investors expect to earn a higher yield. Convertible bonds let a
bondholder exchange a bond to a number of shares of the issuer's common stock. These are
known as hybrid securities, because they combine equity and debt features. Exchangeable bonds
allows for exchange to shares of a corporation other than the issuer. Bondsrating: Bond Rating: A
bond rating is a way to measure the creditworthiness of a bond, which corresponds to the cost of
borrowing for an issuer. These ratings typically assign a letter grade to bonds that indicates their
credit quality. Private independent rating services such as Standard & Poor's, Moody’s Investors
Service, and Fitch Ratings Inc. evaluate a bond issuer's financial strength, or its ability to pay a
bond's principal and interest, in a timely fashion.A bond rating is a letter-based credit scoring
scheme used to judge the quality and creditworthiness of a bond. Investment grade bonds assigned
“AAA” to “BBB-“ ratings from Standard & Poor's, and Aaa to Baa3 ratings from Moody’s. H
gbJunk bonds have lower ratings. The higher a bond's rating, the lower the interest rate it will
carry, all else Rating A rating is an assessment tool assigned by an analyst or rating agency to a
stock or bond indicating its potential for opportunity or safety. more Credit Quality Definition
Credit quality is one of the principal criteria for judging the investment quality of a bond or bond
mutual fund. more Ba3/BBBa3/BB- is the bond rate given to debt instruments that are generally
considered to be noninvestment grade and speculative in nature, providing a measure of the
26
riskiness of the security and the likelihood of the issuer defaulting on the debt.

. Objective 1.1. This Board Memorandum proposes to facilitate constitution of an Alternative

Investment Fund (AIF) under the SEBI (Alternative Investment Funds) Regulations, 2012
(hereinafter referred as “AIF Regulations”) namely Corporate Debt Market Development Fund
(“CDMDF” or “the Fund”) to act as a Backstop Facility for purchase of investment grade
corporate debt securities to instil confidence amongst the participants in the Corporate Bond
Market during times of stress and to generally enhance secondary market liquidity by creating a
permanent institutional framework for activation in times of market stress, as proposed in the
Union Budget 2020-21. Accordingly amendments to AIF Regulations is proposed. It also
proposes to amend the SEBI (Mutual Funds) Regulations, 1996 (hereinafter referred as “MF
Regulations”) to provide for enablement of contribution by the specified debt oriented Mutual
Fund schemes towards building corpus of the aforesaid CDMDF. 1.2. In order to operationalize
the aforesaid backstop facility, the framework for trigger mechanism and the standard operating
procedure (SOP) are also proposed. 2. Background 2.1. For countries in need of long term capital
for the development of industry and the economy, a well-developed corporate bond market offers
an important avenue for such long-term funding, and supplements the lending activity of banks. In
March 2020, the Indian corporate bond market witnessed unprecedented risk aversion and mutual
funds (MFs) simultaneously faced significant redemption pressure. Many countries facing similar
pressures, including the US, announced asset purchase programs to calm the debt markets. 2.2. In
times of market dislocation such as disruptions caused due to COVID-19, when redemption
pressure builds up on open ended debt schemes of MFs, the schemes especially, those holding
relatively lower rated (even though it is investment grade papers), face difficulties in meeting the
redemption requirements on account of lack of liquidity in such papers in the corporate debt
market. 2.3. Unlike Banks, MFs do not have access to liquidity support from RBI on an ongoing
basis. While MF Regulations permit MFs to borrow upto a limit to meet temporary liquidity
requirements such as for redemption requests, if the crisis continues for a longer period of time,
relying on borrowing lines for meeting continuing redemption requirements, may have an adverse

27
impact on the investors remaining in the schemes. Further, due to increased risk aversion in times
such as these, investors (especially, corporate investors) may choose to remain in cash, thus,
restricting fresh inflows into mutual fund schemes. 2.4. During August-September 2018 when
there was a default by a conglomerate (NBFC), there was redemption pressure on debt oriented
Mutual Fund Schemes, fearing default by other NBFCs and HFCs. This led to redemption
pressure across open ended debt schemes, resulting in a net redemption of approx. INR 80,000 Cr.
Further, in the peak of the market dislocation in financial markets (during first wave of COVID-19
in India) i.e. during March & April 2020, the net redemption in debt mutual fund schemes, was
about INR 1 lakh Cr (INR 1,03,380 Cr). Thus, redemption pressure has been in the range of INR
1,00,000 Cr, during stress times in recent period. 2.5. Based on experience gained in regulating
the debt market over the years and feedback received on the subject from time to time, and
particularly in light of the disruption observed in the corporate debt market due to the impact of
COVID-19 pandemic, an Internal Task Force was formed by SEBI for the purpose of analyzing
the factors impeding development of the debt market and suggesting a way forward. The said
Task Force prepared a comprehensive report on “Integration and Development of Bond Markets”
which was submitted to the Ministry of Finance in July 2020. 2.6. The Report, inter-alia,
recommended developing sustainable structures intended to serve as Backstop Facilities for
buying of corporate bonds from investors including MFs, with the objective to alleviate the
liquidity shock in times of market dislocation. One of the models proposed was for the
government to establish a specialized entity to buy corporate bonds from the secondary market at
fair value in order to provide the desired liquidity to the sellers of corporate bonds during times of
stress. 2.7. Subsequently, the issue was also deliberated in Mutual Funds Advisory Committee
(MFAC) and thereafter a Working Group (WG) with representation from the MF industry,
Association of Mutual Funds in India (AMFI) and other stakeholders was constituted to provide
recommendations, inter alia, on creation of the Backstop Facility for corporate bonds. Based on
the recommendations of the WG, a proposal was drafted which suggested detailed modalities for
creation of the Backstop Facility for corporate bonds, to be set up with contribution from specified
debt MF schemes and Asset Management Companies (AMCs) with support from the Government
of India. The draft proposal after deliberations in MFAC was subsequently submitted to the
Government. The said proposal underwent multiple iterations and improvements based on
recommendations from other regulatory agencies, Ministry of Finance (MoF), World Bank, etc.
2.8. In this backdrop, with the aim of developing the corporate debt market in India, the Central
Government, as part of the Union Budget 2020-21 announced the following regarding developing
a Backstop Facility for Corporate debt securities “To instil confidence amongst the participants in
the Corporate Bond Market during times of stress and to generally enhance secondary market
liquidity, it is proposed to create a permanent institutional framework. The proposed body would
purchase investment grade debt securities both in stressed and normal times and help in the
28
development of the Bond market”. 2.9. In light of the Budget announcement and based on
discussions with the Department of Economic Affairs (DEA), MoF, the MF industry and internal
deliberations, it has been proposed that the aforementioned Backstop Facility for corporate debt
securities namely Corporate Debt Market Development Fund (CDMDF) be set up in the form of
an Alternative Investment Fund (AIF). 2.10. Availability of a buyer of last resort for corporate
bonds as envisaged above is expected to provide stability to the debt market during times of
market dislocation. The proposed CDMDF will function as a fund on standby and is envisaged to
facilitate liquidity in the corporate debt market and to respond quickly in times of market
dislocation, similar to the mechanisms available in developed markets globally in order to achieve
the following: (i) To build confidence of market participants. (ii) To bring liquidity and stability.
(iii) To address risk aversion during times of market dislocation including for securities rated
below AAA. (iv) To create liquidity options for investors at large. 2.11. Department of Economic
Affairs (DEA), MoF vide letter dated December 26, 2022 informed that the draft proposal on the
CDMDF has been approved. Subsequent to meeting with DEA, NCGTC and SBI AMC, a revised
draft with minor changes on CDMDF Framework has been submitted to DEA, which is placed at
Annexure A. The DEA is in the process of issuing the final framework for CDMDF based on the
revised draft. NCGTC (National Credit Guarantee Trustee Company Limited) is a wholly owned
company of the Department of Financial Services, Ministry of Finance, Government of India
which has been selected for the purpose of extending a guarantee for CDMDF. 2.12. NCGTC after
consultation with SEBI, DEA and SBI AMC (the proposed Investment Manager for CDMDF) has
shared the draft scheme for extending the guarantee called Guarantee Scheme for Corporate Debt
(GSCD). In terms of this scheme, DEA will set up a trust Guarantee Fund for Corporate Debt
(GFCD) to be managed by NCGTC. A copy of the draft scheme is placed at Annexure B. 3.
Details of DEA approved framework for CDMDF 3.1. Structure and Tenure: (i) CDMDF to be set
up as an AIF in the form of a Trust under AIF Regulations. (ii) CDMDF shall be launched as a
close ended scheme with an initial tenure of 15 years from the date of its initial closing (date on
which contribution from all AMCs and specified schemes is received by CDMDF). Based on the
requirements of the corporate bond market, the tenure can be extended with prior approval of the
Government of India in consultation with SEBI subsequent to a review of the entire framework
after 12 years from the date of its initial closing. (iii) The Investment Manager-cum-Sponsor of
the Fund shall be SBI Funds Management Ltd., the Asset Management Company of SBI Mutual
Fund (“SBI AMC”). (iv) The AMC floated by PSU Banks gets covered under the provisions of
the Companies Act, 2013, being what in common parlance is known as ‘Deemed Government
Companies’ which are owned and controlled directly or indirectly by the Government. As per the
audited accounts as on March 31, 2021, SBI holds ~63% stake in SBI Funds Management Limited
(SBI AMC) and ~37% stake is held by AMUNDI Asset Management through a wholly owned
subsidiary, AMUNDI India Holding. SBI AMC will be the settlor of the Fund. A new trustee
29
company will be set up by SBI with 2/3rd independent directors on its Board. Unit holders of the
Fund shall be the beneficiaries. (v) This has been excised. The fees and expenses of CDMDF shall
be reviewed by Board from time to time. The rationale for above expenses is placed at Annexure
P. (vi) To begin with, units of CDMDF shall be subscribed by Asset Management Companies
(AMCs) of MFs and “specified debt oriented MF Schemes” (i.e. Open ended Debt oriented
Mutual Fund schemes excluding Overnight funds and Gilt funds and including Conservative
Hybrid funds). (vii) This has been excised. (viii) Specified debt oriented MF Schemes shall invest
25 bps of their AUM in the units of CDMDF. Further, AMCs shall make a one-time contribution
equivalent to 2 bps of the AUM of specified debt-oriented MF Schemes managed by them.
Contribution from specified debt oriented MF schemes and AMCs, including the appreciations on
the same, if any, is to be locked-in till winding up of the Fund. However, in case of winding up of
contributing MF Schemes, inter-scheme transfers within the same mutual fund or across mutual
funds may be undertaken. (ix) The Fund shall remain open for additional contributions by; a.
AMCs and specified debt-oriented MF Schemes of new MFs. b. New schemes of the said
categories of existing MFs. c. All MF Schemes of the said categories due to increase in AUM. d.
This has been excised. 3.2. Activities: (i) In normal times, the CDMDF shall deal only in liquid
and low-risk debt instruments such as low duration G-Secs, T-bills, Tri-party Repo on G-sec,
AAA debt securities etc. using only its corpus. The Fund may also be permitted to undertake
various activities related to corporate debt market including repo, Securities Lending and
Borrowing Mechanism (SLBM), etc., as may be permitted by SEBI Board from time to time,
subject to suitable risk management measures. (ii) In times of market dislocation, CDMDF shall
purchase and hold eligible corporate debt securities from the participating investors (i.e. specified
debtoriented MF schemes to begin with) and sell as markets recover. Since the objective is to
provide liquidity at times of market dislocation it shall be ensured that the fund is ready for such
scenarios in future, if any. (iii) CDMDF will monitor the near normalcy of the market post market
dislocation in consultation with SEBI and offload a large part of its holdings within a reasonable
time period of 3 months from the end of market dislocation period. However, the above timeline
may be extended with the approval of SEBI Board. (iv) The securities purchased by CDMDF need
to have an investment grade credit rating and residual maturity not exceeding 5 years on the date
of purchase. CDMDF shall not buy unlisted or below investment grade or defaulted debt securities
or securities in respect of which there is a material possibility of default or adverse credit news or
views. 3.3. Funding: (i) Contribution to the Fund shall be mandatory for specified debt oriented
MF Schemes and AMCs. (ii) Specified debt oriented MF Schemes shall contribute 25 bps of their
AUM to the Fund (~INR. 2,860 Cr. based on AUM as on December 31, 2022). (iii) AMCs shall
make a one-time contribution equivalent to 2 bps of the AUM of their specified debt-oriented MF
schemes (~ INR. 228 Cr. based on AUM as on December 31, 2022). Further, AMCs of new MFs
shall also make a one-time contribution equivalent to 2 bps of their specified debt-oriented MF
30
schemes, based on the AUM at the end of the financial year following the one in which the
specified scheme(s) are launched. (iv) The Fund will be eligible to take leverage of up to 10 times
of contribution to corpus from banks or bond market or repo market which shall be guaranteed by
NCGTC up to a maximum of INR 30,000 Cr. (v) The specified debt-oriented MF Schemes shall
provide additional incremental contribution as their AUM increases, on half-yearly basis.
However, if AUM decreases there shall be no return or redemption from CDMDF. (vi) New
schemes from existing MFs under the specified categories or such schemes of new MFs shall also
contribute 25 bps of their respective AUM and make incremental contribution in accordance with
para (v) above. 3.4. Access to the Fund (i) Access to the Fund shall be in proportion to the
contribution made to the Fund at a mutual fund level (i.e., in the ratio of total units of CDMDF
held by all specified debt schemes of each mutual fund) in accordance with detailed guidelines as
may be approved by SEBI. The access to the fund be capped to the amount of debt securities that
may be sold to CDMDF, and shall be kept as such since an unlimited access from the “Buyer of
last resort” may incentivize moral hazard and may effectively be used to address single entity (and
not market wide) dislocation. The cap in turn can be logically linked to the contribution by
individual schemes (aggregated at MF level) as has been proposed in the framework. (ii) The
Fund shall be available to specified mutual fund Schemes during market dislocation, utilization of
which shall be voluntary. (iii) This has been excised. 3.5. Governance Mechanism for CDMDF
3.5.1. Board of Trustees/ Trustee Company: i. At the time of constitution of the trust, the Board of
Trustees/Trustee Company, shall be appointed with prior approval of the SEBI Board. The
Directors of the Trustee Company shall be appointed with prior approval of SEBI. ii. Board of
Trustees/ Trustee Company to comprise two-third of Independent Directors. Of the remaining
one-third, one member shall be nominated by AMFI. The activities of the Board of Trustees/
Trustee Company would be to approve governance standards and policies of the Investment
Manager (IM)(i.e. SBI AMC) and monitor activities of the Fund and the IM. iii. The role and
responsibilities of trustees would be similar to the role and responsibilities assigned to trustees
under SEBI (Mutual Funds) Regulations, 1996 (MF Regulations). An Audit Committee of the
Board of Trustee shall be constituted, which shall review compliance with the provisions of
Private Placement Memorandum (PPM) as required under AIF Regulations along with other
responsibilities as may be specified. iv. Any change in investment strategy of the CDMDF may
only be with the prior approval of SEBI. 3.5.2. Governance Committee (GC): i. GC will be
appointed by the Investment Manager and shall comprise corporate bond market experts including
academicians, CEOs or CIOs of AMCs, risk management professionals, independent market
experts, etc. ii. All the policies of the Fund shall be jointly approved by the GC, Board of IM and
Board of Trustee/Trustee Company. iii. GC, while also approving the policies of the Fund, would
take a more handson approach to supervise the activities of the Fund and oversight of the
Investment Committee, especially relating to management of conflict of interest, if any. iv. GC
31
will also have oversight on management of asset liability mismatches during times of market
dislocation as borrowed money would be used to purchase assets of the scheme at that stage.
3.5.3. The Investment Committee (IC) shall be internal to the Investment Manager and would
perform various activities of the Fund, including the actual buy and sell decisions of the Fund.
3.5.4. Management Team would be a part of IM which includes the fund management, trading,
risk and research team etc. and comprises experienced professionals (such as fund managers and
risk managers). 3.6. Trigger of Market Dislocation (i) As the Sectoral Regulator for Corporate
Debt Market, the Board shall decide the trigger of debt market disruption warranting the Backstop
Facility to operate in times of market dislocation and consequently the need for activation of
guarantee by the NCGTC. (ii) The broad parameters of the model (i.e., Financial Stress Index
(FSI)) shall use India Fixed Income & Forex comprising of 10 indicators pertaining to Indian
Bond market and Forex market and as may be modified from time to time based on learnings, in
consultation with the Government of India and the broad indicators shall be placed in public
domain. In case of trigger of the index (FSI), it should be immediately brought to the notice of the
SEBI Board and accordingly, the Board will make a comprehensive assessment of the situation. In
order to take this decision, the SEBI Board shall consider various parameters reflecting the status
of the market and the need for intervention including the output of a model which has been
prepared for this purpose to identify signals of stress in the Indian corporate bond market as well
as the qualitative factors. The detailed model for trigger and end of market dislocation is covered
at Part 7 below. (iii) Further, during times of market dislocation, the period for which the
Backstop Facility will be open shall be as decided by the SEBI Board and which can be
extendable. The market dislocation period shall be considered to have ended, if no alert from the
aforesaid model appears for a continuous period of 3 months, unless otherwise determined by the
SEBI Board. (iv) The activities of the fund during times of market dislocation shall be reported to
the FSDC and DEA - MoF, Government of India. (v) Since SEBI Board has representatives from
Department of Economic Affairs (DEA), Ministry of Corporate Affairs (MCA), Reserve Bank of
India (RBI) and other independent professional, thus SEBI would be benefited from their
perspectives at the time of such assessments. 3.7. Mechanism of Borrowing based on Guarantee
through NCGTC (i) The NCGTC will give the guarantee as a standing facility, initially for 15
years. Based on the requirements of the corporate bond market, the guarantee can be extended
subsequently upto 5 years at a time. The guarantee cover shall be valid from the first day of each
declaration of market dislocation for a period upto 5 years from the last day of respective market
dislocation. However, in case of claim, guarantee cover shall be valid upto the date of payment of
claim. (ii) The guarantee would be given to Member Lending Institutions (MLIs) directly for the
purpose of lending by them to CDMDF. MLIs means lending institutions viz. Scheduled
Commercial Banks/other financial intermediary approved by Guarantee Fund for Corporate Debt
(GFCD) for providing funds to CDMDF and who have entered into agreement with
32
GFCD/NCGTC for availing guarantee under the scheme. (iii) The guarantee shall become
operative immediately upon trigger of bond market dislocation. Borrowing shall be drawn by the
Fund as required, against the said guarantee. (iv) However, at no point in time, guarantee will be
more than the specified amount of INR 30,000 Cr. (v) Guarantee fee, as decided by the
Government of India, shall be paid at the time of availing the guarantee facility on an annual basis
on the outstanding loan amount daily pro rata. This has been excised. (vi) Over the tenure of the
Fund there could be multiple instances of trigger. (vii) The recovery from sale of assets held shall
be settled against the claim from borrowing. (viii) Shortfall, if any, will be absorbed in accordance
with the waterfall mechanism for loss absorption as laid down in para 3.9.2 of this Board
Memorandum. (ix) If recovery is greater than the borrowing, excess shall be retained by the Fund
(x) In case of invocation of guarantee, underlying outstanding bank loans/debt obligations, would
be paid by the NCGTC. (xi) During the period when borrowing against the guarantee is
outstanding, no payouts (wherever permitted) to unitholders should be made. 3.8. Mechanism of
investment during times of Market Dislocation (i) The Fund shall buy single or basket of listed
investment grade corporate debt securities with tenure not exceeding residual maturity of 5 years
only from the secondary market from the contributing MF schemes at fair price determined as per
existing norms of valuation (adjusted for liquidity risk, interest rate risk and credit risk). The
principle on fair pricing for purchase of securities by CDMDF is placed at Annexure C. At a
portfolio level, the sellers of debt securities would be paid 90% of the consideration in cash and
10% in terms of units of CDMDF. (ii) The Fund can hold the corporate debt securities till maturity
or can sell the same in the secondary market when the market dislocation eases out. Since the
objective is to provide liquidity at times of market dislocation and ensure that the fund is ready for
such scenarios in future, if any, CDMDF will monitor the near normalcy of the market post
market dislocation in consultation with SEBI and offload a large part of its holdings within a
reasonable time period of 3 months from the end of market dislocation period, while avoiding
“fire sales” by the Fund. However, the above timeline may be extended with approval of SEBI
Board. (iii) The Fund may charge a transaction fee from the seller(s) of the corporate debt
securities during market dislocation and the same will be credited to the Fund. No fee to be
charged to buyers of debt securities from the Fund. The policy in this regard shall be approved by
GC, the Board of IM and Trustees. (iv) Trading Price will be as per the policy approved by the
GC, Board of IM and Trustees based on the following Principles: a. Buy at a fair price (adjusted
for liquidity risk, interest rate risk and credit risk) but not at distress price. b. Sell at breakeven/
profit as markets stabilize, to reduce borrowing as soon as possible. (v) The Valuation of the
portfolio by the Fund shall be governed by the existing norms on valuation as applicable under the
extant MF Regulatory framework. The valuation policy shall be approved by the GC, Board of IM
and Trustees. (vi) In case the rating of the debt securities forming part of the CDMDF portfolio is
downgraded below investment grade, the same shall be reflected in daily NAV. 3.9. Moral Hazard
33
Mitigation 3.9.1. Prudential Norms (i) The Fund shall not buy unlisted or below investment grade
or defaulted debt securities or such securities in respect of which there is a material possibility of
default or adverse credit news or views. (ii) Further, either a list of investment grade debt
securities of eligible issuers shall be disclosed on the website of the IM or a transparent
mechanism to be followed for purchasing of debt securities of various issuers from specified
mutual fund schemes. (iii) Prudential limits shall be as decided by the SEBI Board from time to
time. To begin with the following would be the prudential limits: a. Single issuer limit - 5% of the
aggregate of the corpus and maximum permissible debt; b. Group limits - 7.5% of the aggregate of
the corpus and maximum permissible debt (iv) Limit for buying debt securities from a single MF
shall be in proportion to aggregate contribution by all the schemes of the said MF to the Fund in
accordance with detailed guidelines as may be approved by SEBI. 3.9.2. Loss Absorption
Waterfall (i) The issue of moral hazard is addressed by way of skin in the game from AMCs and
the contributing MF schemes. The CDMDF shall buy securities at fair price adjusted for liquidity
risk, interest rate risk and credit risk. Further, the risk of first loss shall rest with MF schemes
selling to the Fund. Details of the same areas under: Level of loss absorption Particulars Amount.
(INR) 1 st Up to 10% by MF schemes selling debt securities to the Fund (i.e., equivalent to the
units outstanding of the selling MF schemes issued to them against sale of securities to CDMDF)
~ Upto INR 3,600 cr.* 2 nd Contribution of specified debt oriented MF Schemes and AMCs ~
Upto INR 3,088 cr.* 3 rd Government Guarantee ~ Upto INR 30,000 cr. *Based on AUM of
specified debt oriented MF Schemes as on December 31, 2022 and may vary depending on AUM
To give effect to above loss waterfall, different classes of units would be allotted to contributing
AMCs and schemes vis-à-vis’ selling schemes. The details of proposed valuation of different
classes of units of CDMDF is placed at Annexure D. 3.10. Reporting and Monitoring Mechanism
(i) CDMDF being an AIF will be regulated by SEBI under AIF Regulations. Considering the
strategic importance of the entity, a mechanism shall be developed for periodic reporting (monthly
basis) to SEBI. (ii) The reporting to the DEA - MoF, Government of India shall be made on
quarterly basis regarding investment and operational affairs of the CDMDF. (iii) During times of
market dislocation, if securities are purchased by borrowings under guarantee from NCGTC, there
shall be daily reporting of the portfolio and the remaining available headroom for purchase of debt
securities, to NCGTC, Government of India and SEBI. (iv) The detailed format for the above
reporting shall be prescribed by SEBI. (v) The Government of India may at any time call for any
information from the CDMDF through SEBI with respect to any matter relating to its activities as
an Alternative Investment Fund or for the assessment of systemic risk or prevention of frauds.
3.11. Role of SEBI (i) CDMDF will monitor the near normalcy of the market post market
dislocation in consultation with SEBI and offload a large part of its holdings within a reasonable
time period of 3 months from the end of market dislocation period. However, the above timeline
may be extended with the approval of SEBI Board. (ii) Appointment of the Trustee Company
34
shall be subject to prior-approval by the SEBI Board. The appointment of directors of the Trustee
Company shall be subject to prior approval of SEBI. (iii) Change in investment strategy of the
CDMDF would only be with the prior approval of SEBI. (iv) The SEBI Board shall decide the
trigger of debt market disruption warranting the Backstop Facility to operate in times of market
dislocation and consequently the need for activation of guarantee by the NGCTC. Further, the
period for which the Backstop Facility will be open shall also be as decided by the SEBI Board.
(v) CDMDF being an AIF will be regulated by SEBI under AIF Regulations. (vi) Periodic
reporting (monthly basis) of the activities of the Fund to SEBI. Further, the activities of the Fund
during times of market dislocation shall be reported to the SEBI Board, FSDC and the
Government of India on daily basis. The detailed format for the above reporting shall be
prescribed by SEBI. (vii) Once the backstop facility is activated, SEBI will review its continuation
internally and confidentially every fortnight. While making such reviews, the number of Watch
Lists/ Alerts/ Triggers from the FSI during the fortnight would be factored in by SEBI.
Subsequent to such fortnightly review, if the SEBI Board comes to a view that backstop facility
could be withdrawn, the facility can then be withdrawn with two days’ notice to the market. (viii)
The market dislocation period may be considered to have ended, if no alert from the aforesaid
model appears for a continuous period of 3 months, unless a view is taken other-wise, by the SEBI
Board based on a comprehensive review including qualitative factors. 3.12. Disclosures (i) There
shall be a mechanism for daily disclosure of NAV to the unitholders. (ii) The portfolio of the Fund
would be disclosed to the unitholders on fortnightly basis. (iii) The norms applicable to AMCs and
MF schemes for disclosure in respect of their investments in CDMDF shall be specified
appropriately under the regulatory framework for MFs. 3.13. Audit of CDMDF by CAG (i)
CDMDF being floated by SBI AMC may be audited by auditors appointed by C&AG, provisions
relating to the same shall be appropriately incorporated in the trust deed of CDMDF. Department
of Economic Affairs (DEA) would request C&AG to appoint auditors for the Fund. 4. Framework
for CDMDF 4.1. The objective of CDMDF is to undertake such transactions as would provide
stability to the Indian Corporate Bond Market in times of market dislocation. Undertaking such
transactions in the capacity of an AIF would require certain relaxations from, as well as certain
restrictions on, the investment framework currently applicable to other AIFs. 4.2. Based on
proposed mechanism as mentioned at para 3 above, a comparison of the regulatory norms/
restrictions that are proposed for CDMDF and those currently applicable to other AIFs of various
categories are given below: Investment Condition CDMDF Category I AIFs Category II AIFs
Category III AIFs Investment in listed debt securities 100% of investable funds Up to 25% of
investable funds Up to 49% of investable funds Up to 100% of investable funds Minimum
Investment For MF schemes and their AMCs - as specified by the Board. For other investors - as
may be specified by the concerned regulators in due course. INR 1 Crore Single Issuer Limit 5%
of Fund Capital 25% of investable funds 25% of investable funds 10% of investable funds
35
Continuing Interest of Sponsor/ Manager INR 5 Cr 2.5% of corpus or INR 5 Cr, whichever is less
5% of corpus or INR 10 Cr, whichever is less Minimum Corpus ~INR 3,088 Cr INR 20 Cr
Investment Condition CDMDF Category I AIFs Category II AIFs Category III AIFs Leverage Up
to 10 times of corpus using guarantee extended by the Government Not Permitted (except
borrowing for temporary funding) Up to 2 times of NAV Valuation Norms In line with norms
specified under MF regulatory framework As specified under the AIF regulations Disclosure of
NAV to unitholders Daily 6-monthly/ yearly, as agreed with unitholders Monthly (Open ended
schemes)/ Quarterly (Closed ended schemes) Overseas Investment Not Permitted Up to 25% of
investable funds, subject to overall limit of USD 1500 Million across the industry. 4.3. As can be
seen from the table above, to set up the CDMDF under one of the existing categories of AIFs
would require significant changes in respect of leverage, portfolio concentration, valuation,
disclosure requirements, etc. 4.4. Regulation 19 of the AIF Regulations provides that the Board
may lay down the framework for AIFs other than the fund(s) falling in the categories specified in
the AIF Regulations. As CDMDF is envisaged to be a fund, one of its kind where no new
applications for registration would be considered, it is not necessary to introduce a new category
or sub category of AIFs. Thus, it is proposed to provide a framework specifically for CDMDF
under the AIF Regulations. 5. Proposed Regulatory Framework for CDMDF To provide the
regulatory framework for CDMDF, SEBI (Alternative Investment Funds) Regulations, 2012 and
SEBI (Mutual Funds) Regulations, 1996 need to be amended appropriately. Various operational
details as mentioned in paragraph-3 above would be covered in the Fund documents including
PPM. Details of the proposed amendments are given below: 5.1. Broad Framework CDMDF may
be created by inserting a separate Chapter III-B in the AIF Regulations and may be granted
registration under Regulation 6 of the AIF Regulations as “Corporate Debt Market Development
Fund”. Further, for enabling contribution by Mutual Fund schemes and AMCs in units of
CDMDF, it is proposed to insert Regulation 43A in SEBI (Mutual Fund) Regulations, 1996. It is
proposed that the basic principles underlying the framework of the CDMDF shall be provided in
the Regulations under the aforesaid chapter. Additionally, various guidelines may be required to
be issued in relation to adherence with various requirements of NCGTC guarantee. Moreover,
given that many features of CDMDF are unique to it and unlike other products or funds available
in the market, many operational details or illustrations, clarity on applicability of certain norms or
prudential requirements for participating mutual fund schemes etc. would be provided through
issuance of circulars. 5.2. Legal form of CDMDF 5.2.1. CDMDF may be constituted in the form
of a trust and the instrument of trust shall be in the form of a deed, duly registered under the
provisions of the Indian Registration Act, 1908. 5.2.2. The Board of Trustees/Trustee Company of
CDMDF shall be appointed with prior approval of the SEBI Board. The Directors of the Trustee
Company shall be appointed with prior approval of SEBI. The roles and responsibilities of the
trustee of CDMDF would be similar to that of the trustees of MFs in terms of MF Regulations and
36
will be specified in Chapter III-B of the AIF Regulations. 5.3. Manager of CDMDF Manager of
the CDMDF may be appointed with prior approval of the Board in consultation with the
Government. 5.4. Tenure of CDMDF 5.4.1. CDMDF may be set up as a close ended fund, with an
initial tenure of fifteen years from the date of its first closing. Based on the requirements of the
corporate bond market, the tenure can be extended with prior approval of the Government of India
in consultation with SEBI. 5.4.2. CDMDF may be wound up only with the prior approval of the
Board in consultation with the Government. 5.5. Investment conditions for CDMDF 5.5.1. During
market dislocation CDMDF may invest in investment grade corporate debt securities listed on
recognized Stock Exchanges in India, and at other times, CDMDF may invest in liquid and low-
risk debt instruments and undertake any other activity related to corporate debt market, as may be
specified by the Board from time to time. During market dislocation, the maximum investment by
the CDMDF in the debt securities of a single issuer and a group shall be as stipulated by SEBI
from time to time. To begin with, the investment limits may be 5% and 7.5% respectively of the
“Fund Capital” of the Fund at the time of investment. 5.5.2. “Fund Capital” of CDMDF shall be
the aggregate of the corpus of the Fund and the maximum permissible borrowing of the Fund.
5.5.3. During times of market dislocation, the CDMDF may purchase securities only from mutual
fund schemes and entities as specified by the Board. 5.6. Investment in Associates 5.6.1. In terms
of Regulation 15(1)(e) of the AIF Regulations, an AIF shall, inter-alia, not invest in associates,
except with the approval of seventy five percent of investors by value of their investment in the
AIF. AIF Regulations define ‘associate’ as “a company or a limited liability partnership or a body
corporate in which a director or trustee or partner or Sponsor or Manager of the AIF or a director
or partner of the Manager or Sponsor holds, either individually or collectively, more than 15
percent of its paid-up equity share capital or partnership interest, as the case may be”. 5.6.2. As
the investment process of CDMDF is pre-defined and as transactions involving conflict of interest
are overseen by a Governance Committee as mentioned at Para 3.5.2, the restriction in Regulation
15(1)(e) shall not be applicable to CDMDF. 5.7. Investment in overseas Venture Capital
Undertakings (VCUs) In terms of Regulation 15(1)(a) of the AIF Regulations, AIFs may invest in
securities of companies incorporated outside India subject to conditions stipulated by the Reserve
Bank of India and the Board from time to time. However, considering the purpose for which
CDMDF is proposed to be set up, i.e. to intervene in the Indian corporate debt market in times of
market dislocation, in a timely manner, with a view to introduce stability in the corporate debt
market and boost investor confidence, it may not be appropriate to utilize the corpus of CDMDF
for investments outside India. Accordingly, Regulation 15(1)(a) of the AIF Regulations shall not
be applicable to the CDMDF. 5.8. Investors in CDMDF To begin with, CDMDF may raise funds
only from AMCs of MFs and specified open ended debt-oriented MF Schemes. This has been
excised. 5.9. Investment and Corpus 5.9.1. The investments by debt oriented MF Schemes may be
enabled by inserting a new regulation under SEBI (Mutual Funds) Regulations, 1996. The details
37
with regard to specific categories of debt mutual fund schemes, percentage contribution,
Contributions from AMCs, and other operational details may be specified through issuances of a
circular. Since investment by specified debt-oriented MF Schemes would be mandatory, therefore
such investment shall not be treated as a change in fundamental attributes of those schemes. 5.9.2.
This has been excised. 5.9.3. In accordance with the proposed regulatory mandate for AMCs and
MF schemes regarding investment in CDMDF, initial contribution of specified debt-oriented
mutual fund schemes may be approximately INR 2,860 Crore and the one time contribution of
AMCs shall be approximately INR 228 Crore. Therefore, the initial capital contribution to
CDMDF may be approximately INR 3,088 Crore, as compared to the minimum corpus of INR 20
Crore which is applicable to other AIFs. Accordingly, there may not be a need to separately
specify a minimum corpus for launching the investment activities of the CDMDF. 5.10. Leverage
CDMDF may undertake leverage in the form of borrowings up to ten times the corpus of the
Fund, subject to conditions specified by the Board. 5.11. Minimum Capital Commitment by
Sponsor or IM To ensure that the interests of the Sponsor and Manager of CDMDF are aligned
with that of the investors in CDMDF, either Sponsor or IM or a combination of Sponsor and IM
shall invest INR 5 Crore in the CDMDF. 5.12. Change in Investment Strategy Any change in
investment strategy of the CDMDF may only be with the prior approval of the Board. Therefore,
Regulation 9(2) of the AIF Regulations, which specifies that AIFs may materially modify their
investment strategy with the consent of not less than two-thirds of unit holders by value of their
investment, shall not apply to CDMDF. 5.13. Valuation Valuation of investments of CDMDF
shall be governed by the valuation norms applicable to MF schemes under the extant MF
regulatory framework. CDMDF shall ensure that calculation of NAV is independent from the fund
management function and such NAV shall be disclosed to the unit holders on a daily basis. 5.14.
NCGTC Guarantee and Periodic Reporting 5.14.1. The Fund will be eligible to take leverage of
up to 10 times of contribution to corpus from banks or bond market or repo market which shall be
guaranteed by NCGTC up to a maximum of INR 30,000 Cr. The guarantee from NCGTC may
become operational immediately upon trigger of market dislocation as notified by the Board.
5.14.2. Once the guarantee is operational, CDMDF shall on a daily basis, report information in a
specified manner regarding its portfolio and the remaining available headroom for purchase of
securities, to NCGTC, DEA-MoF, Government of India and SEBI. 5.14.3. The portfolio of the
Fund shall be disclosed to the unitholders on fortnightly basis. 5.15. In-specie Distribution to
Unitholders In specie distribution of assets of the CDMDF may be made only at the time of
winding up of CDMDF subject to consent of not less than seventy five percent of the unitholders
by value of their investment in CDMDF. Accordingly, Regulation 29(8) of the AIF Regulations
which specify that inspecie distribution of assets of the AIF may be made by the AIF at any time,
after obtaining necessary investor consent, shall not apply to CDMDF. 5.16. Listing of units of
CDMDF In terms of Regulation 14 (1) and (2) of the AIF Regulations, units of closed ended
38
AIFs, which have declared their final closing, may be listed on stock exchange subject to a
minimum tradable lot of INR 1 crore. Considering that only regulated entities/schemes are meant
to be investors in CDMDF the purpose and intent of CDMDF and requirement of lock-in of
mandatory contribution by MFs and AMCs, it may not be desirable to permit listing of units of
CDMDF. Accordingly, Regulation 14(1) and (2) of the AIF Regulations shall not apply to
CDMDF. 5.17. Filing of Placement Memorandum (PPM) 5.17.1. In terms of Regulation 12 (2) of
the AIF Regulations, with effect from November 11, 2021, the PPM for launch of schemes by
AIFs shall be filed with SEBI through a Merchant Banker. Further, as per Regulation 12(3) of AIF
Regulations comments of the Board on the PPM, if any, shall be communicated to the Merchant
Banker and the same shall be incorporated in the PPM before launch of the scheme. 5.17.2. As the
constitution and operations of the CDMDF are pre-defined and are finalized in consultation with
the Government and the Board, the requirements at Regulation 12 (2) and (3) may not apply to
CDMDF. However, the various operational features and modalities of the CDMDF which are not
stated specifically in the AIF Regulations may be appropriately covered in the PPM. 5.18.
Application for Registration The application may be granted registration under Regulation 6 of the
AIF regulations. The CDMDF shall be required to pay a one-time registration fee of INR 5 Lacs.
6. As the constitution and operations of the CDMDF are pre-defined and have been finalized in
consultation with the Government, for any material changes to the framework, if required, SEBI
may consult the Government. 7. Framework for triggering of Corporate Debt Market
Development Fund This has been excised. 8. Proposals 8.1. The Board may consider and approve
the proposals at paragraph 3 & 5. The draft amendment to SEBI (Alternative Investment Funds)
Regulations, 2012 by inserting a new chapter and SEBI (Mutual Funds) Regulations, 1996 are
placed at Annexure E. 8.2. The Board may also consider and approve the proposal at paragraph 7
on Framework for triggering of Corporate Debt Market Development Fund. 8.3. The draft
notifications for amendments to SEBI (Alternative Investment Funds) Regulations, 2012 and
SEBI (Mutual Funds) Regulations, 1996 are placed at Annexure F. 8.4. The Board is requested to
consider and approve the proposals as in the Memorandum and authorize the Chairperson to make
consequential and incidental changes and take necessary steps to give effect to the decisions of the
Board. Addendum to Memorandum Subject: Framework for “Corporate Debt Market
Development Fund” 9. Further to the proposals mentioned in the Board Memorandum No.
12/2023, Item No. 13 (hereinafter referred as “Board Memorandum”), the following are also
proposed: 9.1. The Guarantee fee payable by CDMDF referred at paragraph 3.7(v) of the Board
Memorandum shall be 0.5% p.a. on the outstanding loan amount daily pro rata at the time of
availing the guarantee facility on an annual basis. 9.2. It is not the intent of the government to
induct other regulated entities such as pension funds, insurance companies, banks etc. in the
CDMDF now or even later. Therefore, paragraph 2.1(vii), 2.1(ix)(d) and 2.4(iii) of Annexure A
and consequently paragraph 3.1(vii), 3.1(ix)(d) and 3.4(iii) of Boar
39
Corporate Debt Market: Developments, Issues & Challenges1
It is an honour to address the distinguished participants of the 9th Annual Conference on Capital
Markets (CAPAM 2012) on an issue which is attracting a lot of attention of the policy-makers and
market participants – the corporate debt market. Deeper and broader financial markets are
desirable for public policy objectives as they play a critical role in improving the efficiency of
capital allocation within the economy. Capital market comprising equity and debt market is one of
the most important segments in the financial system of any country. While India has a very
advanced Gsec market, its corporate bond market is relatively under developed. Developing a
more vibrant corporate bond market has therefore become an important agenda among the
concerned stakeholders, i.e., Government of India (GoI), the Reserve Bank of India, the Securities
and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority
(IRDA), etc. and in the recent times they have made co-ordinated efforts to achieve this objective.
A. Need for a well-developed corporate bond market in India 1. . 2. The 2008 Global Financial
Crisis (GFC) highlighted the need to reduce the dominance of the banking system in financing
corporate sector by developing a good corporate bond market. India’s infrastructure funding
requirements (estimated at around 10 per cent of GDP annually) need a robust corporate bond
market for diversifying risk, enhancing financial stability, and for better matching of risk-return
preferences of the borrowers. Historically, India’s financial system has been bankdominated,
supplemented by the Development Financial Institutions (DFIs). However, the financial system
has undergone several changes during the recent years and DFIs have been converted into banks.
Commercial banks, by nature, are not able to fill the gap in long-term finance, given the asset-
liability management issues. 3. A well-developed corporate bond market is critical for Indian
economy as it (i) enables efficient allocation of funds, (ii) facilitates infrastructure financing, (iii)
improves the health of the corporate balance sheets, (iv) promotes financial inclusion for the Small
and Medium Enterprises (SMEs) and the retail investors, (v) safeguards financial stability and (vi)
enables development of the municipal bond market. Accordingly, development of the corporate
bond market has been high on the agenda for the regulators. I will cover each of these areas
briefly. Efficient allocation of resources 4. A well-developed corporate bond market provides
additional avenues to corporates for raising funds in a cost effective manner and reduces reliance
of corporates on bank finance. A deep and liquid debt market augments financial savings and
helps match the savers to the borrowers in an efficient manner. By enlarging the financial sector,
capital markets promote innovation in financial instruments. In addition, it instils discipline in
behaviour of firms leading to increased efficiency of the system. The existence of a well-
functioning bond market can lead to the efficient pricing of credit risk as expectations of all bond
market participants are 1 Special address delivered by Harun R Khan, Deputy Governor, Reserve
Bank of India at FICCI’s 9th Annual Conference on Capital Markets: CAPAM 2012: “Developing
Indian Capital Markets - The Way Forward” on October 12, 2012 in Mumbai. The speaker
40
acknowledges the contributions of Dr. Subbaiah Singala, Shri. Brij Raj, Shri Raj Kumar Jain, Shri.
N.R.V.V.M.K. Rajendra Kumar and Shri Vivek Singh of the Reserve Bank of India. He is also
grateful to Shri Surajit Bose for his assistance. Page 2 of 11 incorporated into bond prices. In
order to achieve the objective, it is desirable to have diversified issuer and investor base. Issuer
profile in India, however, is concentrated among a few category of market participants dominated
by financial sector firms including banks, Non-Banking Financial Companies (NBFCs), financial
institutions, housing finance companies (HFCs) and Primary Dealers (PDs) (81 per cent) while
other non-finance corporates account for only 19 per cent of total issuances made in 2011-12.
Similarly, on demand side, majority of investment are made by banks and institutions including
Foreign Institutional Investors (FIIs) with very little or negligible part played by retail investors.
Thus, there is an urgent need to further develop the Indian corporate debt market. Infrastructure
financing 5. The Committee on Infrastructure Financing (Chairman: Shri Deepak Parekh) has
estimated that `51.46 trillion would be required for infrastructure development during the 12th
Five Year Plan (2012-17) and that 47 per cent of the funds could come through the PPP route. If
we add the potential financing needs for upgrading our railways, urban and rural infrastructure,
the financing needs could be much larger. As much as the G-sec market development has
provided a boost to the development of the corporate bond market, the municipal bond market
could derive similar benefits from a well-developed corporate bond market. This would provide
boost to financing the urban infrastructure in an assured and sustainable manner. In this context, it
is important to note that GoI’s capital expenditure has remained stagnant during the last two years
at around 13 per cent. Hence, the role of private sector assumes greater importance in the context
of infrastructure development. Health of the corporate balance sheet 6. External borrowings of the
corporate sector have increased substantially in the last decade, in part due to the falling implicit
cost of the external commercial borrowings (ECBs). While the external debt could help the
corporate sector diversify the funding sources, excessive reliance on the same could pose balance
sheet risks when the availability of funding liquidity is subject to sharp volatility in the
international markets, making the debt rollovers difficult or rollovers are possible only at high
interest rates. A Standard & Poor’s (S&P) forecast in June 2012 had warned that more than half of
the 48 companies that are due to redeem an estimated US$ 5 billion of convertible bonds in 2012
may default, while the others may redeem by borrowing at high cost or stiffer terms. The recent
phenomenon of sharp fluctuation in the exchange rate, particularly sharp depreciation of Rupee
has imparted severe pressure on the profitability of many Indian firms having large foreign
exchange obligations. A well-developed domestic corporate bond market could, thus, reduce such
vulnerability of our corporates to both currency and liquidity risks besides reducing our external
sector vulnerabilities as share of ECBs as per cent of our foreign exchange reserves has been
declining in the recent years. A perusal of the various sources of raising resources in the domestic
market reveals that the large non-financial corporates have been raising only about 4 per cent
41
through the debt route while the bank borrowings and foreign currency borrowings account for
17.8 per cent and 3.2 per cent respectively as on March 31, 2011. Financial inclusion of the SMEs
and retail investors Page 3 of 11 7. Corporate debt can provide our SMEs with an avenue for
sourcing funds. Since this would require rating and would result in greater external scrutiny, it
would help SMEs become more transparent and follow proper accounting, governance and
disclosure practices. It would also increase their understanding of this important market for
sourcing funds in addition to banks and other alternative funding options. It is expected that
Chambers of Commerce and SME associations would take this up on a priority basis so that our
SMEs too could access the corporate debt market in the coming years as has been the experience
in the US, Europe and some Asian countries. This would also go a long way in fulfilling our
financial inclusion objectives for the SMEs, most of whom, as we know, do not have access to
formal financial sector. Corporate debt can also provide an excellent long term investment avenue
for retail investors, who lack knowledge and understanding of this important asset class. One
hopes that, market bodies, such as, the Fixed Income Money Market and Derivatives Association
of India (FIMMDA), the Primary Dealer Association of India (PDAI), etc. together with the stock
exchanges take up the task of spreading awareness with all sincerity that it deserves. This is very
relevant as Indian households have one of the highest savings rate in the world but the household
wealth in India is generally parked in bank deposits, gold and real estate with almost negligible
investment in corporate bonds. If retail investors prefer to invest in shares of certain companies,
there should be no reason why they should be hesitant to also consider investing in its debt.
Financial stability 8. Various financial crises have highlighted that even well regulated,
supervised, capitalized and managed banking systems may have limitations in mitigating financial
vulnerabilities. The crises have underscored that the banking systems cannot be the predominant
source of long-term investment capital without making an economy vulnerable to external shocks.
Alan Greenspan had argued that bond markets could act like a “spare tyre”, substituting for bank
lending as a source of corporate funding at times when banks’ balance sheets are weak and banks
are rationing credit. The capital inflows to the country through ECBs, while helping the country
fund the current account deficits and corporate to raises resources at a lower cost, could become a
source of the transmission of severe external shocks to the domestic economy. Therefore, it is
important to develop the domestic corporate bond market to enable corporates to meet a
substantial part of their funds requirement domestically. Further, credit flow to infrastructure
sector by banks has grown manifold in last few years. There is, however, a risk of exposure
attached to banks with such long term financing considering ALM mismatch. Moreover, banks’
ability to withstand stress is critical, especially in the context of the recent increase in banks’ non-
performing assets on account of their exposure to the infrastructure sector. Bond markets also aids
financial stability by spreading credit risks across the economy and thereby shielding the banking
sectors in times of stress. Further, a well-developed bond market can also help banks raise funds
42
to strengthen their balance-sheets. Viewed in the above context, a vibrant debt market is critical to
meet the funding requirement for infrastructure sector. Hence, going forward, there is a need to
increase the reliance on the corporate bond financing so as to reduce macro-economic
vulnerability to shocks and mitigate systemic risks. Development of municipal bond market Page
4 of 11 9. According to the High Powered Expert Group Committee (Chairperson: Dr. Isher Judge
Ahluwalia) India will need to invest `39,187 billion between 2012 and 2031 to meet its urban
infrastructure requirements. Municipal bonds could be an important source of financing this
requirement. Since 1997, only 25 municipal bond issues have taken place in India mobilising only
`14 billion. An active corporate bond market could enable market for municipal bonds issued by
the Urban Local Bodies (ULBs). In this context, a World Bank study (October 2011) on
“Developing a Regulatory Frame work for Municipal Borrowing in India” has focused on such
bonds. Keeping in view sustainability it has recommended that there should be interest cap on
such bonds and they should be treated as tax-free bonds in the same manner as other tax free
instruments. The study has also recommended that a new asset class called ‘rated municipal
securities’ needs to be added instead of ‘nongovernment securities’ to both the IRDA and the
Pension Fund Regulatory and Development Authority’s (PFRDA) investment guidelines. B.
Growth of Indian debt market 10. 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. C. Structure of corporate debt
market in India 11. The primary market for corporate debt is mainly dominated by private
placements (93 per cent of total issuance in 2011-12) as corporates prefer this route to public
issues because of operational ease, i.e., minimum disclosures, low cost, tailor made structures and
speed of raising funds. Banks/FIs (42.3 per cent of total issuances) followed by finance companies
(26.4 per cent) were the major issuers in 2011-12. India lacks a long-term debt market for pure
43
project finance. Corporate bonds issued in India usually carry a rating of AAA indicating lack of
interest in bonds of lower rated borrowers in the debt market. Institutional participants, such as,
banks, primary dealers, mutual funds, insurance companies, pension funds, corporates, etc. are the
major players in this market. Retail investors are also gradually entering this market. Their
participation is, however, minuscule. As regards regulation of corporate debt market, the
regulatory involvement is clearly delineated between the Reserve Bank of India and the SEBI.
Reserve Bank is responsible for the market for Page 5 of 11 repo transactions and OTC credit
derivatives besides framing prudential regulations for banks, etc. in respect of their exposure to
corporate bonds. In all other cases, SEBI has the regulatory jurisdiction except in case of unlisted
privately placed bonds. D. Measures taken to develop the corporate bond market 12. Government,
SEBI and other stakeholders have initiated several measures to develop the corporate debt market.
Reserve Bank of India has also taken various initiatives in this regard. Some of these are
recounted below: i. To promote transparency in corporate debt market, a reporting platform was
developed by FIMMDA and it was mandated that all RBI-regulated entities should report the
OTC trades in corporate bonds on this platform. Other regulators have also prescribed such
reporting requirement in respect of their regulated entities. This has resulted in building a credible
database of all the trades in corporate bond market providing useful information for regulators and
market participants. ii. Clearing houses of the exchanges have been permitted to have a pooling
fund account with RBI to facilitate DvP-I based settlement of trades in corporate bonds. iii. Repo
in corporate bonds was permitted under a comprehensive regulatory framework. iv. Banks were
permitted to classify their investments in non-SLR bonds issued by companies engaged in
infrastructure activities and having a minimum residual maturity of seven years under the Held to
Maturity (HTM) category; v. The provisioning norms for banks for infrastructure loan accounts
have been relaxed. vi. The exposure norms for PDs have been relaxed to enable them to play a
larger role in the corporate bond market. vii. Credit Default Swaps (CDS) have been introduced on
corporate bonds since December 01, 2011 to facilitate hedging of credit risk associated with
holding corporate bonds and encourage investors participation in long term corporate bonds. viii.
FII limit for investment in corporate bonds has been raised by additional US$ five billion on
November 18, 2011 taking the total limit to US$ 20 billion to attract foreign investors into this
market. In addition to the limit of US$ 20 billion, a separate limit of US$ 25 billion has been
provided for investment by FIIs in corporate bonds issued by infrastructure companies. Further,
additional US$ one billion has been provided to the Qualified Financial Institutions (QFI). ix. The
terms and conditions for the scheme for FII investment in infrastructure debt and the scheme for
non-resident investment in Infrastructure Development Funds (IDFs) have been further
rationalised in terms of lock-in period and residual maturity; and x. Further, as a measure of
relaxation, QFIs have been now allowed to invest in those MF schemes that hold at least 25 per
cent of their assets (either in debt or equity or both) in the infrastructure sector under the current
44
US$ three billion sub-limit for investment in mutual funds related to infrastructure. Page 6 of 11
xi. Revised guidelines have been issued for securitisation of standard assets so as to promote this
market. The guidelines focus on twin objectives of development of bond market as well as provide
investors a safe financial product. The interest of the originator has been aligned with the investor
and suitable safeguards have been designed. xii. Banks have been given flexibility to invest in
unrated bonds of companies engaged in infrastructure activities within the overall ceiling of 10 per
cent; xiii. Bank has issued detailed guidelines on setting up of IDFs by banks and NBFCs. It is
expected that IDFs will accelerate and enhance the flow of long-term debt for funding the
ambitious programme of infrastructure development in our country. E. Issues and challenges in
Corporate Bond Market 13. While the measures taken so far have generated the momentum
needed to develop the market, the indicators are suggesting that the market is yet to develop to its
potential in relation to needs of our macro-economy. The size of the Indian corporate bond market
at 11.8 per cent of GDP is lower than the average for Emerging East Asia and for Japan at 17.2
and 19.8 per cent respectively. There are potential risks associated with this market, such as,
absence of robust bankruptcy framework, insufficient liquidity, narrow investor base, refinancing
risk, lack of better market facilities and standardisation. Some of the issues and challenges which
need attention are: i. Taking measures to improve liquidity, such as, consolidation of particularly
the privately placed bonds, etc; ii. Setting up a suitable framework for market making in corporate
bonds; iii. Providing tools to manage credit, market and liquidity risks {e.g. CDS, Interest Rate
Futures (IRF), Repo in corporate bonds, etc.}; iv. Introducing a suitable institutional mechanism
for credit enhancement to enable SMEs and other corporates with lower credit rating to access the
corporate bond market; v. Developing a smooth yield curve for the government securities market
for efficient pricing of the corporate bonds; vi. Enhancing transparency by setting up of
centralised database for tracking rating migration, issue size, etc.; vii. Increase the scope of
investment by provident/pension/gratuity funds and insurance companies in corporate bonds; viii.
Calibrated opening of the corporate bond market to the foreign investors; ix. Developing safe and
sound market infrastructure; x. Establishing a sound bankruptcy regime; xi. Rationalization of
stamp duty across states; xii. Developing the securitization market under the new regulatory
framework; xiii. Wider participation of retail investors in the market through stock exchanges and
mutual funds. 14. I would briefly touch upon some of these issues, particularly those with which
the Reserve Bank is connected directly or indirectly. Improving liquidity Page 7 of 11 15. Low
liquidity is an issue that needs to be addressed urgently. Several reports have suggested
consolidation of the corporate bond issues through reissues to promote liquidity. We need to make
a beginning in this area by involving PSUs and large corporate with significant volumes of bonds
outstanding in devising a suitable scheme of consolidation of their issues. There are suggestions to
the effect that in respect of regular issuers that there could be restriction on the number of
securities they can issue in a year so that reissues would become necessity. Market making 16.
45
Banks and PDs have played the role of market making in the G-Sec with reasonable success and
we need to explore the possibility of replicating the experience in the corporate debt market as
well, albeit with the realisation that primary dealers would be exposed to greater credit risk if they
carry a sufficiently large inventory of corporate bonds that is needed for market making. Moreover
their limitation to increase exposure to corporate bonds with the context of growing issuance size
of Government bonds has to be kept in view. Some suggestions to incentivise PDs for market
making are, however, being discussed with the stakeholders. Further, there is a need for a debate
on creation of a separate agency/institution to promote market making in corporate bonds, on the
lines of institutions established to promote government securities market. Credit derivatives 17. In
the context of development of the corporate bond market and promoting infrastructure funding,
CDS has been introduced with all safeguard, such as, not allowing naked CDS for the users,
mandating position limits for the market makers, compulsory reporting of transactions to the trade
repository in CCIL, etc. and high expectations. CDS could provide an avenue for participants to
mitigate credit risk and enable effective redistribution of credit risk within the system. With the
necessary infrastructure that included trade repository, documentation, publication of CDS curve
for valuation, standardisation of contracts, etc. in place, participants were permitted to enter into
CDS with effect from December 1, 2011. 18. Though the guidelines were framed after detailed
discussions with the market participants, only few trades have taken place since the launch of the
product. Some of the reasons being attributed are difficulty in signing separate Credit Support
Annex (CSA for India), non-availability of netting benefits and posting of collateral on daily
basis. Bothe SEBI and IRDA are likely to permit their regulated entities to participate in CDS as
users soon. These are not major operational issues and should not deter market participants from
undertaking trades. Stringent capital adequacy guidelines are also being termed as stumbling
block. Since CDS is a complex derivative product and downside risk is very high, Reserve Bank
intends to follow a cautious and gradual approach in the nascent stage of development of the
market. As for as capital adequacy guidelines are concerned, Reserve Bank has broadly followed
Basel norms. Hence, it is imperative that market participants use the product to suit their business
and risk management requirements. Interest rate derivatives 19. Interest rate derivatives (IRD)
products like Interest Rate Swaps (IRS) and IRF enable market participants to hedge their interest
rate risk and take a trading call Page 8 of 11 in the market, leading to the development of the
underlying cash market in terms of enhancing liquidity and price discovery. Thus, success of IRDs
will be key to the development of corporate debt market. Though the market for IRS has evolved
over the past decade and is fairly liquid with average daily trade volumes comparable with the
volume traded in the G-Sec market, same is not true for exchange traded IRF. Reserve Bank is
examining the recommendations made by Working Group on “Enhancing Liquidity in G-Sec and
Interest Rate Derivatives Market” (Chairman: R. Gandhi) relating to introducing IRF based on
overnight call borrowing rate, fine tuning the product design of the delivery-based 10-yr IRF by
46
permitting single-bond contracts, larger contract size, etc. to revive IRF market. As regards IRS,
Reserve Bank has already taken various initiatives like setting up of a reporting platform for IRS
transactions and enabling non–guaranteed central clearing of IRS trades. The process for
introduction of guaranteed settlement of IRS transactions is underway. It is expected that market
participants will make use of various IRD products for hedging interest rate risk in their portfolio.
There is also a need for altering the skewed participation profile in the IRS market given that
majority of the participants are foreign and private sector banks with miniscule interest from
public sector banks. Repo in corporate debt 20. Among the various initiatives taken by RBI,
introduction of repo in corporate bonds has been one that is aimed to impart secondary market
liquidity to the corporate bond market. The guidelines permitting repo incorporate bonds were
issued in March 2010 and the same were fine-tuned in December 2010. However, except for a
handful of trades, the market has not taken off. The reasons cited for lack of interest include non-
signing of the Global Market Repo Agreement (GMRA), lack of lenders, such as, mutual funds
and insurance companies in repo market, etc. Reserve Bank is engaging with other regulators to
address these issues. While SEBI has permitted the mutual funds to participate in this repo market,
authorisation from IRDA is expected soon. There is a view that an exchange traded tripartite repo
structure could enhance attractiveness of corporate bonds and improve trading volumes. There are,
however, concerns, among others, relating to the capacity of central counterparty (CCP) to handle
the risk, particularly given the low level of liquidity in the underlying cash market and liquidity
accessing capacity of the CCP under extreme situations when settlement obligations have to be
met in an orderly manner. The efficacy of these instruments (CDS, IRF and repo) hinges around
the crucial issue of whether market participants would use the instrument to hedge risks or they
remain as available instruments not used. Though all these instruments were introduced after
having detailed consultation with the market participants, it is rather perplexing for regulator to
find almost no activity in these instruments. It is hence necessary that the market participants
make best use of the product. Credit enhancement - bank guarantee 21. Other issue which market
has been demanding is allowing banks to provide credit enhancement/partial credit enhancement
to corporate bonds by means of guarantee, credit facility, liquidity facility, etc. The measure may
appear to be expedient but the underlying objective of de-risking the bank balance sheets through
development of corporate debt market will not be met as such a product will place the entire risk
on the banking system. Further, banks providing credit enhancements/partial credit enhancement
like issuing guarantees for corporate bonds will distort the pricing of the corporate bonds,
discourage institutional and Page 9 of 11 retail investors to appraise and assume credit risk and
add to the reputational and financial risk of banks. Further, if guarantees are offered by public
sector banks, investors tend to form an impression that the bonds have implicit Government
support. Thus, provision of bank guarantee will impinge on the genuine development of corporate
bond market. In fact there is hardly any parallel in the world of credit enhancements being
47
provided by the banking sector to corporate bonds. In this regard, some structure for partial credit
enhancement, outside banking, could, however, be considered. Under the extant regulations of the
Foreign Exchange Management Act (FEMA), entities like multi-lateral/regional financial
institutions, government and financial institutions, foreign equity holders, etc. have been enabled
to provide credit enhancement and for this guarantee fees upto 200 bps could be paid by the Indian
issuers. Some international and domestic financial institutions have in fact shown some interest in
this regard and these initiatives could be taken forward. Smooth sovereign yield curve 22. The
absence of a risk-free term structure of interest rates makes it difficult to price credit risk of
instruments issued by the private sector and quasi-sovereign. In the Indian context, however, with
issuance of Government bonds for different maturities upto 30 years the sovereign risk free curve
does exists. There is, however, an issue relating to having a smooth yield as also almost flat nature
of the curve beyond 10 years since trading is confined to a few points, particularly in the 10 to 14
year segment. Fixed Income and Money Market Derivatives Association( FIMMDA) has,
however, taken steps to create a yield curve by taking available trade data from different points
and applying the Cubic Spline interpolation model for smoothening the yield curve. In addition to
passive consolidation being adopted by the Reserve Bank over the years, it is, in consultation with
the Government, considering the process for active consolidation involving buybacks/switch
operations besides regular issuances at different points of the curve. Enhancing transparency 23. It
is desirable that the level of information dissemination available in G-Sec and money market is
replicated in corporate debt market. This is required as there is paucity of information on
individual issuances as there is no comprehensive database (though one private firm collects quite
a bit of data) which constrains policy-making. The proposed measures of SEBI to simplify the
disclosure norms for debt listing will definitely improve the situation. However, there is an urgent
need to design and create such centralised database with more details like issue size, option
availability, rating, etc. for better market transparency and improve regulation. It may also be
noted that there is also a bias towards issuance of bonds through private placement which is not a
very transparent method and thus, is impacting the secondary market liquidity in corporate debt.
Hence, there is need to encourage public issuance of bonds. Relaxing investment restrictions 24.
Keeping in view the long term funding requirements of infrastructure sector, insurance, provident
funds (PFs) and pension companies are best suited for making investment in such bonds. Hence,
there is a need to revisit the investment guidelines of such institutional investors since the existing
mandates of most of these Page 10 of 11 institutions do not permit large investment in corporate
bonds. Prudential requirements of the sectoral regulations would, however, need to be balanced
with the need for a developed bond market which ultimately would be in the interest of all the
financial market participants. Expanding access to the foreign investors 25. There is a growing
demand to open up the corporate debt market and, in particular infrastructure debt segment to the
FIIs/QFIs. There is also a demand for fiscal concession to the FIIs. It has to be kept in view that
48
based on our experience and lessons learnt from the global financial crisis, we have adopted a
cautious approach. Nevertheless, the limits and conditions for investments by the FIIs have been
liberalized particularly for the infrastructure bond as mentioned in para 12 above. The limits
available so far, however, have not been used up significantly. The recent announcement
regarding reduced withholding tax to five per cent for foreign currency denominate infrastructure
bonds and its likely extension for the Rupee infrastructure bond investments by the FIIs may lead
to greater utilization of the available limits. Settlement systems/ trading platform 26. The success
of order matching trading platform in G-Sec market can act as guidance for setting up of order-
matching trading platforms for the corporate debt market. Considering that the trading platforms
on exchanges are non-functional, a quote driven anonymous screen based trading platform could
possibly bring about the desired focus on trading in corporate debt market due to reduction in
transaction cost and improved time efficiency in execution of trades. Efficient bankruptcy regime
27. A robust, timely, effective and efficient bankruptcy regime is essential to development of
corporate debt market from investors’ point of view. Steps, such as, reforming bankruptcy law,
early resolution of bankruptcy cases and streamlining the procedures relating to insolvency would
go a long way in achieving the same. The issue of insolvency of financial institutions established
under statutes bi-lateral netting among them during bankruptcy also need resolution. Possibly as
recommended by the Committee on Financial Sector Assessment, a comprehensive insolvency
regime for banks and other financial institutions need to be expedited. F. Implementation of Basel
III and corporate bond market 28. Many steps have been taken to promote bank lending to
infrastructure sector like liberalisation of credit exposure norms, liberal dispensation for
classification of investments under HTM category, expansion of list of businesses included under
infrastructure sector, etc. As a result, banks’ exposure to infrastructure lending has grown by more
than four times between 2005 and 2011. However, two factors are limiting the ability of the
banks. First, in the context of Basel III guidelines for the banks, the additional capital requirement
is estimated at `5 trillion for the banks, of which non-equity capital will be of the order of ` 3.25
trillion while equity capital will be of the order of `1.75 trillion. Capital augmentation of banks in
future could be a challenge and this could constrain them from increasing their lending to
infrastructure in line with the financing needs of the sector. Therefore, there is a clear Page 11 of
11 need for a corporate debt market to serve as a source of long-term finance for corporates and as
an alternate to a bank-dominated financial system. The specific characteristics of infrastructure
bonds like long duration and high coupon make these bonds attractive for insurance and pension
companies who should step up their investments given the limitations on banks’ capacity. Steps
being contemplated by IRDA for insurance companies may provide necessary boost. 29. The
second constraint faced by the banks is that of ALM mismatches that limits the banks role in
lending to infrastructure. For banks it would be difficult to assume bulk of the project risk and
capital costs indefinitely in infrastructure projects without a commensurate development of the
49
corporate bond market. Therefore, the importance of long-term debt financing for infrastructure
projects can hardly be overstated owing to the longer pay-back period, multiplicity of approvals
required, delays due to complexities in the design, safety and environmental aspects, etc. It may,
however, be noted that we may see large issues of bonds by the banks to augment capital
requirements for Basel III as indicated above and this , in turn, add to the volumes in the corporate
bond market. G. Concluding remarks 30. I have highlighted 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. I have also briefly discussed the growth and structure of Indian corporate bond
market and outlined measures taken by the regulators, in particular the Reserve Bank of India to
develop the market. I have flagged 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. 31.
The task before us is to improve liquidity, enhance transparency, provide safe and sound market
infrastructure, enable appropriate institutional structure, such as, robust bankruptcy framework,
etc. The regulators have taken proactive steps and provided the market with tools of risk
management. Efforts are on to enable wider participation the market and create scope for market
making. The regulators, like Reserve Bank, have always followed a consultative approach and
welcomed suggestions from the stakeholders. It is also expected that the market participants need
to be more active and participate in corporate bond market and make use of risk management
tools/financial products. This would enable growth of the corporate bond market and cater to the
needs of the real economy and the financial sector. I am sure that the panellists of the next session
would deliberate on some of the issues raised above and other related issues and provide useful
and implementable suggestions to meet the challenges of developing a more vibrant corporate
bond market in India. 32. I once again thank FICCI for giving me this opportunity to share my
thoughts on such a topical subject.

50
51
Script 1. Debt market in India In the previous session, we learnt about Money Market in India. In this
session we are going to discuss Debt Market in India. Let us first understand the meaning of Debt
Market: The Debt Market is the market where fixed income securities of various types and features
are issued and traded. Debt Markets are therefore, markets for fixed income securities issued by
Central and State Governments, Municipal Corporations, Govt. bodies and commercial entities like
Financial Institutions, Banks, Public Sector Units, Public Ltd. companies and structured finance
instruments. Here, in the meaning we had gone through the two important words they are securities
and fixed income securities. First, understand both the term in detail. Securities are financial
instruments that represent a creditor relationship with a corporation or government. Generally, they
represent agreements to receive a certain amount depending on the terms contained within the
agreement. Fixed-income securities are investments where the cash flows are according to a
predetermined amount of interest, paid on a fixed schedule. 2. Structure of debt market in India Indian
Debt Market Structure • In order to understand the structure of the debt market we will look at it
through a framework based on its main participants. These participants are as follows: • Regulators -
The Debt regulators are RBI, SEBI and Department of Company Affairs (DCA). • Issuers - are
entities, which issue these instruments and are primarily corporate or the Government. • Instruments -
the instruments are the certificates issued in tradable form. • Investors - are entities, which invest in
these instruments or trade in these instruments. Investors in Debt Market are: 1. Wholesale Debt
Market 2. Banks, 3. Financial Institutions, 4. RBI, 5. Insurance Companies, 6. Mutual funds, 7.
Corporates and FIIs, 8. Retail Debt Market , 9. Individuals, 10. Pension funds, 11. Private trusts, 12.
Non-banking financial companies (NBFCs) and other legal entities 3. Various debt market
instruments The instruments traded can be classified into the following segments based on the
characteristics to the identity of the issuer of these securities: Main categories of securities Who
issued these types of securities? They are…. Types of debt instruments Government Securities
Central Government Zero Coupon Bonds Coupon Bearing Bonds Treasury Bills STRIPS State
Governments Coupon Bearing Bonds Public Sector Bonds Government Agencies / Statutory Bodies
Govt. Guaranteed Bonds, Debentures Public Sector Units PSU Bonds Debentures Commercial Paper
Private Sector Bonds Corporate Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero
Coupon Bonds, Inter-Corporate Deposits Banks Certificates of Deposits, Debentures, Bonds Financial
Institutions Certificates of Deposits, Bonds There are three sectors in which Debt instrument can be
issued they are Government securities, Public sector Bonds and Private Sector Bonds. So, let us
understand each one of them in detail. 4. Government securities, Public sector Bonds and Private
Sector Bonds First main segment is Government Securities (Government Securities) • A government
security is a tradable instrument issued by the central government or the state governments. It
acknowledges the government’s debt obligation. • Such securities are short-term (usually called
treasury bills, with original maturities of less than one year) or long-term (usually called government
52
bonds or dated securities with original maturity of one year or more). • RBI issues Government
Securities On behalf of the Government Of India . Government Securities offer fixed Interest rates
where interest is payable semiannually. • For short term, there are T-Bills which are issued by RBI for
91 days, 184 Days and 364 Days. They are of two types: central government securities and state
government securities. Next question is who are the main investors of Govt. Securities in India?
Traditionally, the Banks have been the largest category of investors in Government Securities
accounting for more than 60% of the transactions in the Wholesale Debt Market. The Banks are a
prime and captive investor base for Government Securities as they are normally required to maintain
25% of their net time and demand liabilities as statuary liquidity ratio(SLR) but it has been observed
that the banks normally invest 10% to 15% more than the normal requirement in Government
Securities because of the following requirements: • Risk free nature of the Government Securities •
Greater returns in Government Securities as compared to other investments of comparable nature
Who are the main issuers of Government Securities? • In India, the central government issues T-bills
and bonds or dated securities, while the state governments issue only bonds or dated securities, which
are called State Development Loans (SDLs). • Government securities carry practically no risk of
default, and, hence, are called risk-free gilt-edged instruments. The Government of India also issues
savings instruments such as Savings Bonds, National Saving Certificates (NSCs) and special
securities (oil bonds, Food Corporation of India bonds, fertilizer bonds, power bonds, and so on).
Trading in Government securities • There is an active secondary market in government securities. The
securities can be bought/sold in the secondary market. • The secondary market allows debt
instruments to be sold by an existing investor prior to maturity at the prevailing market yield. An
active secondary market is an important ingredient in the successful promotion of primary issues.
They are traded on: (i) Over the Counter or Telephone Market In this market, a participant who wants
to buy or sell a government security may contact a bank/ primary dealer/financial institution either
directly or through a broker registered with SEBI, and negotiate for a certain amount of a particular
security at a certain price. Such negotiations are usually done over the telephone, and a deal may be
struck if both the parties agree on the amount and rate. In the case of a buyer, such as an urban co-
operative bank wishing to buy a security, the bank’s dealer (who is authorized by the bank to
undertake transactions in government securities) may get in touch with other market participants over
the telephone and obtain quotes. All trades undertaken in the Over the Counter (OTC) market are
reported on the secondary market module of the Negotiated Dealing System (NDS). (ii) Negotiated
Dealing System The Negotiated Dealing System (NDS) for electronic dealing and reporting of
transactions in government securities was introduced in February 2002. It allows the members to
electronically submit bids or applications for the primary issuance of government securities when
auctions are conducted. The Negotiated Dealing System (NDS) also provides an interface to the
Securities Settlement System (SSS). (iii) Negotiated Dealing System-OrderMatching(NDSOM) In
August 2005, the RBI introduced an anonymous screenbased order matching module on the NDS,
53
called the Negotiated Dealing System-Order Matching (NDS-OM). This is an order-driven electronic
system where the participants can trade anonymously by placing their orders on the system or
accepting the orders already placed by other participants. The NDS-OM is operated by the Clearing
Corporation of India Ltd. (CCIL) on behalf of the RBI. Direct access to the NDS-OM system is
currently available only to select financial institutions such as commercial banks, primary dealers,
insurance companies, and mutual funds. Other participants can access this system through their
custodians, i.e., those with whom they maintain Gilt Accounts. Next question arise is that what to do
when Oversubscription and development of Government Securities in India Retention shall be done
for the over-subscription limit. In addition, now I am going to state different regulations to the over-
subscription of government securities: a) In general, issuers shall be allowed to retain the
oversubscription money up to the maximum of 100% of the Base Issue size or any lower limit as
specified in the offer document. However, for the issuers filing a shelf prospectus, they can retain
oversubscription up to the rated size, as specified in their Shelf Prospectus. b) The issuers of tax free
bonds, who have not filed Shelf Prospectus, the limit for retaining the oversubscription shall be the
amount, which they are authorised by CBDT to raise in a year or any lower limit, subject to the same
being specified in the offer document. c) Currently, in respect of public issue of NCDs, SEBI
Regulations does not specify any maximum cap on the retention of over-subscription. Second
segment is Public Sector Bonds: They are those bonds, whichare issued by public sector units in
India. They are divided into two parts: Government agencies/ statutory bodies and Public Sector
Units. Third and the last segment is Private Sector Bonds: Private Sector Bonds (Corporate Bonds
CBs) Private Sector Bonds are debt instruments which are issued by private companies to fulfill their
financing needs. 5. Sub-types of bonds • Government guaranteed bonds are debt security that offers a
secondary guarantee that interest and principal payment will be made by a third party, should the
issuer default due to reasons such as insolvency or bankruptcy. A guaranteed bond can be municipal
or corporate, backed by a bond insurer, a fund or group entity, or a government authority. • A
debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures
are backed only by the general creditworthiness and reputation of the issuer. Both corporations and
governments frequently issue this type of bond to secure capital. • Corporate Bonds are private sector
debt instruments .These bonds come from PSUs (Public Sector Units) and are offered for an extensive
range of term up to 15 years. There are also some perpetual bonds. o As compared to Government
Securities, Corporate Bonds carry higher risks which depend upon the corporations, the industry
where the corporation is currently operating, the current market conditions and the rating of the
corporation. • Certificate of Deposit: These are short term instruments issued by commercial Banks
and Specialized Financial Institutions. These are negotiable money market instruments. o CDs usually
offer higher returns than Bank Term Deposits, are issued in Electronic form and use as a Promissory
Notes. Banks offer CDs which have maturity between 7 days to 1 Year. o CDs from Financial
Institutions have maturity between 1 to 3 years. • Commercial Papers: These are popular instruments
54
for financing working capital requirements of Companies. They are short term securities ranging from
7 to 365 days. CPs are issued by corporate entities at a discount to face value. They are issued in the
form of promissory notes. • Some bonds, called Zero Coupon Bonds, do not pay out any interest prior
to maturity. These bonds are sold at a discount because the value from the bond occurs at maturity
when the principal is returned to the bondholder along with the interest. • One type of Zero Coupon
Bond is a “Strip”. A strip bond is a bond where both the principal and regular coupon payments--
which have been removed-- are sold separately. Also known as a "zero-coupon bond." 6. How is the
price determined in the debt markets? The price of a bond in the markets is determined by the forces
of demand and supply, as is the case in any market. The price of a bond in the marketplace also
depends on a number of other factors and will fluctuate according to changes in: • Economic
conditions • General money market conditions including the state of money supply in the economy •
Interest rates prevalent in the market and the rates of new issues • Credit quality of the issuer There is
however, a theoretical underpinning to the determination of the price of the bond in the market based
on the measure of the yield of the security Each debt instrument has three features: Maturity, Coupon
and Principal Maturity: Maturity of a bond refers to the date, on which the bond matures, which is the
date on which the borrower has agreed to repay the principal. Term-to-Maturity refers to the number
of years remaining for the bond to mature. The Term-to-Maturity changes everyday, from date of
issue of the bond until its maturity. The term to maturity of a bond can be calculated on any date, as
the distance between such a date and the date of maturity. It is also called the term or the tenure of the
bond. Coupon: Coupon refers to the periodic interest payments that are made by the borrower (who is
also the issuer of the bond) to the lender (the subscriber of the bond). Coupon rate is the rate at which
interest is paid, and is usually represented as a percentage of the par value of a bond. Principal:
Principal is the amount that has been borrowed, and is also called the par value or face value of the
bond. The coupon is the product of the Principal and the coupon rate. The name of the bond itself
conveys the key features of a bond. For example, a GS CG2008 11.40% bond refers to a Central
Government bond maturing in the year 2008 and paying a coupon of 11.40%. Since Central
Government bonds have a face value of Rs.100 and normally pay coupon semi-annually, this bond
will pay Rs. 5.70 as sixmonthly coupon, until maturity. The key role of the debt markets in the Indian
Economy stems from the following reasons: • 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. Since the Government Securities are issued to meet the short term and
long term financial needs of the government, they are not only used as instruments for raising debt,
but have emerged as key instruments for internal debt management, monetary management and short
term liquidity management. What are the benefits of an efficient Debt Market to the financial system
and the economy? 1. Reduction in the borrowing cost of the Government and enable mobilization of

55
resources at a reasonable cost. 2. Provide greater funding avenues to public-sector and private sector
projects and reduce the pressure on institutional financing. 3. Enhanced mobilization of resources by
unlocking illiquid retail investments like gold 4. Development of heterogeneity of market participants
5. Assist in the development of a reliable yield curve. 7. Fiscal responsibility act The Fiscal
Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to
institutionalise financial discipline, reduce India's fiscal deficit, improve macroeconomic management
and the overall management of the public funds by moving towards a balanced budget. The main
purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring
down the fiscal deficit to a manageable growth of GDP. Objectives The main objectives of the act
were: 1. To introduce transparent fiscal management systems in the country 2. To introduce a more
equitable and manageable distribution of the country's debts over the years 3. To aim for fiscal
stability for India in the long run 4. Additionally, the act was expected to give necessary flexibility to
Reserve Bank of India(RBI) for managing inflation in India. Fiscal management principles: The
Central Government, by rules made by it, was to specify the following: 1. A plan to eliminate revenue
deficit by 31 Mar 2008 by setting annual targets for reduction starting from day of commencement of
the act 2. Reduction of annual fiscal deficit of the country 3. Annual targets for assuming contingent
liabilities in the form of guarantees and the total liabilities as a percentage of the GDP Content of the
Act Since the act was primarily for the management of the governments' behaviour, it provided for
certain documents to be tabled in the Parliament annually with regards to the country's fiscal policy.
This included the following along with the Annual Financial Statement and demands for grants. The
Act further required the government to develop measures to promote fiscal transparency and reduce
secrecy in the preparation of the Government financial documents including the Union Budget.
Switch deals: It’s option which can be practiced by the buyer/ seller to switch the deal into another
market. Debt instrument can be converted into any other financial instruments. Some debt instruments
possess these type of characteristics of switching the deal into other financial market. Summary The
Debt Market is the market where fixed income securities of various types and features are issued and
traded. They are of short term. Its, structure include government securities, Public Sector Units and
Private Sector Units. These all sector units issues various types of debt instrument to full fill the
financial need of the market. There are various bonds like corporate bonds,

56
57
• Challenges in debt market in india

An active corporate bond market serves multiple functions. Apart from providing
borrowers an alternative to bank finance, corporate bonds can lower the cost of longterm funding.
Banks are typically constrained in lending long-term because their
liabilities are relatively of a shorter tenor. An efficient corporate bond market with
lower costs and quicker issuing time can offer an efficient and cost-effective source
of longer term funds for corporates. At the same time, it can also provide institutional
investors such as insurance companies and provident and pension funds with longterm financial
assets (“preferred habitat”), helping them match the durations of their
assets and liabilities.
2.
From a macro-financial or financial stability perspective, a well-developed
corporate bond market serves to spread risks away from the banking system. Banks
are key to financial stability, as they provide liquidity services, credit and payment
systems to the economy, and it is important to regulate their risk-taking activities. A
market-based source of finance, such as corporate bond market, therefore, is more
effective in dissipating risk across a much wider category of investors, thereby
contributing to overall financial stability. A reasonably developed corporate bond
market can play the role of the “spare tyre2”, mitigating financial shocks and preserving
financial stability.
3.
It is against this background that the Government, SEBI and the Reserve Bank
have been taking concerted efforts to facilitate the development of the corporate bond
market in India. I thought I would use this opportunity to dwell upon the various aspects
related to the development of this market, the journey so far, the challenges which
have been encountered and share some thoughts on the potential way forward.

1 Keynote address delivered by Shri T Rabi Sankar, Deputy Governor on August 24, 2022 at the
Bombay Chamber of Commerce & Industry, Mumbai. Inputs from Dimple Bhandia, Chief
General
Manager, G Jagan Mohan, General Manager and Rituraj, Assistant General Manager of RBI’s
Financial
Markets Regulation Department are gratefully acknowledged.
2 The term “spare tyre” originally came from a speech in 1999 by Alan Greenspan, Chairman,
Federal

58
Reserve (1999) and relates to alternative sources of raising resources compared to bank finance

The Regulatory Effort

4.
The efforts taken to develop the corporate bond markets broadly over the last
decade and a half have been wide ranging. The reforms and developments have
ranged from advancements in the corporate bond microstructure to the evolution of a
facilitative regulatory framework, complemented by efforts to develop related risk and
derivative markets and measures to enhance secondary market liquidity.
5.
SEBI, the primary regulator of the corporate bond market, has taken significant
steps over the years to improve the market microstructure for corporate bonds –
settlement through delivery versus payment (DvP) mode which removes settlement
risk; operationalisation of a trade reporting platform for enhancing transparency;
introduction of an electronic bidding platform (EBP) for primary issuance;
consolidation of stock through reissuance; introduction of request for quote (RFQ)
platforms and many more. RBI has also been taking measures to develop the
corporate bond market - permitting banks to provide partial credit enhancement (PCE)
to incentivise a larger investor base; requiring large borrowers to raise a share (about
50%) of their incremental borrowings through market instruments; encouraging FPI
investment by raising investment caps, introduction of Voluntary Retention Route; etc.
As entity regulators, RBI, IRDAI and PFRDA have encouraged their regulated entities
to invest in corporate debt securities.
The Current Status
Having gone through the various measures and efforts taken for the development of
the corporate bond markets, let me now spend a few moments introspecting on the
progress made.
A. Resource mobilisation - the primary market
6.
The growing size of the corporate bond market and the number of issuances
every year are important indicators of the success of the development efforts of the
Government and regulators. Over the years, there has been a steady increase in
mobilisation of resources through the corporate bond route. The outstanding stock of
corporate bonds has increased four-fold from ₹10.51 lakh crore as at end of FY 2012
to ₹40.20 lakh core as at end of FY 2022 (Chart 1). Annual issuances during this period
have increased from ₹3.80 lakh crore to close to ₹6.0 lakh crore (Chart 2)

59
Let me conclude now. We have made impressive progress in the development
of the corporate bond markets - the market is large and growing; the issuer base is
expanding; product diversity and sophistication are developing; secondary volumes
are low but growing; and market infrastructure is the best in the world. Efforts need to
focus on improving complementary– repo and derivative – markets, diversify the
investor base, both domestic and global, and improve access of borrowers at the lower
end of the credit spectrum. Beyond this, market development and improvements will remain a
continuous exercise. As much as we need to take these steps, it will serve
12

60
 CHAPTER: -2
REVIEW OF LITERATURE.

61
REVIEW OF LITERATURE

In any economy, a smoothly functioning debt market is considered crucial for development and
stability. Armour and Lele (2009) postulate that economic structure is a determinant of financial
structure. Since India is a predominantly services based economy, the financial structure
automatically prefers equity market liberalization over debt market liberalization.
It is evident that there has been much deliberation on the corporate debt scenario in India but as
the underlying theme for most of the analysis has been cross country experiences in the corporate
debt domain, the application of these learnings to the Indian context needs to be cautiously
exercised (Wells and Schou-Zibell, 2008).
The International Capital Markets Association (2013) argues that vibrant corporate debt markets
bring substantial economic benefits and are important for all stakeholders concerned viz.
companies, investors, economies and governments.
Good friend (2005) advocates the use of corporate bond markets by more transparent
firms, to
lower their effective interest costs. On the contrary, Luengnaruemitchai and Ong (2005) concede
that there is no conclusive evidence establishing the superiority of either a bank dominated or a
market dominated financial system but state that a well-diversified economy with balanced
distribution across bank lending and corporate bonds is less vulnerable to a financial crisis.
From the perspective of a developing economy, the World Bank (2000) observes that “the
corporate bond market in a country can substitute part of the bank loan market, and is potentially
able to relieve the stressed banking system in a developing country of unbearable burden.”
Development of corporate debt markets needs strong institutional and regulatory support. The
World Bank (2000) specifically identifies seven necessary developmental components for
the
effective functioning of vibrant bond markets. Any “absence, deficiency or inefficiency”
of any
Sengupta (1998) establishes a direct correlation between any firm’s disclosure practices and its
effective interest cost. Edwards et al (2007), while acknowledging merit in opposing arguments
provides persuasive evidence of reduced transaction costs on allowing bond price transparency.
On the other hand, Bessembinder and Maxwell (2008) are more skeptical and seek to achieve
some middle ground. It is true that investors stand to benefit from increased transparency, due to
reduction in ‘bid ask spreads’. However, bond dealers experience reductions in compensations
thereby shifting trading activities to other securities. Further, dealers are averse to carrying
inventory and sharing research with investors. According to Wells and Schou-Zibell (2008), the
development of regulatory and financial supervisory framework plays an important role in the
vibrancy of corporate debt markets. Luengnaruemitchai and Ong (2005), strongly emphasize
62
regulation and policy as one of the development issues of corporate debt markets in India. Three
objectives justify a strong regulatory support system: fair and equal treatment of investors, market
integrity and containment of systemic risk. According to Wells and Schou-Zibell (2008), the
inconsistent, disorganized and overlapping institutional and regulatory framework has been one of
the primary reasons impeding the development of strong corporate debt markets in India. These
gaps have given rise to regulatory arbitrage with different market players reporting to different
regulators depending on size and ownership. Hakansson (1999) substitutes ‘institutions and
regulations’ with the word ‘mechanisms’. When bank lending and corporate debt is more balanced
in an economy, the market gets an opportunity to assert itself, thereby providing a more effective
hedge against systemic risk. Corporate debt markets inherently bring with them market discipline,
through various mechanisms. Dissemination of timely, accurate and relevant information through
a reliable financial reporting system is the first of such mechanisms. Secondly, transferable debt
ensures the presence of a 7 pool of professional financial analysts, to provide objective advice to
investors. Thirdly, it results in a more effective management of a default or bankruptcy case.
Finally, the effect of market forces governing corporate debt also rubs off on bank lending, as the
banks can ill afford to engage in uncompetitive lending. The gradual and steady development of
strong institutional and regulatory frameworks is necessary to sustain the momentum of corporate
debt markets. The BIS (2006) provides interesting case studies to highlight this contrast. A sudden
expansion of corporate bond markets without the necessary support structures is unsustainable and
can cause strain on the financial system if the prevailing credit quality of corporate bonds is
compromised or companies overleverage their balance sheets. The paper specifically describes
several policy initiatives in Malaysia which boosted the corporate bond market development. The
regulatory and institutional environment does indeed play a huge role in tilting the scales in favour
of either bank lending or corporate bonds. Empirical studies reveal vast differences in the financial
structures of the US and the European economy. The US economy is centered on corporate bonds,
whereas the European economy prefers bank lending. This is because the institutional setup is
vastly different in these economies. De Fiore and Uhlig (2005) have modeled the problem and
observed that the Euro markets place much higher reliance on bank finance than the US markets,
which are inclined towards bond finance. The paper has explored the contribution of agency costs
in generating the rift observed above. Luengnaruemitchai and Ong (2005) opine that crowding out
by government bonds is one of the potential obstacles to healthy corporate bond markets. A high
level of public debt crowds out corporate borrowing by reducing the appetite of financial
institutions. This increases the cost of borrowing for corporates making bond markets an unviable
source of funding (Ağca and Celasun, 2009). On the contrary, Raghavan and Sarwano (2012)
conclude that in case of India, unlike economies like Korea, the development of the government
bond market has in fact had a positive effect on the corporate bond market. Hakansson (1999)
contends that the absence of an adequately sized corporate debt market leads to an oversized
63
banking system in any economy. It also results in a large portion of the lending market being
excessively regulated, without being subjected to free market forces. Such an 8 imbalance is not
desirable, because this becomes the perfect breeding ground for crony capitalism, sloppy lending
by banks and careless investments by corporates. Another important characteristic of vibrant bond
markets is the availability of various instruments to choose from. The World Bank (2000)
contends that though small issue sizes are mostly responsible for illiquidity in corporate debt
markets, they can help cater to the specific investment needs of investors if they are diverse. Thus,
investment banks should continue engineering a wide portfolio of debt instruments, in addition to
“fine-tuning the parameters of individual instruments for specific clients”. Luengnaruemitchai and
Ong (2005), while acknowledging the complexity of the relationship between the derivatives
market and the underlying cash market, concede that once the underlying market reaches a certain
development stage, efficiency gains from derivative market (unbundling and reallocating risk)
become apparent. Consequently, there is very high demand for such products in the US and
European debt markets since they provide investors with a wide range of products and instruments
to manage risks. As a result, they also facilitate better price discovery and liquidity in the
underlying bond market. Wells and Schou-Zibell (2008) point out that derivatives and swap
markets are critical for the development of corporate bond markets. These tools broaden the
investor base and lend the much needed liquidity to the market. These instruments also play a
pivotal role in reducing costs, enhancing returns and managing risk; particularly interest rate risk.
Diversity is required not only with respect to the type of instrument but also its investment grade
and maturity length. For developed corporate bond markets, it is not necessary for them to be
dominated by AAA rated bonds. Conversely, Igata, Taki, Yoshikowa (2009) mention that one of
the important success factors of the US bond market is the continuing issue of high yield bonds
(which are bonds rated BB and below). The US market recognizes the attractive risk return
characteristics of high yield bonds which enable high growth companies to obtain financing.
Besides investment grade, another credible success factor has been the maturity length of bonds3 .
3 The average maturity in the US bond market has lengthened in the recent past and has been
upwards of 12 years since 2007. Additionally, ultra long term bonds of maturities ranging from 30
to 50 years are also widely used. These are typically useful investment avenues for long term
investors such as pension funds. 9 In the Indian context, Mitra (2009) focuses on the supply side
issues hampering the development of corporate debt markets in India and lists the lack of diversity
in instruments as a major factor. Internationally, there are various types of instruments prevalent,
such as step up bonds, step down bonds, deep discount bonds, reverse floater bonds, indexed
bonds, currency bonds, etc. However, the Indian bond market is primarily dominated by fixed rate
coupon bonds. Secondly, the average age of the bonds issued by Indian corporations is only 5 to 7
years. Corporate bond markets are also deeply affected by the volume and diversity (or lack
thereof) of market participants. The active market participant base in the US has catalyzed the
64
development of corporate debt markets. According to Igata, Taki, Yoshikowa (2009), though the
issuer base in the bond market is dominated by financial institutions, there is active participation
from other sectors as well. On the investors’ side, Luengnaruemitchai and Ong (2005) identify
two major investor bases: local institutional and foreign. The growth in local institutional
investors such as pension funds, mutual funds and insurance companies clearly drives the local
demand for corporate bonds. Foreign investors are an equally important component of the demand
for corporate bonds. The World Bank (2000) provides an interesting justification for liberalizing
and deregulating bond markets. With increasing globalization, such opportunities for issuers and
investors do not last very long. Investors compete for a finite set of opportunities provided by
issuers and vice versa. As such the debt market is highly competitive. Therefore, anything that
hinders their decision making capability will undermine the confidence of the participants. This is
the primary motivation for having liberalized and deregulated markets. Wells and Schou-Zibell
(2008) state that, though India began securitization quite early compared to other Asian
economies, the market has not yet taken off. They have also articulated how regulation hampers
participation in the Indian context. Regulatory responsibility for bond markets is fragmented and
often at cross purposes. Corporate bonds are regulated by SEBI, along with participants like
brokers and mutual funds. Banks and primary dealers are regulated by the RBI, insurance
companies by the Insurance Regulatory and Development Authority (IRDA) and pension funds by
the Pension Fund Regulatory and Development Authority. Foreign investment has traditionally
remained controlled, with SEBI and RBI imposing periodic limits on foreign 10 participation.
Mitra (2009) identifies a few more such demand side factors. For banks a high SLR ratio,
regulatory asymmetry in treatment of loans and bonds, and other restrictions on investments
hamper their ability to freely invest in the corporate bond market. For example these restrictions
prevent banks from investing in high yield bonds of lower rated corporations. Khanna and Varottil
(2012) elucidate the “Political economy of Bonds”. According to them another critical issue
accounting for the differences in equity market and debt market liberalization was the laws that
needed reforms. On the equity side, management and controlling shareholders were largely in
favour of equity reforms and consequently allowed for more room for negotiation and agreement.
On the debt side, changes were necessary to bankruptcy laws, labor laws and judicial enforcement.
At the time of liberalization the base of political power in India was support of labor unions and
therefore any changes to labor or bankruptcy laws (allowing quick dismissal of labor) was not
feasible. This hampered the growth of the manufacturing sector, further undermining the growth
of the corporate bond market. It can be argued that debt markets typically are well developed in
mature economies like the USA, Japan or Germany and the development of corporate bond
markets was preceded by that of stock and government bond markets, which in turn was preceded
by years of capital accumulation through industrial development (World Bank, 2000). Naturally,
emerging economies lag behind in corporate bond market development due to their nascent stage
65
prevent banks from investing in high yield bonds of lower rated corporations. Khanna and Varottil (2012)
elucidate the “Political economy of Bonds”. According to them another critical issue accounting for the
differences in equity market and debt market liberalization was the laws that needed reforms. On the
equity side, management and controlling shareholders were largely in favour of equity reforms and
consequently allowed for more room for negotiation and agreement. On the debt side, changes were
necessary to bankruptcy laws, labor laws and judicial enforcement. At the time of liberalization the base
of political power in India was support of labor unions and therefore any changes to labor or bankruptcy
laws (allowing quick dismissal of labor) was not feasible. This hampered the growth of the manufacturing
sector, further undermining the growth of the corporate bond market. It can be argued that debt markets
typically are well developed in mature economies like the USA, Japan or Germany and the development
of corporate bond markets was preceded by that of stock and government bond markets, which in turn
was preceded by years of capital accumulation through industrial development (World Bank, 2000).
Naturally, emerging economies lag behind in corporate

66
 CHAPTER:-3
RESEARCH METHODOLOGY

67
❖ OBJECTIVE OF RESEARCH METHODOLOGY.

1 To analyze the current state of the corporate debt market in India: This objective focuses on
understanding the size, structure, and composition of the corporate debt market, including key
players, instruments, and market dynamics.

2 To assess the regulatory framework governing the corporate debt market: This objective
involves examining the regulatory environment and policies that impact the issuance, trading, and
investment in corporate debt securities in India.

3 To identify the drivers of growth in the corporate debt market: This objective aims to explore the
economic, regulatory, and industry-specific factors that contribute to the growth and development
of the corporate debt market in India.

4 To examine the challenges and risks faced by participants in the corporate debt market: This
objective involves identifying and analyzing liquidity issues, credit risks, regulatory challenges,
and other factors that pose challenges to issuers, investors, and other stakeholders in the corporate
debt market.

5 To explore the opportunities for innovation and development in the corporate debt market: This
objective focuses on identifying opportunities for innovation, such as the introduction of new debt
instruments, financing structures, and market platforms to enhance the efficiency and depth of the
corporate debt market in India

6 To assess the impact of government policies and initiatives on the corporate debt market: This
objective involves evaluating the impact of government policies, initiatives, and reforms on the
corporate debt market, including measures to promote liquidity, transparency, and investor
protection.

7 To analyze the investor base and investor behavior in the corporate debt market: This objective
aims to study the composition of the investor base, including institutional investors, retail
investors, and foreign investors, as well as their investment preferences, risk appetite, and
behavior in the corporate debt market.

8 To examine the role of credit rating agencies in the corporate debt market: This objective
involves assessing the role and influence of credit rating agencies in the corporate debt market,
including their methodologies, practices, and impact on investor perceptions and market
68
dynamics.

9 To study the trends and developments in corporate debt issuance and trading: This objective
focuses on analyzing trends in corporate debt issuance, including sectoral trends, issuance
volumes, and pricing dynamics, as well as trends in secondary market trading and liquidity

10 To provide recommendations for policymakers, regulators, and market participants: This

objective aims to offer actionable recommendations to policymakers, regulators, issuers, investors,
and other stakeholders to address challenges, promote growth, and enhance the efficiency and
stability of the corporate debt market in India.
These objectives can serve as a guide for structuring a comprehensive study on the corporate debt
market in India, addressing various aspects of its functioning, challenges, opportunities, and
potential areas for improvement.

69
❖ METHOD OF DATA COLLECTION.

Literature Review: Reviewing existing literature, research papers, reports, and publications related
to the corporate debt market in India from academic journals, industry reports, government
publications, and reputable online sources.
Regulatory Filings and Publicly Available Data: Analyzing data and information available from
regulatory bodies such as the Securities and Exchange Board of India (SEBI), Reserve Bank of
India (RBI), and stock exchanges, including annual reports, financial statements, disclosure
filings, and market reports.
Market Data Sources: Utilizing market data sources such as Bloomberg, Reuters, and other
financial databases to gather information on corporate debt issuance, trading volumes, pricing, and
other market-related metrics.
Primary Data Collection:

Surveys and Questionnaires: Designing and administering surveys or questionnaires to key

stakeholders in the corporate debt market, including issuers, investors, regulatory authorities,
credit rating agencies, and market intermediaries, to gather insights on market dynamics,
perceptions, and preferences.
Interviews: Conducting structured or semi-structured interviews with industry experts, market
participants, policymakers, and regulators to gain in-depth insights into specific aspects of the
corporate debt market, regulatory frameworks, challenges, and potential opportunities.
Focus Groups: Organizing focus group discussions with representatives from different segments
of the corporate debt market to explore common issues, perceptions, and perspectives on market
trends, regulatory developments, and investor behavior.
Data Analysis:

Quantitative Analysis: Utilizing statistical techniques to analyze quantitative data obtained from
secondary sources or surveys, such as descriptive statistics, regression analysis, and trend analysis,
to identify patterns, correlations, and relationships in the data.
Qualitative Analysis: Conducting thematic analysis or content analysis of qualitative data obtained
from interviews, focus groups, or open-ended survey responses to identify themes, patterns, and
emerging insights related to market dynamics, challenges, and opportunities.
Expert Opinions and Delphi Technique:

Seeking expert opinions from industry practitioners, researchers, and analysts through expert
panels or the Delphi technique to gather consensus-based insights and forecasts on key issues,
trends, and developments in the corporate debt market.
70
By employing a combination of these data collection methods, researchers can gather
comprehensive and diverse insights into the corporate debt market in India, enabling a thorough
analysis of its structure, functioning, challenges, and opportunities.

❖ Primary Data Collection:

Surveys and Questionnaires: Designing and administering surveys or questionnaires to key
stakeholders in the corporate debt market, including issuers, investors, regulatory authorities,
credit rating agencies, and market intermediaries, to gather insights on market dynamics,
perceptions, and preferences.
Interviews: Conducting structured or semi-structured interviews with industry experts, market
participants, policymakers, and regulators to gain in-depth insights into specific aspects of the
corporate debt market, regulatory frameworks, challenges, and potential opportunities.
Focus Groups: Organizing focus group discussions with representatives from different segments
of the corporate debt market to explore common issues, perceptions, and perspectives on market
trends, regulatory developments, and investor behavior.
Data Analysis:

Quantitative Analysis: Utilizing statistical techniques to analyze quantitative data obtained from
secondary sources or surveys, such as descriptive statistics, regression analysis, and trend analysis,
to identify patterns, correlations, and relationships in the data.
Qualitative Analysis: Conducting thematic analysis or content analysis of qualitative data obtained
from interviews, focus groups, or open-ended survey responses to identify themes, patterns, and
emerging insights related to market dynamics, challenges, and opportunities.
Expert Opinions and Delphi Technique:

Seeking expert opinions from industry practitioners, researchers, and analysts through expert
panels or the Delphi technique to gather consensus-based insights and forecasts on key issues,
trends, and developments in the corporate debt market.
By employing a combination of these data collection methods, researchers can gather
comprehensive and diverse insights into the corporate debt market in India, enabling a thorough
analysis of its structure, functioning, challenges, and opportunities.

❖ Data Analysis:
Quantitative Analysis: Utilizing statistical techniques to analyze quantitative data obtained from
secondary sources or surveys, such as descriptive statistics, regression analysis, and trend analysis,
to identify patterns, correlations, and relationships in the data.
Qualitative Analysis: Conducting thematic analysis or content analysis of qualitative data obtained
71
from interviews, focus groups, or open-ended survey responses to identify themes, patterns, and
emerging insights related to market dynamics, challenges, and opportunities.
Expert Opinions and Delphi Technique:

Seeking expert opinions from industry practitioners, researchers, and analysts through expert
panels or the Delphi technique to gather consensus-based insights and forecasts on key issues,
trends, and developments in the corporate debt market.
By employing a combination of these data collection methods, researchers can gather
comprehensive and diverse insights into the corporate debt market in India, enabling a thorough
analysis of its structure, functioning, challenges, and opportunities.

72
 CHAPTER:- 4
DATA ANALYSIS INTERPRETATION
AND PRESENTATION

73
Government Securities Since the last report on the Indian bond markets published in 2013, there
has been considerable progress that the Indian government securities markets have recorded. We
outlined several areas pertaining to the Indian government securities market where there was/is
room for improvement and articulated specific advocacy points, which we urged the Indian
authorities to consider adopting. While it is fair to say that many of the suggested
changes/improvements to the Indian government securities framework have been passed, there is
room for more improvement.

The longer end of the curve which is > 15y maturity however continues to be less traded
accounting for 1-3% of volumes. This is because the most active participants in this segment are
investors like pension funds and insurance firms who are long only investors and undertake less
trading activity in this segment. Thus, one of our goals, the suggested encouragement of traders to
trade across the maturity spectrum has not yet been met. That said, the authorities are conscious of
the need for longer dated benchmarks and in order to make the longer end more relevant for
investors like Employee Provident Fund Organizations(EPFOs) and insurance companies a 40
year bond was issued for the first time in 2015.

74
Corporate bonds issuances have seen a steady uptick in the last ten years. From just about Rs. 3
lakh crores in FY12, they jumped close to about four-fold at Rs. 7.8 lakh crore in FY21, before
moderating to Rs. 6 lakh crore in FY22. Higher borrowings through corporate debt in FY21 was
driven largely by RBI’s measures such as TLTROs. In FY22, corporate bond yields rose in line
with G-sec yields amidst a higher than expected borrowing programme by the government,
elevated oil prices and rising global yields. This could partly have come in the way of issuances as
unlike bank loans where interest cost varies with the monetary regime, cost of capital gets locked
in at the issuance rate for bonds. As a result, issuances of corporate bonds was also lower in FY22.
In FY23 so far (Jul’22), corporate bonds issuances have increased by 14.1% on a YoY basis

It can be observed from the chart above that almost all of these issuances have come from private
placements as opposed to public issues. Furthermore, there has been no change in this trend in the
last 10 years. Notably, while private placement accounted for 88% of the total corporate bonds
issuance in FY12, its share has risen to 98% in FY22. A major reason for this is that companies do
not wish to undertake the cumbersome processes involved in case of a public issue. On the other
hand, private placements provide a number of advantages to companies including lower costs,
quicker turnaround time and better price discovery. Outstanding corporate bonds: Resources
mobilized through the corporate bond market have increased steadily over the years. Stock of
corporate bonds outstanding has shown a remarkable improvement from just Rs. 10.5 lakh crore
in FY12 to Rs. 39.6 lakh crore in FY22, a four-fold jump (Figure 2). In contrast, while credit
outstanding by SCBs (industry and services) has remained higher than corporate bonds
outstanding, incremental credit by SCBs has been far more sluggish. From Rs. 29.6 lakh crore in
FY12, outstanding credit by SCBs has increased to Rs. 61.7 lakh crore, or a two-fold increase.

75
Even in terms of growth rate, while both credit outstanding by SCBs and corporate bonds started
at a similar level of ~18% in FY12, corporate bonds have witnessed higher momentum in all the
years thereafter, barring FY20. Even in FY21, while SCB credit growth moderated sharply to
1.6% from 7.6% in the previous year, growth in corporate bonds outstanding improved to 11%
(6.1% in FY20). In FY22 as well, outstanding corporate bonds have increased by 11.2%, while
growth in SCB credit has been lower at 8.1% (Figure 3). This is a positive sign for the market that
it is being accessed by both issuers and investors in higher numbers.
Even in terms of growth rate, while both credit outstanding by SCBs and corporate bonds started
at a similar level of ~18% in FY12, corporate bonds have witnessed higher momentum in all the
years thereafter, barring FY20. Even in FY21, while SCB credit growth moderated sharply to
1.6% from 7.6% in the previous year, growth in corporate bonds outstanding improved to 11%
(6.1% in FY20). In FY22 as well, outstanding corporate bonds have increased by 11.2%, while
growth in SCB credit has been lower at 8.1% (Figure 3). This is a positive sign for the market that
it is being accessed by both issuers and investors in higher numbers.

76
Credit demand in the economy has gathered steam in recent months amidst a pickup in economic
activity. In Jul’22, bank credit rose by an impressive 15.1% on a YoY basis. With capacity
utilization rates picking up (75.3% in Q4FY22), the demand for credit is likely to see a further
pickup. While external borrowings in the form of ECBs played an important role in
supplementing the domestic financing needs of companies in the past, with the global backdrop of
higher rates and depreciating currency, their relative attractiveness has diminished. As a result
both companies and banks are likely to tap the corporate bond market in the later part of the year
to meet the increasing demand for credit. In recent days, several leading banks have raised funds
by issuing bonds. The above analysis has shown that while the corporate bond market in India has
seen a healthy growth, it remains highly constrained due to a number of factors. First, absence of
an active secondary market for corporate bonds which diminishes their attractiveness for retail
investors due to lower liquidity than equities or government bonds. Second, a major share of
corporate bond issuances take place through the private placement route and in the absence of a
secondary market may not be available for retail investors. Third, the corporate bond market is
heavily skewed towards higher rated papers. As per RBI, 80% of issuances in value terms in FY22
were rated AAA, and another 15% were rated AA. Our analysis also shows that while AAA rated
companies may be able to source cheaper funds through the bonds market, this does not hold true
for others. There have been several working groups that have suggested ways to make the market
more buoyant which have been implemented. As only higher paper find favour with investors,
there is need to enhance the rating of lower rated paper through specific policy measures. Making
CDS mandatory for lower rated paper can possibly help to reinvigorate the market. A major
limitation in the financial sector space is dealing with default. Banks have structures to deal with
NPAs and the risk gets defrayed over the entire loan portfolio. For debt paper, the legal route is
the only one available which is time consuming. Hence most investors are deterred from investing
in lower rated bonds. Work needs to be done on this aspect too in parallel to make this market
more buoyant.

77
 On the other hand, in the non-financial segment, funds raised by manufacturing sector (Figure 5)
by tapping the corporate bonds market has remained low and averaged about 5.6% between FY12 to
FY22. On the other hand, share of services sector has averaged about 10% between FY12 to FY22. In the
same period, share of electricity has averaged close to 7%.

78
Chapter no:-5
conclusions

79
 Conclusions.
Deepening corporate bond markets can offer India several benefits in terms of inclusive growth,
including fostering access to long-term finance for the corporate and financial sectors, allowing
better risk management, and supporting lending to innovative sectors.
: The Debt Market is part of the securities market where debt securities, also known as 'fixed
income securities', of various types and features are issued and traded.
The debt or bond market is where loan assets are bought and sold. There's no single physical
exchange for bonds. Transactions are mainly made between brokers, large institutions, or
individual investors. The equity or stock market is where stocks are bought and sold.
You can purchase corporate bonds or deposits through a broker, banker, or bond trader in the
primary market. You may also buy some bonds over the counter. The intermediary provides face
value, coupon rate, credit rating, tenor, allotment, and redemption dates for efficient decision-
making.
The top 10 most-indebted companies in India paint a picture of financial challenges and strategic
considerations. Leading the pack is Reliance Industries Limited (RIL) with a hefty debt of Rs 3.14
lakh crore, followed by NTPC, Vodafone Idea, and Bharti Airtel in the energy and telecom
sectors.
: In the Indian bond market, total value of government debt or government bonds stands at Rs
161.1 lakh crore. While corporate bonds valued at Rs 44.2 lakh crore as of September 2023. The
bond or fixed-income market size is rapidly expanding in India.27 Dec 2023
The corporate debt market plays a critical role in the global economy, as investors lend money to
companies in exchange for regular interest payments and the promise of their principal investment
being returned at the end of the maturity period
Corporate debt can also be structured as revolving credit, in which a company iteratively borrows
and repays cash over a period of time – in effect, a corporate credit card. This debt is typically
held by groups or syndicates of commercial banks and is short-term in nature (from one to four
years).
: What is a corporate bond? A bond is a debt obligation, like an Iou. Investors who buy corporate
bonds are lending money to the company issuing the bond. In return, the company makes a legal
commitment to pay interest on the principal and, in most cases, to return the principal when the
bond comes due, or matures
Debt
Money borrowed by one party from another entity to serve a need that otherwise cannot be met
outright

80
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.
Start with a free account to explore 20+ always-free courses and hundreds of finance templates
and cheat sheets.
What is Debt?
Debt is the money borrowed by one party from another to serve a financial need that otherwise
cannot be met outright. Many organizations use debt to procure goods and services that they can’t
manage to pay for with cash.

Debt

Under a debt agreement, the borrower obtains authorization to get whatever amount of money is
needed on condition it will be repaid on an agreed date. In most cases, the amount owed is
serviced with some interest.

Based on the amount borrowed, debt can be an asset or a complication. Knowing the best way to
manage debt is tricky, particularly for a borrower who is finding it hard to make scheduled
payments.

Breaking Down Debt

There are many types of debt, but the most common ones are auto loans, mortgages, and credit
ca…
Good Debt vs. Bad Debt
In the field of corporate finance, a lot of attention goes to the amount of debt an entity owes.

If, for one reason or another, sales drop, and a company is no longer as profitable as it once was,
then it may not be able to repay its loans. Such a company suffers the risk of going bankrupt.
However, an entity that does not take out loans may be limiting its expansion potential.

There are many industries in the market, and each interacts with debt uniquely. Thus, each
company defines the right amount of debt using scales unique to its industry. When evaluating a
company’s financials, a variety of metrics come into play to assess whether its debt level is within
an acceptable range.

Good debt lets an individual or company manage finan…

Secured vs. Unsecured Debt
Secured debts involve a repayment promise, as well as collateral. Securing a debt means providing
an asset so that in the event a borrower defaults, it can be sold to recover the money that was lent
81
out.

Real-life examples of secured loans include mortgages and auto loans because the item under
financing is the collateral. For example, if the borrower is purchasing a car, and defaults on
payment, the loaner can sell the vehicle to recover the remaining amount. Also, if an entity takes a
mortgage, the property is used as collateral. The lender maintains interest, financially, over the
asset until the borrower clears the mortgage.

Unsecured debt, on the other hand, does not involve collateral. However, if a borrower does not
repay …
Conclusions
Deepening corporate bond markets can offer India several benefits in terms of inclusive
growth, including fostering access to long-term finance for the corporate and financial sectors,
allowing better risk management, and supporting lending to innovative sectors. From a financial
stability perspective, in common with several emerging market economies, deeper onshore
corporate debt markets with a wider domestic investor base at home can increase resilience to
capital flow surges in the face of external shocks and reduce opportunistic short-term borrowing in
global markets. For India, key policy priorities to move in this direction include strengthening
credit rights and ratings, improving trading infrastructure, and promoting safe financial
innovation.

References
Besides G-Sec market, there is an active market for corporate debt papers in India which 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 and step
Conclusions about the corporate debt market involve various factors and considerations. Here are
some key points to consider:

1. *Risk-Return Profile:* Corporate debt offers a balance between risk and return. Investors are
typically compensated with higher yields compared to government bonds but face a higher level
of credit risk.

2. *Interest Rate Sensitivity:* Corporate bonds are sensitive to interest rate changes. As interest
rates rise, bond prices tend to fall, impacting the overall returns on corporate debt investments.

3. *Credit Quality Matters:* The creditworthiness of the issuing corporation significantly

influences the risk associated with corporate debt. Investors should carefully assess credit ratings
82
and the financial health of the issuing compani…
Several factors influence the debt market in India, shaping its dynamics and performance. Here
are key factors to consider:

1. *Interest Rates:* The Reserve Bank of India (RBI) sets the benchmark interest rates. Changes
in these rates impact the entire debt market, influencing bond yields and prices.

2. *Inflation:* Inflation rates affect the real returns on debt investments. Higher inflation may
erode the purchasing power of fixed-income returns, making real returns less attractive.

3. *Credit Ratings:* The creditworthiness of issuers plays a crucial role. Credit rating agencies
assess and assign ratings to debt instruments, providing investors insights into the credit risk
associated with different securities.

4. *Economic Indicators:* Overall economic Certainly! Here are 10 multiple-choice questions

(MCQs) related to the debt market in India:

1. *Question:* What is the primary influence on interest rates in the Indian debt market?

a) Stock market performance

b) Reserve Bank of India (RBI) decisions
c) Government expenditure
d) Foreign direct investments

2. *Question:* How do changes in inflation rates impact the Indian debt market?

a) Decrease bond yields

b) Increase real returns on debt investments
c) Boost purchasing power of fixed-income returns
d) Have no effect on the debt market

3. *Question:* What is the significance of credit ratings in the Indian debt market?

a) Determine government spending

b) Influence foreign exchange rates
c) Assess credit risk…
The debt market in India, also known as the bond market or fixed-income market, plays a crucial
83
role in the overall financial system. Here are key aspects of the debt market in India:

1. *Types of Instruments:* The Indian debt market comprises various instruments, including
government bonds, corporate bonds, debentures, commercial paper, certificates of deposit, and
money market instruments.

2. *Government Securities:* Government bonds, issued by the Reserve Bank of India (RBI) on
behalf of the government, are a significant component. These securities include Treasury Bills and
dated securities with varying maturities.

3. *Corporate Bonds:* Companies raise capital by issuing bonds or debentures to investors.

Corporate bonds provide an avenue for investors to ea…
Several factors influence the debt market, shaping its dynamics and performance. Here are key
factors that play a significant role:

1. *Interest Rates:* Changes in interest rates have a direct impact on the debt market. Rising
interest rates typically lead to lower bond prices and vice versa, affecting yields.

2. *Inflation:* Inflation erodes the purchasing power of money over time. In a debt market
context, higher inflation can result in investors demanding higher yields to compensate for the
decreasing real value of their returns.

3. *Economic Conditions:* The overall economic environment, including GDP growth,

employment rates, and industrial production, influences investor confidence and the
creditworthiness of issuers in the debt market.

4. *Credit Quality:
The creditworthiness of issuers is a critical factor. Credit rating agencies assess and assign
ratings to debt instruments, reflecting the risk associated with a particular issuer.

5. Supply and Demand:* The balance between the supply and demand for debt instruments affects
prices and yields. High demand and limited supply can lead to lower yields and higher prices, and
vice versa.

6. *Central Bank Policies:* The policies of central banks, such as interest rate decisions and
quantitative easing measures, impact overall market liquidity and interest rate levels.

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7. *Global Economic Conditions:* International economic factors, including global interest rates,
currency exchange rates, and geopolitical events, can influence the debt market.

8. *Liquidity:* The ease with which debt instruments can be bought or sold in the market is
crucial. Higher liquidity provides investors with more flexibility and can contribute to more
efficient price discovery.

9. *Regulatory Environment:* Government regulations and policies, set by regulatory bodies such
as the Securities and Exchange Commission (SEC) or equivalent authorities, play a role in
shaping the debt market landscape.

10. *Investor Sentiment:* Market participants' perceptions and sentiment impact trading activities
and can lead to short-term fluctuations in bond prices.

11. *Issuer-Specific Factors:* The financial health, management quality, and business prospects
of individual issuers directly influence the risk associated with their debt instruments.

12. *Currency Exchange Rates:* For investors dealing with international debt instruments,
changes in currency exchange rates can impact overall returns.

13. *Market Expectations:* Anticipated future economic conditions, interest rate movements, and
policy changes can influence investor behavior in the debt market.

Understanding and analyzing these factors are crucial for investors, issuers, and policymakers to
make informed decisions in the debt market. Each factor contributes to the overall risk and return
profile of debt instruments, making the debt market a dynamic and complex financial
environment.

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