DEBT MARKET –Why?
For financing Govt.- short t & long
Long term assets for pension funds
Risk diversification
Less reliance on bank credit for corporates
To manage Monetary policy by RBI – controlling inflation or deflation. E.g. recent hike in REPO and CRR.
What is debt market?
Market for issuance , trading and and settlement in fixed/floating income (debt) securities.
Securities can be issued by Central & State government,PSU,Banks, FIs & corporates etc
Securities include Government/PSU/Corporate debt.
Government debt – G-Sec/T-bills.
Public sector undertakings – bonds/debentures/ certificate of deposits etc
Corporates (PVT. Banks/Corporates) – commercial paper/bonds / debentures etc
Indian Debt market
Size of global market is around $ 31.4 trillion.
US bond market is around 13.5 trillion and the largest one.
Total size of Indian debt market is estimated to be $ 92 to 100 bn which is 30% of GDP.
Indian debt market is primarily a whole sale market and restricted to institutional investors.
RBI regulates Government debt and short term Money market instruments (up to one year) and SEBI regulates debt market (instruments having a maturity period of more than 1 year )
Primary dealers
PD can be referred as Merchant bankers to GOI
Functions –
Commit participation as principals in GOI issues through bidding process
Provide under writing services
Offer firm buy-sell/bid-ask quotes for T.Bills/dated securities
Development of secondary Debt market
Products in the Debt market
Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured/ charged against the asset of the company in favour of debenture holder.
Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows-
Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.
Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.
Products in Debt market
Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. Issued at discount and redeemed at par
It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee.
Commercial paper is a money market instrument issued normally for a tenure of 7 days and up to 1 year
Treasury Bills: Short-term (up to 14/91/182/364 days) bearer discount security issued by the Government as a means of financing its temporary cash requirements.
Certificate of deposit – issued by banks for short term borrowing. 7 days to 1 year with a minimum amount of Re 1.00 lacs. Mainly in OTC market.
Products in Debt market
Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme.
These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates ( up to thirty years).
Government debt
Central
State
Local bodies
Instruments – dated securities,T.Bills, Capital index bonds, etc
RBI – Nodal agency to raise funds
Covers major segment of debt market
Participants in the Debt market
Central/State Govt/local bodies
RBI
Primary dealers – develop G sec market & also underwriters
PSUs
Corporates
Banks/FIs/FIIs/MFs/PF
Trust/Societies
Rating agencies
G-SEC –Central Govt.
Object – to fund fiscal deficit & temporary liquidity crunch
Intermediary - RBI
Instruments – mainly dated securities(1-20 yrs) &T.Bill(14,91,182 & 364 days)
SGL – Subsidiary General Ledger. Record of holding securities in the name of various investors by RBI in “D” mat form (electronic form)
Constituent SGL
Price/Coupon based on auction system
Indian Debt market
Retail trading in G-Sec started from 16.01.03. as per guidelines of SEBI.
G-Sec auctions with a reservation of 5% of the issue amount for non competitive bids by retails investors.
Non competitive bidding is open to individuals/HUFs/firms/companies/corporate bodies/PF/trust etc as prescribed by RBI.
Requirement not more than 1 crore and do not have SGL a/c (securities General Ledger a/c) with RBI
Apply through PD/Bank
Minimum bidding Re 1o,ooo and multiples thereof.
Money market
Market –maturity profile of instruments vary from 1 day to 1 year
Call money – over night/ Notice money – 1-14 days and term money > 15 days to 1 year.
Purpose – to mange short term liquidity
Participants –Banks/NBE (lending only)
Not meant for corporates
Transactions –unsecured OTC – to fund short term requirements e.g.. reserve requirements, build up of short term funds etc
Call rates – short term liquidity conditions influence –supply side- deposit mobilization, capital inflows, etc.
Demand side – tax outflows, Govt. borrowings, credit off take, reserve requirements etc
Money Market Instruments(2)
Certificates of Deposit
Commercial Paper
Inter-bank participation certificates
Inter-bank term money
Treasury Bills
Bill rediscounting
Call/notice/term money
CBLO
Market Repo
Money market instruments
T-Bill – 14/91/182/364 days.
REPO (Repurchase option)/RRPO ( Reverse Repurchase option
Certificate of deposit- by banks for a period of 7 days to 1 year
Commercial paper
Call – over night
Notice money – >1 to 15 days mainly among banks
Term money – maturity 15 days & up to 1 year
Issue of G-Sec trough auction
Securities are issued through auction (by RBI) either on price or yield basis.
Where the issue is price basis, coupon is predetermined and bidders quote price per Re 100 face value of the security.
Where the issue is yield basis, coupon of the security is decided in the auction.
On the basis of bids received, RBI detemines the cut off price or yield.
Allotment – Uniform price (Dutch auction) or Differential (French auction )
Non competitive bidding (RBI guidelines)
Introduced from Dec,2001.
Eligibility: Participation on a non-competitive basis in the auctions of dated GOI securities will be open to investors who satisfy the following:
1. do not maintain current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of India.
Exceptions: Regional Rural Banks (RRBs) and Cooperative Banks shall be covered under this Scheme in view of their statutory obligations.
2. make a single bid for an amount not more than Rs. two crore (face value) per auction
3. submit their bid indirectly through any one bank or PD offering this scheme.
Exceptions: Regional Rural Banks (RRBs) and Cooperative Banks that maintain SGL account and current account with the Reserve Bank of India shall be eligible to submit their non competitive bids directly.
Coverage: Subject to the conditions mentioned above, participation on "non-competitive" basis is open to any person including firms, companies, corporate bodies, institutions, provident funds, trusts, and any other entity as may be prescribed by RBI. The minimum amount for bidding will be Rs.10,000 (face value) and thereafter in multiples in Rs.10,000 as hitherto for dated stocks.
Allotment under the non-competitive segment to the bank or PD will be at the weighted average rate of yield/price that will emerge in the auction on the basis of the competitive bidding. The securities will be issued to the bank or PD against payment on the date of issue irrespective of whether the bank or PD has received payment from their clients.
Non competitive bidding (RBI Guidelines)
In case the aggregate amount of bid is more than the reserved amount (5% of notified amount), pro rata allotment would be made. In case of partial allotments, it will be the responsibility of the bank or PD to appropriately allocate securities to their clients in a transparent manner.
In case the aggregate amount of bids is less than the reserved amount, the shortfall will be taken to competitive portion.
Security would be issued only in SGL form by RBI. RBI would credit either the main SGL account or the CSGL account of the bank or PD as indicated by them. The facility for affording credit to the main SGL account is for the sole purpose of servicing investors who are not their constituents. Therefore, the bank or PD would have to indicate clearly at the time of tendering the non-competitive bids the amounts (face value) to be credited to their SGL account and the CSGL account. Delivery in physical form from the main SGL account is permissible at the instance of the investor subsequently.
It will be the responsibility of the bank or the PD to pass on the securities to their clients. Except in extraordinary circumstances, the transfer of securities to the clients shall be completed within five working days from the date of issue.
Liquidity Adjustment facility
Collateralized Lending Facility – for Banks & PDs
Purpose- to meet day to day liquidity mismatches in the system
REPOS & Reverse REPOs through auctions by RBI
REPO – liquidity is pumped in to the system and vice versa for reverse REPO. E.g. RBI lends money to market.
RREPO – RBI borrows from the market.
Tenor – 1 to14 days
Bench mark for short term money market rates
Liquidity Adjustment facility
Conducted on daily basis (Monday to Friday excepting holidays)
Rate of interest – fixed.
Pricing of securities will be at face value.
Minimum bid size Re 5 cr
Participants- Sch.commercial banks,PDs, having current and SGL with RBI.
Eligible securities – SLR securities of GOI.
Membership
Why CBLO ?
The drawback, of course, in the `Repos' is that there is no flexibility, as the obligations can be squared up only on the due date.
Even if the borrower's liquidity position improves, he cannot `prepay'.
If the lender's position dries up and forces him to call back the money, he cannot call back his lending.
CORPORATE DEBT
In vogue since 1980 and interest rates regulated
Regulator – SEBI – SE traded debt
RBI – OTC traded debt
Different structures –Debentures, NCD, CP,Deep discount bonds,secured promissory notes etc
Mostly private placement
Corporate debt – SEBI guidelines
The issue of debt securities having maturity period of more than 365 days by listed companies (i.e. which have any of their securities, either equity or debt, offered through an offer document, and listed on a recognized stock exchange and also includes Public Sector Undertakings whose securities are listed on a recognized stock exchange) on private placement basis must comply with the conditions prescribed by SEBI from time to time for getting them listed on the stock exchanges.
Further, unlisted companies/statutory corporations/other entities, if they so desire, may get their privately placed debt securities listed on the stock exchanges, by complying with the relevant conditions. Briefly, these conditions are
Corporate debt – SEBI guidelines
Compliance with disclosure requirements under Chapter VI of the SEBI (Disclosure and Investor Protection) Guidelines, 2000, Listing Agreement with the exchanges and provisions of the Companies Act.
Such disclosures may be made through the web site of the stock exchanges where the debt securities are sought to be listed if the privately placed debt securities are issued in the standard denomination of Re. 10 lakhs.
The company shall sign a separate listing agreement with the exchange in respect of debt securities.
The debt securities shall carry a credit rating from a Credit Rating Agency registered with SEBI.
Corporate debt – SEBI guidelines
The company shall appoint a debenture trustee registered with SEBI in respect of the issue of the debt securities.
The debt securities shall be issued and traded in Demat form.
All trades with the exception of spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange.
Why corporate market is not growing?
In local markets, dealers call it dead market. Why?
Average annual issuance Re 70,000 cr and daily volumes is around Re 100 cr.predominantly through private placement.
Institutions appetite especially banks is low. Lending to corporate attracts lower riks provisions unlike investing in bonds where the bank face the risk of taking hit when bonds yield rise.
Lower rated issuers find it difficult to play ie in SE due to stringent listing norms
Lack of exit route due to liquidity since there is no active market for trading.
Banks lend at attractive sub PLR rates.
Regulatory arbitrage - Raising a loan in over seas is lot easier than in domestic market.
What is the need for corporate debt market?
Corproates need diversified funding sources.
Entities like provident fund and insurance funds to diversify for risk management and returns
Banks do not all the money to meet corporate demand.
No comments:
Post a Comment