Professional Documents
Culture Documents
November 3, 2011
Contents
1. Growth of the India corporate bond market
2
2. Uses of corporate bonds for foreign investors 3
3. Limits for Foreign Investors in Corporate Bonds 4
4. Infrastructure corporate bonds
6
5. Corporate debt market: Instruments & Issuers 7
6. Corporate debt market: Ratings and Maturity 11
7. Corporate debt market:: Investors
13
8. Corporate debt market:: Market dynamics
15
9. New Developments
15
Appendices
In this primer, we look at the India corporate bond market and answer three
questions. First, we answer why and how foreign investors should get involved. Second, we list the available instruments and highlight sizes, liquidity, ratings etc. Finally, we explain the market infrastructure and the main
onshore players
Abhishek PandaAC
In bp
1y
5y
10y
550
(91-22) 6157-3387
abhishek.x.panda@jpmorgan.com
J.P. Morgan Chase Bank Ltd., Mumbai
Nitin DiasAC
(44-20) 7325-4760
nitin.a.dias@jpmorgan.com
J.P. Morgan Chase Bank Ltd., London
450
350
250
150
50
-50
Jan-06
Oct-06
Jul-07
Apr-08
Jan-09
Oct-09
Jul-10
Apr-11
Source: Bloomberg
The certifying analyst(s) is indicated by the notation AC. See last page of the report for
analyst certification and important legal and regulatory disclosures.
www.morganmarkets.com
16
17
18
19
19
21
2%
3%
7%
9%
4%
2007
Source: SEBI
2008
2009
2010
2011 YTD
8,895
9000
8,535
8,338
8000
7,940
7000
Jun-10
Source: SEBI
Sep-10
Dec-10
Mar-11
4%
11%
7%
9%
1%
18%
1%
13%
21%
17%
11%
29%
45%
37%
60%
91%
88%
86%
86%
85%
80%
62%
54%
20%
44%
0%
0%
2008
Source: BIS, RBI, JPM
40%
66%
20%
80%
60%
40%
1,506
1,431
1,057
500
11%
80%
2,378
2,026
1000
India
2009
Government
Financial
2010
Corporate
Japan
UK
Germany
Government
Brazil
China
Financial
US
Corporate
February 2008
Listed corporate
bonds made
exempt from TDS
(Tax deducted at
source)
2007
February 2009
2008
Actual day count convention is made mandatory for new bond issues
2010
2009
October 2010
2011
AAA
AA
11
7
Jan-07 Oct-07
Jul-08
Source: Bloomberg
Apr-09
Jan-10
Oct-10
Jul-11
1y
5y
10y
450
350
250
150
50
-50
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Source: Bloomberg
2006-11
Avg
Yield
1y AAA PSU
Govt 1y
5y AAA PSU
Govt 5y
10y AAA PSU
Govy 10y
8.3
6.7
9.0
7.5
9.1
7.7
Average
Volatility
credit
of yield
spread
1.6
1.67
1.4
0.8
1.42
0.7
0.7
1.43
0.6
53
Max
spread
Min
spread
5.29
-0.21
4.07
0.57
4.11
0.57
48
43
Source: Bloomberg
2c. Limited opportunities for relative value of local vs. USDdenominated corporate bonds
While we could evaluate relative value between INR and
USD bonds, comparison with hard currency bonds is
rendered difficult as there is limited availability of shortdated dollar bonds and limited liquidity in dollar bonds
issued by Indian companies. We highlight that the 5-year
USD bond issued by REC was trading at an indicative yield
of 4.4% in November 2011. In comparison, the FX hedged
yield of buying a 5-year and 1-year AAA-rated local bonds
issued by a PSU are 4.1% and 6.2%, respectively.
38
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Source: Bloomberg
1200
1000
800
600
400
200
0
Jan-07 Oct-07 Jul-08
Source: Bloomberg, JPM
Apr-09
Jan-10
Oct-10
Jul-11
The quota for government bonds for FIIs has been almost
fully utilized. As of September 30, 2011, only INR33bn (i.e.
US$ 700mm) or 6% of the existing government quota was still
available.
Description
Government debt
(unrestricted)
Government debt
(long-term)
Corporate debt
(unrestricted)
Infrastructure (debt
mutual funds)
Infrastructure (lock
in 1y)
Infrastructure (lock
in 3y)
Total
Amount
Utilization* (%) Availability
(USD bn)
5
98
Through auctions
87
Through auctions
15
94
Through auctions
3
5
On tap
8
Through auctions
17
On tap
50
Growth
(%)
95
219
79
56
60
103
54
60
89
250
104
Issuer Bond
REC
PFC
PGC
IRFC
9.48% 2021
9.61% 2021
9.35% 2021
9.57% 2021
Bloomberg
Ticker
EI7715903
EI7212059
EI7970193
EI6959825
Issue
date
08/10/11
06/29/11
08/29/11
05/31/11
Coupon Maturity
9.48%
9.61%
9.35%
9.57%
08/10/21
06/29/21
08/29/21
05/31/21
Indic
Yield*
9.70%
9.69%
9.61%
9.57%
Infrastructure
28%
Rural Electrification
Corporation (RECL)
Issuer
Description
Govt. Ownership*
Free float
Income before XO (INR mn)
Net Debt (INR mn)
Local rating
Power Finance
Power Grid Corporation
Corporation (POWFIN) (PWGRIN)
Financial Institution
Finances rural
which lends to power
electrification projects
and related sectors
67%
74%
33%
26%
25849
26471
686903
853484
AAA
AAA
Power transmission
company
69%
31%
26719
368017
AAA
Indian Railway
Finance Corporation
(INRCIN)
Finances
development needs
of Indian railways
100%
0%
4852
381244
AAA
As of March 2011
Source: Bloomberg, REC, PFC, Power Grid, IRFC
Issuers
Banks
Subordinated bonds to
raise capital
Instruments
Certificates of deposits
Short-dated discounted
obligation issued by banks
Investors
Mutual funds
Perpetual bonds
Corporates
Working capital
management & long term
capital needs
PSUs
Largest category of
borrowers
Commercial papers
Short-dated discounted
obligation issued by
corporates
Corporate bonds
Provident funds
Mandatory investment in corporate
bonds
Banks
MTM investors under non-SLR
FIIs
New breed of investors (limits apply)
Corporates
Emerging class of investors
250
200
150
100
50
0
Jan-05 Jan-06
Source: RBI
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
800
600
400
200
0
Jan-05 Jan-06
Source: RBI
CPs
6%
Jan-08
Jan-09
Jan-10
Jan-11
Corporate
bonds
64%
Jan-07
3m Corporate CP yield
Base Rate HDFC bank
11
10
9
8
7
CDs
30%
Source: NSDL, SEBI, RBI
6
Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11
Source: Bloomberg
Jul-11
Sep-11
500
400
300
200
100
0
Jan-05 Jan-06
Source: RBI
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
9
8
4000
CD outstanding RHS
CD % of bank deposits
3000
5
4
2000
3
2
1000
1
0
Jan-05 Jan-06
Source: RBI
0
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
%
14
%
1y CD yield
Credit/Deposit ratio
76
12
74
72
10
70
68
66
64
78
62
4
Mar-07
Dec-07
Sep-08
Source: Bloomberg, RBI
60
Jun-09
Mar-10
Dec-10
Banks
25%
PSU
44%
Corporate
15%
NBFC
16%
Source: NSDL
50
40
42
14
12
18
20
44
45
47
60%
11
2
40%
20%
37
22
16
21
28
18
27
13
0%
2007
17
27
2008
2009
Banks
Source: NSDL
23
2010
2011
Corporate
NBFC
Total
PSU
Chart 21: Breakup of total debt financed across bank credit & bonds
China
85%
15%
India
84%
16%
UK
72%
28%
Japan
71%
29%
Brazil
66%
Germany
The total bank credit outstanding is nearly five times the size
of total local currency non-sovereign bond market. This is
considerably lower than other developed and EM countries.
52%
Korea
US
48%
45%
55%
8%
0%
92%
20%
10
34%
40%
60%
Bank Loans
80%
100%
Corporate bonds
Total
630
469
454
345
313
298
298
297
282
270
3,655
Source: NSDL
Agency
Majority shareholders
% share
CARE
CRISIL
ICRA
Fitch (India)
Brickwork Ratings
58%
52%
29%
100%
_
Listed /
Unlisted
Listed
Listed
Listed
Unlisted
Unlisted
Ratings
Local corporate bonds are rated by many domestic agencies,
of which the main ones are listed in table 7.
Nearly 70% of total outstanding bonds in India are locally
AAA-rated, the highest grade, and close to 100% of all
bonds outstanding qualify as investment grade (BBB- or
above). In terms of issuance, 73% of total bonds issued in
the last five years have been rated AAA.
The larger concentration of AAA rated paper and nearabsence of speculative-grade paper can be explained by the
investment regulations of the major investors. Insurance
companies cannot buy securities whose ratings are below
A+ as per investment regulations. Provident funds are only
BBB
1%
BBB+
1%
A A- A+
2% 1% 3%
AA
10%
AA3%
AA+
10%
AAA
69%
Source: NSDL
11
Perpetual
3%
15y or above
18%
1y-2y
5%
3y-5y
25%
6y-9y
8%
10y-14y
41%
Source: NSDL, data based on actual maturity (put-call option data ignored)
2
16
4
26
80%
42
60%
17
21
33
30
37
5
40%
12
31
21
2007
Source: NSDL
12
37
1y-2y
2008
3y-5y
38
1
2009
6y-9y
29
11
2010
10y-14y
3
19
36
3
7
10
20%
0%
3
13
30
30
14
2011
15y or above
5
Total
Perpetual
951
856
790
640
619
700
551 542
600
500
400
300 206
200
100
0
2011
645
597
404
303
298
204190
129
10 3 2
2014
Source: NSDL
2017
2020
2023
2026
48 40
2029
3 3 2 4
2032
2035
Gilt
0%
Others
2%
Equity
26%
Debt
47%
% of total assets
Category
Banks
Life Insurance
Non-life Insurance
Provident funds
Central
Government
securities
24*
25**
20
35**
Other
Cash
Govt
Reserve
securities Ratio
6
25**
20
15**
Other Approved
Priority
Infrastructure Investment grade
(includes Corporate Sector % of
& Housing
PSU bonds
bonds, equities, FDs) total credit
40
15**
35
60***
30**
10***
13
INR bn
Premia in
2009-10
Life Insurance Term plan 1499
Life Insurance Unit-linked 1155
Non-life Insurance
358
Total
3013
Category
Source: IRDA
14
Year on Year
growth
14.3%
27.4%
14.0%
19.0%
Share of total
industry
50%
38%
12%
Corporate
bonds
2%
CPs
0%
Credit
63%
Source: RBI
Shares
1%
Mutual funds
1%
Govt
Securities
27%
Cash +
Reserves
6%
9. New developments
Proposed introduction of CDS
The Reserve Bank of India (RBI) has proposed that single
name CDS contracts on corporate bonds be introduced from
November 2011.
The proposal categorizes market participants in the CDS
market as users (Commercial Banks, PDs, NBFCs, Mutual
Funds, Insurance Companies, Housing Finance Companies,
Provident Funds, Listed Corporates and Foreign
Institutional Investors (FIIs)) and market-makers
(Commercial banks, PDs and some NBFCs). The proposals
state that users can only buy CDS protection and they must
own the underlying bond to buy protection. The users
cannot buy protection for an amount greater than the face
value of underlying bonds they own and for tenors greater
than the tenor of the underlying bond. The market-makers
can buy or sell protection and may take naked CDS
positions.
The CDS contracts are only permitted for listed corporate
bonds of original maturity greater than one year. The
guidelines also permit CDS contracts to be written on
unlisted but rated bonds of infrastructure companies and
unlisted or unrated bonds of SPVs set up by infrastructure
companies. The CDS contracts cannot be written on
Commercial Papers (CPs), Certificate of Deposits (CDs) and
Non-Convertible Debentures (NCDs) with original maturity
of upto one year. Obligations such as asset-backed
securities/mortgage-backed securities, convertible bonds
and bonds with call/put options are not permitted as
Chart 28: Weekly secondary market volumes of Corporate bonds on
NSE
INR bn
35
30
25
20
15
10
5
0
Aug-04
Nov-05
Feb-07
May-08
Aug-09
Nov-10
Source: RBI
15
16
Dividends
%
15
20
15
15
15
15
15
25
10
15
20
10
20
20
15
10
10
20
15
15
10
20
15
10
10
15
20
10
20
20
15
15
15
10
10
15
10
15
15
12.5
20
15
15
10
20
Interest
%
15
20
10
10
15
15
15
15
10
10
15
10
15
20
10
15
10
20
15
10
10
15
15
10
10
15
15
10
20
20
10
20
15
10
10
15
10
10
15
10
15
15
10
10
15
Royalties
%
15
30
10
15
20
15
20
15
10
15
30
10
20
30
20
10/20
10
30
30
15
10
20
20
20
10
20
15
15
30
30
15
15
15
10
10
15
10
10
30
15
15
22.5
10
10
22.5
17
Country
Dividends Interest
%
%
Russian Federation
10
10
Singapore
15
15
South Africa
10
10
Spain
15
15
Sri Lanka
15
10
Sweden
10
10
Switzerland
15
15
Syria
0
7.5
Tanzania
15
12.5
Thailand
20
20
Trinidad & Tobago
10
10
Turkey
15
15
Turkmenistan
10
10
UAE
15
12.5
United Kingdom
15
15
United States
20
15
Uzbekistan
15
15
Vietnam
10
10
Zambia
15
10
Non treaty countries
0
20
*Source: Ministry of Finance
Please verify with tax professionals
Royalties
%
10
15
10
20
10
10
20
10
20
15
10
15
10
10
15
15
15
10
10
20
18
CP Commercial Paper
CRR Cash Reserve Ratio
DFI Development Financial Institution
19
20
In years
0.5
10
15
AAA
80
98
94
98
100
87
86
77
77
77
92
68
AA+
92
109
105
114
114
100
98
89
89
89
104
83
AA
106
123
121
129
130
118
118
110
108
106
119
100
In bp
0.5
10
15
AAA
73
98
94
85
87
88
87
85
85
85
85
68
AA+
85
109
105
100
101
101
99
97
97
97
97
81
AA
97
123
121
115
117
119
119
118
116
114
112
95
In years
Banks
In years
NBFCs
In bp
0.5
10
15
AAA
100
130
138
142
140
124
124
116
117
117
132
103
AA+
120
149
160
177
179
167
169
162
158
154
165
143
AA
144
169
175
195
204
198
199
192
188
184
194
161
In years
Corporates
In bp
0.5
10
15
AAA
89
115
112
118
118
103
103
96
95
95
109
88
AA+
104
130
132
140
142
130
132
126
125
123
137
116
AA
124
155
157
165
167
155
157
151
150
148
162
141
*Source: FIMMDA
21
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