INTRODUCTION

The debt market is one of the most critical of the financial system of any economy
and acts as the fulcrum of a modern financial system. The debt market in most
developed countries is many times bigger than the other financial markets. Including
the equity market. The US bond market is more than USD 35 trillion in size with a
turnover exceeding 500 billion daily, representing the largest securities market in the
world The size of the world bonds market is close to USD 47 trillion which is nearly
equivalent to the total GDP of all the countries in the world.
The total size of the Indian debt market is currently estimated to be in the range of
USD 150 billion to 200 billion. India’s debt market accounts for approximately 30 per
cent of its GDP. The Indian bond market, measured by the estimated value of the
bond outstanding, is next only to the Japanese and Korean bond markets in Asia. The
Indian debt market in terms of volume.is larger than the equity market. In terms of the
daily settled deals, the debt and the forex markets currently (2008-09) command a
volume of Rs.1,40,000 crore against a meagre Rs. 20,000 crore in the equity markets
(including equity derivatives).
In the post-reforms era, a fairly well- segmented debt market has emerged comprising
the following
 Private corporate debt market
 Public sector undertaking bond market
 Government securities market
The government securities market accounts for more than 90 per cent of the turnover
in the debt market. It constitutes the principal segment of the debt market.

The debt market is a market where fixed income securities of various types and
features are issued and traded

History of the Indian Debt Market

The Indian debt market has traditionally been a wholesale market with participation
restricted to a few institutional players__ mainly blanks. Banks were the major
participants in the government securities market due to statutory requirements. The
turnover in the debt market too was quite low at a few hundred crores till the early
1190s.The debt market was fairly underdeveloped due to the administered interest rate
regime and due the availability of investment avenues which gave a higher rate of
return to investors.
In the early 1990s, the government needed a large amount of money for investment in
development and infrastructure projects .the government realized the need of a
vibrant6 efficient, and healthy debt market and undertook measures. The reserve bank
put in substantial efforts to develop the government securities market but market have
not yet fully developed in terms of volume and liquidity.
The debt market plays a key role in the 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 both short-term and long term objectives, and pricing of
non-government securities in financial markets.
It is the debt market which can provided returns commensurate to the risk, a variety of
instruments to match the risk and liquidity preference of investors, greater safety, and
lower volatility. Hence, the debt market has a lot of potential for growth in the future.
The debt market is critical to the development of a developing country like Indian
which requires a large amount of capital for achieving industrial and infrastructural
growth.
Regulation of the debt market the RBI regulated the government securities market and
money market while the corporate debt market comes under the purview of the
Securities Exchange and board of India (SEBI).
In order to promote an orderly development of the market, the government issued a
notification on March2, 2000,delineating the areas of responsibility between the
Reserve bank and the SEBI. The contracts for sale and purchase of government
securities, gold related securities money market securities and securities shall be from
these securities, and ready forward contracts in debt securities shall be regulated by
the RBI. Such contracts, if executed on the stock exchanges shall, however. Be
regulated by SEBI in a manner that is consistent with the guidelines issued by the
RBI.

Do you know the impact of the debt market on the economy ?

 Opportunity for investors to diversify their investment portfolio. • Higher liquidity
and control over credit. • Better corporate governance.
 Improved transparency because of stringent disclosure norms and auditing
requirements.
 Less risk compared to the equity markets, encouraging low-risk investments. This
leads to inflow of funds in the economy.
 funds for Increased implementation of government development plans. The
government can raise funds at lower costs by issuing government securities

The major reforms that took place in the 1990’s ?

 Introduction of the auction system for sale of dated government securities in June
1992.
 The RBI moved to computerize the SGL and implement a form of a ‘delivery versus
payment’ (DVP) system.
  Innovative products in form of Zero Coupon Bonds and Capital Indexed Bonds (Ex.
Inflation Linked) were issued.
 The RBI setup “trade for trade” regime. All forms of netting were prohibited.
 Wholesale Debt Market (WDM) segment was set up at NSE.
 Interest Income in G-Secs was exempted from the purview of TDO you know the
impact of the debt market on the economy?
 Opportunity for investors to diversify their investment portfolio.
 Higher liquidity and control over credit.
 Better corporate governance.
 Improved transparency because of stringent disclosure norms and auditing
requirements.
 Less risk compared to the equity markets, encouraging low-risk investments. This
leads to inflow of funds in the economy.
 Increased funds for implementation of government development plans. The
government can raise funds at lower costs by issuing government securities. The
major reforms that took place in the 1990’s
 Introduction of the auction system for sale of dated government securities in June
1992.
 The RBI moved to computerize the SGL and implement a form of a ‘delivery versus
payment’ (DVP) system.
 Innovative products in form of Zero Coupon Bonds and Capital Indexed Bonds (Ex.
Inflation Linked) were issued. • The RBI setup “trade for trade” regime. All forms of
netting were prohibited.
 Wholesale Debt Market (WDM) segment was set up at NSE. • Interest Income in G-
Secs was exempted from the purview of T

Link Between the Money Market and the Debt Market

The money market is a market dealing in short-term debt instruments (up to one
year).while the debt market is a market for long-term debt instruments (more than one
year). The money market supports the long-term debt market by increasing the
liquidity of securities. A developed money market is a prerequisite for the
development of a debt market.

Characteristics of the Debt Market

The characteristics of an efficient debt market are a competitive market structure. low
transaction costs, a strong and safe market infrastructure and a high level of
heterogeneity among market participants. An efficient debt market helps in reducing
the borrowing costs, of the government. Reducing the pressure on institutional
financing by providing greater funding avenues, enhancing mobilization of resources
by unlocking unproductive investment like gold, and developing a stable yield curve.

Following are some features of debt market?

-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.

DEFINATION:

The debt market is the market where debt instruments are traded. Debt
market refers to the financial market where investors buy and sell debt
securities, mostly in the form of bonds. These markets are important source
of funds, especially in a developing economy like India. India debt market is
one of the largest in Asia.

Participants in Indian debt markets

Central Government

The Central and the State Government need money to manage their short term and long
term finances and fund budgetary deficits. Being the largest issuers in the Indian Debt
markets, they raise money by issuing bonds and T-bill of different maturities.

Reserve Bank of India (RBI)

As a banker to the government, the RBI has a key task of managing the borrowing
program of the Government of India. It has the Money market and the G-Secs market
under its purview. Apart from its regulatory role it also performs several other important
functions such as controlling inflation (by managing policy / interest rates in the country),
ensuring adequate credit at reasonable costs to various sectors of the economy,
managing the foreign exchange reserves of the country and ensuring a stable currency
environment.

SEBI

The SEBI acts as the regulator for the corporate debt market and the bond market
wherein the entities raise money from the public through public issue. The regulation
comprises of manner in which the money is raised and tries to ensure a fair play for the
retail investor. It forces the issuer to make the retail investor aware of the risks inherent in
the investment, through its disclosure norms. SEBI also regulates Mutual Funds and the
instruments in which these mutual funds can invest. Investment from Foreign Institutional
Investors (FIIs) also falls under the SEBI's scanner.
Primary Dealers (PDs)

Primary Dealers (PDs) are market intermediaries appointed by RBI who underwrite and
make market in government securities by providing two-way quotes, and have access to
the call and repo markets for funds.

Banks

Banks are the largest investors in the debt markets, particularly the government
securities market due to SLR requirements. They are also the main participants in the
call money and overnight markets. They issue CDs and bonds in the debt markets and
also arrange the CP issues of corporates.

The other participants in the Indian debt markets are…

 Financial Institutions
 Mutual Funds
 Provident & Pension Funds
 Insurance Companies
 Corporates

While financial institutions and corporates issue short and long term fixed income
instruments to meet their financial requirements. Insurance companies and Mutual Funds
along with Provident & Pension Funds are also the other large investors in the Indian
debt markets who invest significant amount mobilized from their investors.
The Advantages and Disadvantages of Debt Market

Advantages
The biggest advantage of investing in Indian debt market is its assured returns. The returns that the
market offer is almost risk-free (though there is always certain amount of risks, however the trend
says that return is almost assured). Safer are the government securities. On the other hand, there
are certain amounts of risks in the corporate, FI and PSU debt instruments. However, investors can
take help from the credit rating agencies which rate those debt instruments. The interest in the
instruments may vary depending upon the ratings.

Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans to
the investors against government securities.

Disadvantages
As there are several advantages of investing in India debt market, there are certain disadvantages
as well. As the returns here are risk free, those are not as high as the equities market at the same
time. So, at one hand you are getting assured returns, but on the other hand, you are getting less
return at the same time.

Retail participation is also very less here, though increased recently. There are also some issues of
liquidity and price discovery as the retail debt market is not yet quite well developed.

Types of Instruments Traded in the Debt Market

1. Government Securities –
 o It is the Reserve Bank of India that issues Government Securities or G-
Secs on behalf of the Government of India.
o These securities have a maturity period of 1 to 30 years. G-Secs offer
fixed interest rate, where interests are payable semi-annually.
o For shorter term, there are Treasury Bills or T-Bills, which are issued by
the RBI for 91 days, 182 days and 364 days.

2. Corporate Bonds –
o These bonds come from PSUs and private corporations and are offered
for an extensive range of tenures up to 15 years.
o Comparing to Government Securities , corporate bonds carry higher
risks, which depend upon the corporation, the industry where the
corporation is currently operating, the current market conditions, and
the rating of the corporation

3. Certificate if Deposits
o Certificate of Deposits (CDs), which usually offer higher returns than
Bank term deposits, are issued in Demat form
o Banks can offer CDs which have maturity between 7 days and 1 year.
o CDs from financial institutions have maturity between 1 and 3 years

4. Commercial Paper
o There are short term securities with maturity of 7 to 365 days.

Structured Debt –

o Structured debt is some type of debt instrument that the lender has
created and adapted to fit the needs and circumstances of the borrower
.
o A debt package of this type usually includes one or more incentives that
encourage the debtor to do business with the lender, rather than
seeking to develop a working relationship with other lenders.
o While the overall structure of the debt is adapted to the needs of the
borrower, the terms also benefit the lender in the long term.
o The main goal of structured debt is to create a debt situation that
provides the debtor with as many benefits as possible, while also
keeping the overall debt load as low as possible
o At the same time, the lender receives an equitable return for the
structured debt arrangement

The different types of instruments traded in debt market can be classified into
following segments:

Types Issuers Instruments

Central Government 1. Zero Coupon bonds
Government
: 2. Coupon bearing bonds
Securities
State Government : 3. Treasury bills

Government agencies
, statutory bodies ,
Public sectors bonds
public sector
undertakings
Corporates :
Bank :
Private sector bonds
Financial Institutions
: 2. Debentures
4. Floating rate bonds
5. STRIPs
1. Coupon bearing bond
1. Debentures
2. Government guaranteed
bonds
3. Commercial papers
4. PSU bonds
1. Debentures
2. Commercial papers
3. Fixed floating rate
4. Zero coupon bonds
5. Inter-corporate deposits
1. Certificate of debentures
3. Bonds
1. Certificate of deposits
2. Bonds

Dematerialization of Debt Securities

Dematerialized trading was earlier restricted only to the equity shares and units of
MFs. With the passage of Finance Act 2000, stamp duty payable on transfer of debt
instruments was waived, in case of the transfer taking place in the demat mode. In
order to promote dematerialization, RBI specified that repos on PSU bonds would be
permitted only in demat form. From June 30, 2001, FIs, PDs and SDs have been
permitted to make fresh investments and hold CP only in dematerialized form. The
outstanding investments in scrip had to be converted into demat by October 2001.
Since June 30, 2002, banks and FIs are required to issue CDs only in demat form.
With these developments, NSDL and CDSL have admitted debt instruments such as
debentures, bonds, CPs, CDs etc., irrespective of whether these debt instruments are
listed, unlisted or privately placed.
Holding and trading in dematerialized form provides a number of benefits to the
investors. As securities in demat form can be held and transferred in any
denomination, it is possible for the participant to sell securities to corporate clients,
provident funds, trusts in smaller lots. This was not possible in the physical
environment, as splitting of securities involved considerable amount of time. In the
demat form, it is possible for the participant to STRIP these securities and create a
retail market for the same.
With effect from October 31, 2001, banks, financial institutions, and primary dealers
can make fresh investment in and hold bonds and debentures, privately placed or
otherwise, only in demat form.

Primary and Secondary Segment of Debt Market

In the primary market, new debt issues are floated either through prospectus,
rights or privates placement. The private placement market is more attractive
because the cost of raising a loan is only half of that of loans from the
market. Under the current guidelines, corporates are required to report details
of resources raised through private placements to the stock exchanges-BSE
and NSE. This was aimed at giving investors a good idea of how the
companies propose to use these funds and also the risk return allowed. In
mid-2006, the US private placement market, raising 300 million through a 10
– 12 year loan. More Indian companies are likely to tap this market.

The debt instruments are traded on the OTCEI, BSE, and WDM segment of
NSE. BSE is the first exchange in the country to provide an electronic trading
platform for corporate and other non-government debt securities rough the
order matching system. The clearing and settlement of the trades is
undertaken through the clearing house of the exchange.

At present, bond deals in India are struck over phones, following which the
players report the transactions on NDS. The negotiated dealing system NDS is
used predominantly as a reporting

Platform. The RBI wants the price discovery. Order matching and deals to
take place on the NDS.

The National Stock Exchange of India Ltd, se up a separate segment for

trading in debt securities known as the Wholesale Debt Market segment of
the exchange. In fact, NSE commenced operations in June 1994 with the
WDM segment of the exchange. Prior to he commencement of trading in the
WDM segment of NSE, the only trading mechanism available in debt market
was the telephone. The NSE provided, for the first time in the country, an on-
line automated screen based system known as NEAT (National Exchange for
Automated Trading) across a wide range of debt instruments. This system is
an order driven system which matches the best buy and sell orders on a price
time priority and simultaneously protects the identity of the buyer and the
seller. Trading under this system leads to a risk free, efficient price
mechanism and transparency.
Initially, government securities, T-bills, and bonds issued by public sector
undertakings were made available for trading. Now his range has been
widened to include non-traditional instruments such as floating rate bonds,
zero coupon bonds, index bonds, commercial a paper, certificate of deposit,
corporate debentures state government loans, SLR and non-SLR bonds issued
by financial institutions and local bodies, units of mutual funds and securitized
debt.

Types of Entitles on the NSE- WDM Segment

 BROKERS
 Trading members
 Participants

On the NSE-WDM segment, brokers are involved merely in order execution for
their clients only. Besides brokers there are two types of entities in this
segment: (1) trading members and (2) participants. Trading membership is
open to corporates, subsidiaries of banks and financial institutions satellite
dealers and primary dealers who have a minimum net worth of Rs 2 crore.
They can place orders and execute Trades on the system. Participants take
direct settlement responsibility for trades executed on the exchange on their
behalf by an NSE Trading member. Participants comprise of large investors
such as banks, primary dealers and institutions who are not members of NSE
and therefore cannot directly transact but effect transactions through the
NSE-WDM segment.

Types of Trades on the NSE- WDM segment

 Outright
 Repos

The government security trade on the WDM segment could be outright trade
or repo transaction with a flexibility for varying dats of settlement which. in
Turn, is to be clearly specified. However. For non-government securities only
outright transactions are allowed. ALL outright secondary market transactions
in government securities are settled on T +1 basis form May 24, 2005. In
case of repo transactions in government securities, the first leg can be settled
either on T+0 basis or T + 1 basis. All outright transactions of non-
government securities can be settled up to T + 2. All trade in government
securities is reported to RBI- SGL through the Negotiated Dealing System
(NDS) or the order matching of RBI. The clearing Corporation of India Limited
(CCIL) provides settlement guarantee for transactions in government
securities including repos. The trader are settled on a net basis through the
DVP-III system while the trades for non- government securities basis directly
between participants on delivery versus payment basis. The settlement cycle
government securities was standardized to T + 1 FROM May 11, 2005.
THE PRIVATE CORPORATE DEBT MARKET
The private corporate sector needs large amounts of long-term funds for
expansion. Modernization, restructuring operations and mergers/acquisitions.
It can raise funds through equity and debt. Equity is risk capital and there are
limit to which a corporate can raise funds through equity shares. Corporates
need to diversify funding sources. Hence, they can raise capital either through
long-term borrowing from banks and financial institutions or by issuing
debentures/bonds in the debt market. Banks do lend long-term loans but they
do not have the capacity nor the appetite for such long-term loans. Moreover,
lending a large number of long-term loans would create asset-liability
mismatch problem for the banks as banks accept short-term deposits. But,
banks would be willing to invest in 10 to 20 years bonds issued by corporates
if they have an exit route. i. e, they are in a the corporate bond market. The
corporate debt market is a market wherein debt securities of corporates are
issued and traded therein. A well-developed corporate bond market enables
corporates to raise long-term capital for long-gestation projects/acquisitions at
a lower cost and thereby aid in economic growth. The corporate debt market
supplements the banking system. It enables a better asset- liability match for
both corporates and banks. Moreover, rating of debt securities by credit rating
agencies helps in increasing investor confidence, which, in turn. Enables
investors to hold a diversified portfolio consisting of both debt and equity
instruments. As investors such as mutual funds, banks, and insurance
companies need a steady flow of income to cater to the varying needs of their
customers, they are major investors in this market. An active corporate debt
market fosters market discipline and nurtures credit culture.
SEBI ( Issue and Listing of Debt Securities) regulation, 2008 define ‘debt
securities’ as non-convertible debt securities which create or acknowledge
indebtedness, and include debentures, bonds and such other securities of a
body corporate or any statutory body constituted by virtue of a legislation,
whether s non-convertible debt securities which create or acknowledge
constituting a charge on the assets of the body corporate or not, but excludes
bonds issued Government or such other bodies as may be specified by the
SEBI receipts and securitized debt instruments.

Significance of the Corporate Debt Market

 Aids in economic growth by providing long-term capital
 Supplements the banking system
 A stable source of finance