interactive measurement of hierarchically related consumers
TRANSCRIPT
Indian Debt Capital Market
November 2011
Disclaimer
The information contained herein is proprietary and the
property of Venator Search Partners and Piper Serica Advisors
Pvt. Ltd. The research on Indian Debt Capital Market is
conducted for Venator Search Partners. The information
contained herein is based on primary and secondary sources
and we do not vouch for its correctness. The recipient should
use its own judgment before using this information.
Structure of Indian Debt MarketRegulators
SEBI, RBI, DCA
Market Segment Issuers Instruments Investors
The Sovereign
Issuer
Central Govt.
State Govt.
GOI dated securities,
Treasury Bills,
State Govt. securities
Index bonds, zero
coupon bonds
RBI
DFIs
The Public
Sector
Govt. Agencies &
Stat. Bodies
Comm. Banks
/DFIs
Govt. Guaranteed
Bonds/ Debentures
Banks
Pension Funds
PSUsPSU Bonds,
Debentures, CP
CD, Debentures,
Bonds
FIIs
Corporates
The Private
Sector
Corporates
Pvt. Banks
Bonds, Debentures,
Commercial Paper
(CP), Floating
Rate Notes FCDs,
PCDs, ZCBs
Bonds, Debentures, CPs
and CDs
Individuals
Provident Funds
Insurance
Companies, Trusts
&Mutual Funds
Indian Debt Capital Market – International
Comparison
22%
34%
48% 49%54%
68%
76%
93%
108%
121%
140%
177%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Chile India UK China Singapore Brazil Germany Malaysia France Spain Italy USA
GD
P (
% )
India's DCM Market as % of GDP
Government Securities Market…
India’s Government Bond Market vs. International Bond Markets
Source: RBI
7%
30% 31% 32% 32%36%
39% 40%
47% 49%51%
80%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Chile India Spain China UK Malaysia Singapore Germany USA Brazil France Italy
% o
f G
DP
Public Bond Market Capitalization as % of GDP
Indian Government Bond Markets is not much out of the line with
the rest of the world.
…Government Securities Market
Investor Base in Government Securities
Source: RBI
Commercial banks
38%
Insurance Companies
22%
RBI
12%
Bank - Primary Dealers
9%
Provident Funds
7%
Co-operative Banks
3%
Corporates
3%
FII's
1%
Mutual Funds
1%
Fiancial Institutions
0%
Non-Bank Primary
Dealers
0%Others
4%
Corporate Bond Market…
India’s Corporate Bond Market vs. International Bond Markets
4%
15% 16% 16% 16% 19%
36%
57% 58% 59%
89%
130%
0%
20%
40%
60%
80%
100%
120%
140%
GD
P (
%)
Private Bond Market Capitalization as % of GDP
Source: RBI
…Corporate Bond Market…
Share of Corporate Bonds in Total Debt
13 1312
1112
11
8 8 87
67
5 56
10
15
17
1 12 2
34
0
2
4
6
8
10
12
14
16
18
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(%)
United States Japan China India
Post Crisis the share of Corporate Debt has been declining in the developed countries like
U.S. and Japan where the economies are being supported by additional government
borrowing. On the other hand, its share in the EMEs of China and India is gradually increasing
as more and more corporates approach the market and the market actually open up.
Source: RBI
…Corporate Bond Market…
Too few public issuances
- Private placement completely dominate the primary segment of the corporate
debt market
- High stamp duty (expensive public issuance process)
- Cumbersome TDS process
Resources raised in Debt Market (Rs. Cr)
YearPublic Issues
Private
PlacementTotal
2007-081603 118485 120088
2008-091500 173281 174781
2009-102500 212636 215136
2010-11 (upto Dec'10)2197 164210 166407
Source: SEBI
…Corporate Bond Market…
Trading dominated by the AAA rated securities, which are perceived to have the least probability of
default
Illiquidity
- No market maker
- Institutional investors typically to hold securities to maturity which results in
lack of exit options and result in NO LIQUIDITY
Share of Top 5 Ratings (%)
2008-09 2009-10 2010-11 2011-12 (upto June'11)
Rating Share Rating Share Rating Share Rating Share
AAA 78.15 AAA 72.06 AAA 63.69 AAA 76.16
AA+ 6.4 AA+ 6.09 AA+ 9.33 AA 4.35
AA 3.76 AAA(SO) 5.93 AA- 5.07 AA+ 3.96
A(so) 1.47 AA 2.72 AAA(so) 4.2 AA- 2.42
A-(so) 0.64 AAA(ind) Fitch 2.17 AA 2.37 AAA(so) 1.99
Unrated Securities 8.25 Unrated Securities 4.12 Unrated Securities 5.43 Unrated Securities 4.17
Source: FIMMDA, NSE, BSE
Key Growth Factors
Widen investor base
- Tap latent investors – growing pension sector
Innovative Product Structuring
IFRS Norms – Similar treatment to loans and bonds
Develop and enhance related derivatives product
- Credit Default Swap , Interest rate derivatives etc.
Reform in Stamp Duty & TDS process
- Standard Stamp duty rate across nation, and that the maximum payable should be capped
- Removal of cumbersome TDS on corporate bonds
…Corporate Bond Market…
…Corporate Bond Market… Less rigid Investment Mandate for Insurance Companies and
Pension Funds
- Controlled and phased relaxation for these institutions
Presence of retail investors in the market
- Essential for deepening of Bond market
Facilitating Liquidity in the market:
Active Market Making
Credible Credit Rating
Degree of Standardization with respect to bond covenants
Recent Developments
The 12th Plan aspires for a planned infrastructure expenditure of around $1 trillion - around
11% of GDP
- Government can only meet 50% funding requirement
- The 50% funding gap is expected to be met by developing Corporate Bond Market (Private
sector)
The Government is mulling tax incentives such as reduction in Securities Transaction Tax (STT)
and Stamp Duty, besides withdrawal of withholding tax, to help companies raise funds at
competitive rates.
Increased FII’s investment limit to invest in infra bonds
Government is set to take measures to improve liquidity to develop a vibrant Corporate bond
market to support growing Infra sector
IIFCL, IDFC & LIC have signed a MOU to undertake take-out financing of infrastructure projects
worth up to Rs. 300 billion
…Corporate Bond Market
Government Bond Market• Government has raised the investment limit for FIIs from US $5bn to US $10bn in government
securities
Corporate Bond Market
• Infrastructure Sector to play an catalyst for innovation and growth in Corporate Bond Market in India
• FIIs can invest $20bn in Indian Corporate Bond market (Non-Infra)
• Government has raised the investment limit for FIIs in long-term infra bonds from additional $5bn to
$25billion
• Government allowed Qualified Foreign Investors (QFIs) to subscribe to mutual fund debt schemes in
infrastructure sector, subject to a ceiling of $3 billion within the existing ceiling of $25 billion.
• $5 billion (lock in period 1 year) is carved out of the remaining $22 billion for FII investments in
Longterm infra bonds
• Remaining $17billion (3 years lock – in period) can be invested in long-term infra bonds which have an
initial maturity of five years or more at the time of issue and residual maturity of three years at the
time of first purchase by FIIs.
Key factors for FIIs to invest in India
Thank You