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Presented By
PROF. BHAVIN A. PATEL
(BAP)
 À
  
 

À
  
0
e Debt Market plays a very critical role for
any growing economy w
ic
need to employ
a large amount of capital and resources for
ac
ieving t
e desired industrial and financial
growt

0
e Indian debt market is today one of t
e
largest in Asia and includes securities issued
by t
e Government (Central & State
Governments), public sector undertakings,
ot
er government bodies, financial
institutions, banks and corporates
 DEB MARKE SIZE
0
e Indian debt markets is t
e largest
segment of t
e Indian financial markets
(Source RBI & CCIL)
0 utstanding issue size of Government
securities (Central and state) close to
Rs,474 billion (or Rs ,4,74 crore)
0 Secondary market turnover of around Rs
,0 billion (in t
e previous year 2007)
 DEB MARKE SIZE
0 INCREASED FRM $  BILLIN IN
200  $ 20 BILLIN IN 2007
0 Non-government sector expected to grow
to $ 7 BILLIN $ BY
20,ACCRDING  A GLDMAN
SACHS REPR
 À

À
‡ The Bond Market is the financial
market where debt securities or bonds
are traded.
‡ Those buying these bonds become the
creditors of the company.
‡ The most distinguishing feature of these
instruments is that the return is fixed i.e.
they are as close to being risk free as
possible, if not totally risk free
 


‡ The debt market in India can be divided

into two categories
1. The government securities market or the G-
Sec markets consisting of central
government and state government
securities (therefore loans being taken by
the central and state governments)
2. Bond market consisting of FI (financial
institutions) bonds, PSU (public sector units)
bonds and corporate bonds/debentures.
 Pr  
Pros Cons
´ The returns are risk ´ The returns are not
free. as high as securities
´ High liquidity. markets.
´ Loans can be easily ´ The retail debt
procured from market is not very
banks against govt. well developed
securities

  

‡ Dated Securities
‡ Zero Coupon Bonds
‡ Capital Indexed Bonds
‡ Fixed Income Instruments issued by
corporates
‡ T-Bills


‡ Treasury bills (T-bills) offer short-term
investment opportunities, generally up to
one year.
‡ At present, the Government of India issues
three types of treasury bills through auctions,
namely, 91-day, 182-day and 364-day.
‡ Treasury bills are available for a minimum
amount of Rs.25,000 and in multiples of Rs.
25,000. Treasury bills are issued at a discount
and are redeemed at par. Treasury bills are
also issued under the Market Stabilization
Scheme (MSS).
  
r 
‡ These instruments are of the face value of Rs
100, which the buyer has to pay upfront.
‡ The return is pre-decided. This is known as
the coupon rate or the interest rate. The
interest rate indicates the amount that will
be paid out by the government every year
till maturity. Time to maturity is fixed.
‡ When the security matures the face value
will be returned to the holder
 r  

‡ ZCBs are available at a discount to their
face value.
‡ There is no interest paid on these instruments
but on maturity the face value is redeemed
from the RBI
‡ The difference between the issue price
(discounted price) and face value is the
return on this security
   À



‡ Capital indexed bonds have interest rates
as fixed percentage over the wholesale
price index
‡ The purpose is to provide investors with an
effective hedge against inflation
‡ They are issued at face value. The coupon is
fixed as a percentage over the WPI
 d
À  r 

 rr 
‡ The companies issue debentures, which have a
face value and fixed coupon rate
‡ Debentures can be converted into shares
depending on the type of the instruments
‡ Those that cannot be converted are known as NCD
(non-convertible debentures).
‡ Some of the debentures can be partly converted to
stocks. These are known as PCDs (partly convertible
debentures).
‡ Those debentures that can be fully converted into
stocks are known as FCDs (fully convertible
debentures).
    

Ñ


The current yield calculates the
percentage return that the annual coupon
payment provides the investor. In other
words, this yield calculates what
percentage the actual coupon payment is
of the price the investor pays for the bond.

Current Yield= Coupon Rate U 100

Purchase Price
 


‡ Yield to Maturity-YTM is discount rate that

equates present value of the all the cash
inflows to the cost price of the government
security (market price), which is actually the
Internal Rate of Return of the government
security. The concept of Yield to Maturity
assumes that the future cash flows are
reinvested at the same rate at which the
original investment was made.
 


YTM = I+(F-M)/N
(F+M)/2

where
I = Annual interest Rate
F = Face value of bond
M = Market price of the bond
N = Number of years to maturity
 
0 

   

r
d
‡ Interest Rate Risk
The risk of a bond changing in value when interest rates
change. This affects all bonds regardless of credit
quality, but is more severe for longer maturity bonds.
‡ Reinvestment Risk
The risk that investors will be unable to reinvest the
coupon payments at the coupon rate. This is more
important for high coupon bonds.
‡ Default (Credit) Risk
The risk that the firm will go bankrupt and not make all payments
to
bondholders.
‡ Other Risks: Inflation, Liquidity
d r     

  r 
0 Monetary policy
0 Economic growt

0 Fiscal policy
0 Inflation
0 Attractiveness of debt market
   !r
‡ The Wholesale Debt Market (WDM) segment
of the Exchange commenced operations
on June 30, 1994. This provided the first
formal screen-based trading facility for the
debt market in the country.
‡ Provides trading facility G-secs, T-Bills, Bonds
issued by PSUs, commercial papers,
corporate debentures etc
 HLESALE DEB MARKE -
MAJR PLAYERS
0 BANKS
0 FI¶s
0 RBI
0 Primary Dealers
0 Insurance Companies
0 Provident Funds
0 MF¶s
0 Corporates
0 FII¶s
 YPES F RADE IN HE DM
  RIGH SALE R PRCHASE
2 REP RADE-Also known as Ready Forward rade,
trade w
ic
is intended to be reversed at a later point
in time at a rate w
ic
will include interest component
for t
e remaining period, one participant sells t
e
securities to t
e ot
er wit
an agreement to purc
ase
t
em back at a later date
0 Advantages:-
Facilitates creation of liquidity by permitting t
e seller
to avail a specific sum of money in lieu of interest
payment

Broken Period Concept

 G-SEC
0
e Government Securities market is t
e
oldest and t
e largest component of t
e
Indian debt market in terms of market
capitalization, outstanding securities and
trading volumes
0
e G-Secs market plays a vital role in t
e
Indian economy as it provides t
e benc
mark
for determining t
e level of interest rates in
t
e country t
roug
t
e yields on t
e
government securities w
ic
are referred to
as t
e risk-free rate of return in any economy
 Growt
in DM
0
e Debt Segment
as s
own a gradual but
consistent growt
in turnover in t
e past few
years wit
increased participation from t
e
mainstream banking and institutional players

is Segment expects a sustained rise in
turnover and participation in t
e coming years
wit
t
e initiation of activity by new Members
and t
e continued support and participation
of major banks, Primary Dealers and
institutions
 a
 
   




0
e first
alf of t
e twentiet
century
ad witnessed a significant amount of
retail interest and participation in t
e G-Sec market wit
more t
an
alf t
e

oldings of G-Secs issued being
eld by retail investors, a trend w
ic

continued until t
e early sixties

0
e Indian Debt Market structure was
it
erto t
at of a w
olesale market

wit
participation largely restricted to t
e Banks, Institutions and t
e Primary
Dealers

0
e volumes in t
e 
olesale Debt Market over t
e past few years are
rapidly expanding s
owing attractive financial market wit
a strong potential
for retail participation

0
e Retail Debt Market in India is being created, t
anks to t
e pioneering

efforts of t
e Exc
anges and t
e market participants and t
e strong
leaders
ip and guidance by SEBI, RBI and t
e Govt of India
 Govt Initiative
0
e Hon'ble nion Finance Minister, w
ile presenting t
e
nion Budget for 200-2007, accepted t
e recommendations
of t
e Hig
Level Committee on Corporate Bonds and
Securitization and made a significant policy announcement
about creation of a single, unified exc
ange-traded market for
corporate bonds in India

0 SEBI
as subsequently taken several steps towards creation

of a vibrant Corporate Bond market n July 2,2007 SEBI
permitted BSE to launc
a trade matc
ing platform wit

essential features of an  C Market Several ot
er initiatives
like simplification of t
e Debt listing agreement, rationalization
of stamp duty and introduction of Repos on Corporate Bonds

ave been taken by SEBI
 › 
 › 

0
e Retail Debt Market, in t
e new millennium,

presents a vast kaleidoscope of opportunities for
t
e Indian investor w
ose knowledge and
participation
it
erto
as been restricted to t
e
equity market

e development of t
e Retail Debt Market
as
engaged t
e attention of policy makers, regulators
and t
e Government in t
e past few years
0
e potential of t
e Retail Debt Market can be
gauged from t
e investor strengt
of more t
an 40
million in t
e Indian equity market

 › 

0 It would surprise many to know t
at a retail debt market was at one point of time very muc

present in India

e growing investments in t
e Bond Funds and t
e Money Market Mutual Funds are a
sign of t
e increasing recognition of t
is fact by t
e retail investors
Retail investors would
ave a natural preference for fixed income returns and especially so
in t
e current situation of increasing volatility in t
e financial markets
e Central
Government Securities (G-Secs) are t
e one of t
e best investment options for an
individual investor today in t
e financial markets due to t
e following factors:
0 Zero default risk - due to t
eir sovereign guarantee, ensures t
e total safety of all
investments in G-Secs
0 Lower average volatility in bond prices
0 Greater returns as compared to t
e conventional safe investment avenues like Bank
Deposits and Fixed Deposits, w
ic
also contain credit risk
0 Hig
er leverage -Greater borrowing capacity against G-Secs due to t
eir zero risk status
0 ider range of innovations in t
e nature of securities like Bills, Index linked Bonds, Partly
Paid Bonds and ot
ers like S RIPS and securities wit
call and put options to follow soon
0 Better and greater features to suit a large range of investment profiles and investor
requirements
0 Growing liquidity and t
e increased turnover in recent times in t
e Indian Debt Markets
 ›a

  
0
e Government of India and RBI, in early 2000 announced a
sc
eme for enabling retail participation t
roug
a non-
competitive bidding facility in t
e G-Sec auctions wit
a
reservation of  of t
e issue amount for non-competitive
bids by retail investors

e Retail rading in G-Secs commenced on January ,
200 
e Indian Fixed Income Markets, w
ic
until some
time ago was t
e mainstay of t
e w
olesale investors, were
made accessible to t
e retail investors to enable retail trading
in G-Secs t
roug
stock exc
anges
0
e Indian Investor is today able to buy or sell G-Secs
t
roug
t
e nationwide BSE BL Network of more t
an
7,000 terminals spread across 40 cities around t
e country

e Retail Debt Market Module of BSE
0
e key features of t
e system are:

0 rading: by electronic order matc
ing based on price-time priority

t
roug
t
e BL  Retail rading in G-secs is on a Rolling
Settlements basis wit
a
2 Delivery Cycle

0 Clearing and Settlement:
e Clearing and Settlement mec
anism

for t
e Retail trading in G-Secs is based on t
e existing institutional
mec
anism available at BSE
e trades executed t
roug
out t
e
continuous trading sessions are netted out at t
e end of t
e trading

ours t
roug
a process of multilateral netting
e transactions are
netted out member-wise and t
en scrip-wise so as to determine t
e
net settlement and payment obligations of t
e Members
 Õcont
0
e Delivery obligations and t
e payment orders in respect of t
ese
Members are generated by t
e Clearing and Settlement system of
BSE
ese statements indicate t
e pay-in and pay-out positions of
t
e Members for securities and funds w
o t
en give t
e necessary
instructions to t
eir Clearing Banks and depositories

0
e entire risk management and t
e clearing and settlement

activities for t
e trades executed in t
e Retail Debt Market System is
undertaken by BSE Exc
ange Clearing House

0 Holding and ransfer of G-Secs:
e G-secs for retail trading

t
roug
BSE can be
eld by investors in t
e same Demat account
 F RE
0
e BSE Debt Market solution would soon provide
live Internet trading on its state-of-t
e-art
BSEebx rading System
0
e BSE Debt segment would seek to pave t
e
way for t
e development of a
ealt
y, efficient and
active debt market mec
anism and market
structure in line wit
world class standards and
greater integration wit
t
e global economy
is
will truly
elp t
e Indian capital markets to attain a
place of pride among t
e leading capital markets
of t
e world
opic EndsÕ