DEBT MARKET AND ITS IMPACT ON INDIAN ECONOMY

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Contents
Classification of Indian Financial Market ................................ ................................ ....................... 3 What is a Debt Market? ................................ ................................ ................................ .................. 4 Classification of Indian Debt Market ................................ ................................ .............................. 5 Classification on basis of trading ................................ ................................ ................................ ... 7 Regulators for Indian Debt Market ................................ ................................ ................................ 9 The Structure of Indian Debt Market ................................ ................................ ........................... 10 Debt Instruments ................................ ................................ ................................ ........................... 11 Principal Investors................................ ................................ ................................ ......................... 14 Major Reforms since 1990¶s ................................ ................................ ................................ ........ 16 Type of Risks ................................ ................................ ................................ ................................ . 18 Debt vs Equity Market ................................ ................................ ................................ .................. 19 Importance to the Economy ................................ ................................ ................................ ......... 21 Current Developments in the Debt Market ................................ ................................ ................. 23 Micro-barriers ± institutional issues ................................ ................................ ............................. 25 Macro barriers ± demand and supply ................................ ................................ .......................... 26 External Debt ................................ ................................ ................................ ................................ . 27 Future of Debt Market ................................ ................................ ................................ ................... 29 Worldwide Scenario ................................ ................................ ........... Error! Bookmark not defined. Bibliography ................................ ................................ ................................ ................................ ... 35

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CLASSIFICATION OF INDIAN FINANCIAL MARKET

Financial M arket
M oney
N otiab eg le N N on egotiable D t eb

Capita l
Equity

G t ov

N G t on ov

Prim ary

Seco ndary

The financial markets can be classified in different ways. One way of classifying this is to classify in respect of maturity of the instruments. Accordingly, the financial markets can be classified into two main parts. They are as follows: Money Market This is defined as that financial market where the maturity period of financial instruments issued or traded is up to one year . Capital Market This is defined as that financial market where the maturity period of financial instruments issued or traded is more than one year.

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Debt market refers to the financial market where investors buy and sell debt securities. mostly in the form of bonds. The Indian debt market is today one of the largest in Asia and includes securities issued by the Government (Central & State Governments). Examples of debt instruments include mortgages. especially in a developing economy like India. This fixed return on the bond is often termed as the 'coupon rate' or the 'interest rate'. India ¶s debt market is one of the largest in Asia.13. there are usually some regulations in place that require that any type of investor in debt market offerings have a minimum amount of assets to back the activity. The Debt Market plays a very critical role for any growing economy which need s to employ a large amount of capital and resources for achieving the desired industrial and financial growth. other government bodies. promissory notes. where there is very little chance of the investor losing his or her investment.033 billion (in the previous year 2007) is the largest segment of the Indian financial markets. which equals to the coupon rate. In the event that the market deals mainly with the trading of municipal and corporate bond issues. financial institutions. 1. Depending on the regulations imposed by governments.WHAT IS A DEBT MARKET? The debt market is any market situation where trading debt instruments take place. Like all other countries.474 billion (or Rs. A debt market establishes a structured environment where these types of debt can be traded with ease between interested parties. the debt market may be known as a credit market. This means. The Indian debt markets with an outstanding issue size of Government secur ities (Central and state) close to Rs. the buyer (of bond) is giving the seller a loan at a fixed interest rate. The most distinguishing feature of the debt instruments of Indian debt market is that the return is fixed. the debt market may be known as a bond market. Public Sector Undertakings(PSUs). Therefore.34.7435 crore ) and a secondary market turnover of around Rs 56. Individual investors as well as groups or corporate partners may par ticipate in a debt market. and Certificates of Deposit. This is true even with situations such as bonds. the market may be known as a fixed income market. banks and corporates. (Source: RBI &CCIL) The debt market often goes by other names. However. debt market in India is also considered a useful substitute to banking channels for fin ance. 4 . based on the types of debt instruments that are traded. returns are almost risk -free. If mortgages and notes are the main focus of the trading. These markets are important source of funds. When fixed rates are connected with the debt instruments. there may be very little distinction between how an individual investor versus a corporation would participate i n a debt market. bonds.

Bonds are issued and sold to th e public for funds. Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. The bond market in India plays an important role in fund raising for developmental ventures. government and agency bond market. These securities are issued by the government to raise a public loan or notification in the Official Journal. They may be in the form of treasury bills or bonds dated. however there are some disadvantages associated with it. The G-Sec Market consists of state and central government securities. 5 . There are many different types of bond markets in India Corporate Bond Market. These bonds of law. the municipal bond market. bond market financing and mortgage bonds and security responsibility for the bond market. The returns maybe risk -free but are not as high as the returns from the equities market. Also the retail debt market in Indian is not very well developed yet so retail participation is fairly less. Corporate bonds and debentures and Public Sector Units. shares or bonds held in Bond Ledger Account. It is also the most dominant category in the India debt market. They also offer ample liquidity to the investor as he can sell the security in the secondary market. It means that. loans are being taken by the central and state government. They thus remove uncertainty with regards to financial costs. Bond Market The Bond market consists of bonds issued by financial institutions. Thes e are issued in order to meet financial requirements at a fixed cost. bearer bonds.CLASSIFICATION OF INDIAN DEBT MARKET The Indian debt market can be classified into the following two categories: Government Securities Market (G-Sec Market) It consists of central and state government securities. The Bond market is very advantageous to invest in. This means that the investor is assured returns but the returns are less. They are also preferr ed due to the fact that they entail no tax deduction at the source and can be redeemed at face value on maturity. Government securities are issued to the investor at face value and imply no default risk as the securities carry sovereign guarantee.

t i illi t t t l . t i S$ .t t t illi f i t t . . A ll t. t . t t t ti t t . % i t t lt i t iti it . . %. i ti i t l f . S $ i St t illi f NSE i 6 . . t t ili % . . . .88 illi . % f t t . .

MFs. Financial Institutions. which are executed in the Wholesale Debt Marketas follows:  An outright sale or purchase ± transaction is a one where there is no intended reversal of the trade at the point of execution of the trade. Small trusts and other legal entities in addition to the wholesale investor classes. Provident F unds. There are normally two types of transactions. So in such a transaction. Secondary Debt Market Investors buy and sell previously issued debt securities amongst themselves .  7 . The Buy or sell transaction is an independent trade and is in no way connected with any other trade at the same or a later point of time. The trade is called a Repo transaction from the point of view of the seller and it is called a Reverse Repo transaction from point of view of the buyer. one participant sells securities to other with an agreement to purchase them back at a later date. I nsurance companies. Banks and Financial Institutions usually enter into reverse repo transactions to manage their reserve requirements or to manage liquidity. Primary Dealers. Wholesale Debt Market ± where the investors are mostly Banks. Corporates and FIIs.  A Repo trade ± (which is normally referred to as a Repo trade) is a transaction where the said trade is intended to be reversed at a later point of time at a rate which will include the interest component for the period between the two opposite legs of the transactions.CLASSIFICATION ON BASIS OF TRADING Primary Debt Market Debt securities are issued and sold by borrowers to lenders directly . Repos therefore facilitate creation of liquidity by permitting the seller to avail of a specific sum of money (the value of the repo trade) for a certain period in lieu of payment of interest by way of the difference between the two prices of the two trades. The segments in the secondary debt market based on the characteristics of the investors and the structure of the market are further sub-divided as follows :  Retail Debt Market± involving participation by individual investors. the RBI. Repos and reverse repos are commonly used in the money markets as instruments of short -term liquidity management and are also called as a Collateralised Lending and Borrowing Mechanism.

% of total turnover in debtmarket. . . . Non -government securities accounted for a meagre . million S $ . . million S$ .8 million). . 8 .The egate econdary arket transactions in debt securities including government and non-government securities)increased by . % to s. .88 million) from s. NSE accounted for about % of total turnover in debt securities.

running t he borrowing program of the Government of India. It forces the issuer to make the retail investor aware of the risks inherent in the investment by way and its disclosure norms. Apart from its role as a regulator. it has to concurrently fulfill several other important objectives viz. SEBI controls bond market and corporate debt market in cases where entities raise money from public during public issues. SEBI is also a regulator for the Mutual Funds . controlling inflation. Securities &Exchange Board of India (SEBI) Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of India (SEBI). managing the foreign exchange reserves of the country and ensure a stable currency environment . 9 . Reserve Bank of India also controls and regulates the G -Secs Market. It regulates the method in which such moneys are raised and tries to guarantee a fair play for the retail investor. ensuring adequate credit at reasonable costs to various sectors of the economy.REGULATORS FOR INDIAN DEBT MARKET Reserve Bank of India (RBI) The Reserve Bank of India is the main controller for the Money Market.

THE STRUCTURE I I E T RKET 10 .

Until 19 . Until that date.It also announces the exact dates of auction. or growing the business. the 14 -day T-bill was also introduced. the fact that bonds are worth less when interest rates rise and vice versa can be explained as follows:   When interest rates rise. 1 2-dayand 364-day. it does not have an ownership interest in the issui ng company. or face. purchasing equipment. In exchange. RBIhad suspended the issue of 1 2 -day Tbills from April 1992 . the amount to be auctioned andpayment dates.announced by the RBI.5% since 1974 !).DEBT INSTRUMENTS Corporate bonds Corporate bonds are debt securities issued by private and public corporations.  Treasury Bills Treasury bills are short -term debt instruments issued by the Centralgovernment. and in July 1997. one lends money to the "issuer. When interest rates decline. new issues come to market with higher yields than older securities. issued on tap. Ad hoc treasury bills." the company that issued the bond. representing the 4 types of tenors for which these instrumentsare issued. There are 3 types of T-bills which are issued: 91 -day. also known as "principal.and the auction process for T -bills was started. and they fall in value when interest rates rise. it may be worth more or less than it was paid for. making those older. their prices go up. Hence. have been eliminated in1997. 1 2-day T-bills were introduced in 19 7.5% (the rates on these bills remainedunchanged at 4. Companies issue corporate bonds to raise money for a variety of purposes. which enabled the automatic monetisation of central government budget deficits. Usually. RBI issues a calendar of T-bill auctions. or market risk). making those older ones worth less. and revived theirissuance since May 1999. Three types of T -bills are issued: 91 -day. the longer the maturity. generally semi annually. value of the bond at maturity. their prices go down. because one will receive the par. All T -bills are nowsold through an auction process according to a fixed auction calendar. unlike when one purchases the company's equity stock. the company promises to return the money. All T -bill issuances now represent market borrowings of the centralTreasury bills (T -bills) are short-term debt instruments issued by the Centralgovernment. The inverse relationsh ip between bonds and interest rates²that is. higher -yielding ones worth more. Corporate bonds tend to rise in value when interest rates fall. As a result. It was decided in consultation with the CentralGovernment to re -introduce." on a specified maturity date. While a corporate bond gives an IOU from the company. When one buys a corporate bond. if one s ells a bond before maturity. such as building a new plant. one may be less concerned about these price fluctuations (which are known as interest -rate risk. the only kind of Treasury bill that was available was the 91 -daybill. 1 2-day and 364-day. the company usually pays you a stated rate of interest. the greater is the degree of price volatility. 364 day T -bill was introducedin April 1992. T -bills are available for a minimum amount of 11 . at a fixed rate of 4. RBI did away with 14 -day and 1 2-day TreasuryBills from May 2001.T-bills are sold through an auction process announced by the RBI at adiscount to its face va lue. new bond issues come to market with lower yields than older securities. Hence. By holding a bond until maturity. 1 2 day TBs from April 2005.

Bearer Stock Certificates± A bearer stock certificate. it is not the loan contract. Currently. Unsecured and backed by credit of the issuing company. They differ from IOUs in that they contain a specific promise to pay. 5 Lac thereafter. is a negotiable instrument . buying shares does not always lead to a stock certificate (in a case of a small number of shares purchased by a private individual . Stock Certificates In corporate law . wherein one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee ). on-competitive bids. other terms. Both discriminatory and uniform price auction methods are used inissuance of T bills. RBI allots bids to the on -competitive bidders at the weighted average yi eld arrived at on the basis . and tend to be available only in onshore financial centres. are also allowed from provident funds and other investors. for instance). Commercial Paper      Commercial Papers when issued in Physical Form are negotiable by endorsement and delivery and hence highly flexible instruments. referred to as a note payable in accounting . and physical possession of the certificate entitles the holder to exercise all legal rights associated with the stock. and as a useful way to transfer beneficial title to assets (held by the corporation) without payment of stamp duty. In large corporations. International initiatives have curbed the use of bearer stock certificates in offshore jurisdictions. Issued subject to minimum of Rs 5 lakh and in the multiples of Rs. where the successful bidders have topay the prices they have actua lly bid for. Banks and PDs are major bidders in the Tbillmarket. Can be issued with or without Backstop facility of Bank / FI. 12 ." "loan agreement . or commonly as just a "note". which would contain all the terms and conditions of the loan agreement. such as " loan . Whereas a promissory note is evidence of a loan. Promissory notes A promissory note. where biddersneed not quote the rate of yield at which they desire to buy these T -bills.000. the auctions of all T -bills aremultiple/discriminatory price auctions. as its name implies is a bearer instrument . Stock certificates are generally divided into two forms as follows: Registered Stock Certificates ± A registered stock certificate is normally only evidence of title." and "loan contract" may be used interchangeably with "promissory note" but these terms do not have the same legal meaning. In common speech. and a record of the true holders of the shares will appear in the stockholder's register of the corporation. although they are rarely seen in practice. either at a fixed or determinable future time or on demand of the payee. under specific terms.Rs. Bearer stock certificates are becoming uncommon: they were popular in offshore jurisdictions for their perceived confidentiality. Maturity is 15 days to 1 year. rather than simply acknowledging that a debt exists. a stock certificate (also known as certificate of stock or share certificate ) is a legal document that certifies ownership of a specific number of stock shares (or fractions thereof) in a corporation . 25.000 andin multiples of Rs. 25.

such as a corporation. The inclusion of this feature in the bond¶s structure provides the issuer the right to fully or partially retire the bond. are called floating rate bonds. The essential feature of this type of bonds is the absence of intermittent cash flows. The put options embedded in the bond provides the investor the rights to partially or fully sell t he bonds back to the issuer. or destruction is usually impossible. Such a zero coupon bond is also called a deep discount bond . Recovery of the value of a bearer bond in the event of its loss. no coupons are paid. It differs from the more common types of investment securities in that it is unregistered ± no records are kept of the owner. providing him the right to call the bond on or any time before a pre -specified date. The bond is instead issued at a discount to its face value. When such a bond is issued for a very long tenor. either on or before pre-specified dates. and is therefore in the nature of call option on the bond. or the transactions involving ownershi p. prior to the maturity date. they are also called embedded options. Callable bonds Bonds that allow the issuer to alter the tenor of a bond. Puttable Bonds Bonds that provide the investor with the right to seek redemption from the issuer. but reset with refe rence to a benchmark rate. or by a government. Such bonds whose coupon rate is not fixed. Convertible Bonds A convertible bond provides the investor the option to convert the value of the outstanding bond into equity of the borrowing firm. The effective interest earned by the buyer is the difference between the face v alue and the discounted price at which the bond is bought. the issuer can embed an American option in the bond. Whoever physically holds the paper on which the bond is issued owns the instrument. where the rate of interest is re -set periodically. The actual terms of the put option are stipulated in the original bond indenture. There are also instances of zero coupon bonds being issued at par. There are no intermittent payments of interest . and redeemed with interest at a premium. are called callable bonds. on pre -specified terms. Zero Coupon Bond In such a bond. theft. Floating Rate Bonds Instead of a pre -determined rate at which coupons are paid. at which it will be redeemed. where the issuer specifies the date on which the option could be exercised. This is useful for investors who wish to retain anonymity. 13 . Since these options are not separated from the original bond issue. based on a benchmark rate. are called puttable bonds. it is possible to structure bonds. by redeeming it prior to the original maturity date. Alternatively. and its replacement with equity. Exercising this option leads to redemption of the bond prior to maturity. the issue price is at a steep discount to the redemption value.Bearer Bonds A bearer bond is a debt security issued by a business entity. A call opt ion can be a European option.

They can also include operating companies which decide to invest its profits to some degree in these types of assets.PRINCIPAL INVESTORS Institutional investors Institutional investors are organizations which pool large sums of money and invest those sums in securities. so if one company fails. This spreads risk. Types of typical investors include banks. The employer gives that person's pension contributions to a fund.however. real property and other investment assets. mandateinvestments pre -dominantly in treasury and PSU bonds. Influencing the conduct of listed companies. because inst itutional investors have the freedom to buy and sell shares. They are. retirement or pension funds. These dealers must meet certain liquidity and quality requirements as well as provide a valuable flow of information to the Fed about the state of the worldwide markets these primary dealers. creating the initial market in the proc ess. Most mutual funds also have specialised bond funds such as gilt funds and liquid funds. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. who are market intermediaries appointed by the ReserveBank of India who underwrite and make market in government securities. not very active traders in their portfolio. PF organisations Provident funds are large investors in the bond markets. The fund will buy shares in a company. an ordinary person will have a pension from his employer. insurance companies .S. hedge funds . Primary dealers Primary dealers. Their role in the economy is to act as highly specialized investors on behalf of others.and have access to the call markets and repo markets for funds A pre-approved bank. Federal Reserve. they participate in the debt markets . they can play a large part in which companies stay solvent. Furthermore. such as underwriting new government debt. Mutual funds Mutual funds have emerged as another important player in the debt markets. except for very short -termliquidity requirements. Funds are useful because they will hold a broad portfolio of investments in many companies. They can actively engage in corporate governance . it will be only a small part of the whole fund's investment. A bond fund is a collective 14 . which all bid for government contacts competitively. and providing them with capital are all part of the job of investment management. unless they have a funding requirement that cannot be met through regular accruals and contributions. Therefore. as they are not permitted to sell their holdings. purchase the majority of Treasuries at auction and then redistribute them to their clients. or some other financial product. as the prudentialregulations governing the deployment of the funds they mobilise. owing primarily to the growing number of bond funds that have mobilised significant amounts from the investors. broker/dealer or o ther financial institution that is able to make business deals with the U. Mutual funds are not permitted to borrow funds. and which go under. investment advisors and mutual funds. For instance.

[7] Types of bond funds include term funds. [1] Bond funds typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation. Changes inthese benchmark rates directly impact debt markets and all participants inthe market. Bond fun ds typically pay higher dividends than CDs and money market accounts. or long-term) before they mature. medium-. joint stocks companies . municipalities. including high -yield or junk bonds. as investment ba nker to the government. these bonds also come with greater risk.investment scheme that invests in bonds and other debt securities. which issue securities in the debt markets to fund their developmental projects. raisesfunds for t he government through bond and T -bill issues. trusts. local authorities. in the courseof conduct of monetary policy. Central and state government Central Government s raising money through bond issuances to fund budgetary deficits and other short & long term funding requirements. With the potential for high yield. 15 . which hav e a fixed set of time (short -. but have tax advantages and lower risk. The RBI regulates the bank rates and repo-rates and uses these rates as tools of its monetary policy. local bodies. Others financial institutions . NRI State Governments. as well as to finance their budgetary deficits. and alsoparticipates in the market through open market operations. etc. High-yield bond funds invest in corporate bonds. Municipal bond funds generally have lower returns. Most bond funds pay out dividends more frequently than individual bonds bond fund account for 1 % of mutual fund assets. Banking sector RBI SBI other commercial banks cooperative banks Reserve Bank of India.

the RBIconvinced the Government to abo lish it. regulatory initiatives in introducing internatio nal best practices   16 . contain inflationary pressure. Introduction of auctions ± The auction system introduced in a minor way in the second half of the eight ies. the government debt is being raised at market related ratesthrough auctions. The main objective of this active debt management policy has been to moderate liquidity growth. the developments since 1991/92can be div ided into following sub phases. the choice of auction systemneeded to be carefully drawn. Recognizing this. but also rendered trading in Government securities cumbersome. For such a major policy shift fromadministered interest rate regime to a market based regime. Considering India¶s macro management and micro market structure. in order to give a comfort level to the government as aborrower as also to moderate the risks that might be faced by the uninitiated marketparticipants. and conduct debt managementin a cost -effective manner. Abolition of tax deduction at source ± Tax deduction at source (TDS) used to be major impediment to the development of the government securities market. India¶s government securities market (GSM) has undergone a huge transformation since 1991/92. The removal of TDS on Government securitieswas apparently a small but a major reform in removing pricing distortions for Government securities.MAJOR REFORMS SINCE 1990¶S India¶s macro management of debt has gone through three phases as follows: Phase I (1950 to 1986) Phase 1 was characterized by a captive market and the absence of debt management. Over a period of time. Phase III (1992 onward) As an integral part of a comprehensive program of financial sector reform. and in amajor way in the beginning of the nineties was a significant move to allow the markets todetermine the prices for government securities.   A primary auction market for Government securities has been created and a primary dealer system was introduced in 1995. This not only distorted the pricing mechanism. Banks investments in Government securities valuation/accounting norms ± Concomitantly. These efforts culminated in the active management of debt in phase 3. This was the consequence of relying on reserve requirements and a policy of directed investment coupled with an emphasis on raising cheaper resources to financ e the government¶s developmental activities. Accordingly. RBIwithdrew from the primary market and with the enactment of Fisc al Responsibility andBudget Management Act. it was decided to begin with for ³the sealed bid auction systemwith a post bid reserve price´ (since the Reserve Bank of India as an agent to governmentparticipates in the auctions as a non -competitive bidder). Phase II (1986 to 1992) Phase 2 saw a gradual shift toward passive debt management because of concern about expected future developments and the potential danger of continuing with automatic monetization.

promote greater transparency of prices and volumes traded through daily publication of transactions in government securities. with und erwriting or bidding commitment for 100% of the issue.´      with price discovery through auctions. restrict automatic monetization by fixing a cap on the during -the-year and end-year amount. (Post-1996)      introducing a system of primary dealers (PDs) and satellite dealers. (1991±96) Reforms were engineere d to facilitate ³market -borrowing. to fa cilitate finer bidding. introducing various tenors in treasury bills and publishing a half -yearly calendar for the issuance of treasury bills. switching over from yield -based to price-based auctions.invaluation/accounting norms for the banks¶ investment portfolios (comprising mainlygovernment securities) also necessitated the banks to mark to market their investmentportfolios and forced them to actively trade. establishing ways and means advances (WMAs) to the central government to bridge temporarymismatches in its receipts and payments. 17 . develop appropriate instruments. This gave an added imp etus to the incipienttrading activity. introduce a delivery -versus-payment system (DVP) in order to mitigate the settlement risk. permitting foreign institutional investors to invest in government securities including Treasury bills.  Introduction of Primary Dealers system ± Introduction of Primary Dealers (PDs) into the Government securities market brought a sea change in both the primary market (in terms of finer bidding) and secondary market (in terms of added liquidity and enhanced trading activity). both in primary and in secondary markets. In order to reduce Bank¶s role in the Primary Issuances the PDs were encouraged to underwrite primary issuances through incentives such as underwriting commissions.

The returns maybe risk -free but are not as high as the returns from the equities market.   The following are the risks associated with trading in debt securities:   Counter Party Risk refers to the failure or inability of the opposite party in the contract to deliver either the promised security or the sale value at the time of settlement. Credit risk subsumes the risk of default as well as the risk of an adverse rating change. 18 . Reinvestment Rate Risk: Can be defined as the probability of a fall in the interest rate resulting in a lack of options to invest the interest received at regular intervals at higher rates at comparable rates in the market. which would affect the yield on the existing instruments. However. corporate bonds are subject to credit risk in addition to interest rate risk.  Default Risk/Credit Risk : corporate bonds are subject to credit risk in addition to interest rate risk arises when an issuer of a bond defaults on the interest or principal obligation. Interest Rate Risk can be defined as the risk emerging from an adverse change in the interest rate prevalent in the market. they would have earned more. Price Risk refers to the possibility of not being able to receive the expected price on any order due to an adverse movement in the prices. For instance. If they had waited and invested in the changed i nterest rate scenario. an upswing in the prevailing interest rate may lead to a situation where the investors' money is locked at lower rates.TYPE OF RISKS Government bonds are subject only to interest rate risk .

the information is not widely distributed with respect to debt market and people awareness need to be created more in the debt market.  In the case of debenture .  Debt can be raised i n the form of loan and in the form of marketable financial securities which is also called as Debenture. 19 .  However.  In the case of debt market.  In the case of loan the lender would not be able to realise the money till the borrower pays. the retail debt market hardly exists. the lender would be able to rea lise the money even before the borrower pays as it has a theoretical secondary market.  The return in debt market is less volatile as there is a clear cut linkage between the price of the debt security and the variable which would change the price of the security. in practice.  Moreover.DEBT VS EQUITY MARKET Debt Time of Repayment Amount of Repayment Fixed Equity ot Fixed Fixed ot Fixed Repayment commitment ot dependent on performance of the Company Dependent on performance of the company Relative Riskiness of the borrower Riskiness of the investor More Less Less More Expected Return of the investor Less More In case of debt markets  If people want to invest in the debt market it has to invest in large amount. there is not much of difference between loan and debenture market.

* Conversion rate: With effect from January 01. 0) ¡ ¡ 30.00 (252.46.00) (53.  However in the case of equity market the return is highly volatile as there is no clear cut linkage can be established between the variables and the price of the equity security. (If the trading day is a bank holiday. 20 ¡ ¡ Debt 206.  In the case of equity market retail equity market already exists. immediately preceding day's reference rate has been used).10 (730. 1999. 1 .OV-2009   Equity 1420. Daily Trends in FII Investments on 30 -NOV-2009 Reporting Date Debt/Equity Gross Purchases(Rs Crores) Gross Sales(Rs Crores) Net Investment (Rs Crores) Net Investment US($) million Conversion (1 USD TO INR)* The data presented above is compiled on the basis of reports submitted to SEBI by custodians on 30NOV-2009 and constitutes trades conducted by FIIs on and upto the previous trading day(s). the daily RBI reference rate as on the trading day has been adopted. 0 2151.10 45 .30) (156.In case of Equity Markets  In the case of equity market people can invest directly in the market by way of small amount of investment.00) Rs.

If we think at a global level. The returns earned on the government securities are usually taken as the benchmark rates of returns and are referred to as the risk free return in financial theory. 550 crore in October 2009 to Rs3.IMPORTANCE TO THE ECONOMY If we analyse the thought process of Indian investors then we will find that they are always attracted towards equity market as compared to debt.recognized by business. Indian corporate bond market has never quite taken off. banks. zero coupon bonds gained greater recognition. securities in the financial markets. The Risk Free rates obtained from the G -sec rates are often used to price the other non -govt. Infrastructure . This is mainly due to new reporting rules enforced by SEBI. in recent times. the equity market experienced a drop from 42 per cent of GDP in 1993-94 to 2 . That is why we can term the debt market as a fixed income market.7 per cent in the same period. MIBOR-related commercial papers. Debt market is much more popular than equity because of its low risk and fixed return nature but the trends are just the reverse in India. The corporate bond market is establishing in India and we are more confident in accessing this market. public sector undertakings. short term liquidity management and monetary management. has amazed a lot of people. Even after several attempts by regulator Securities and Exchange Board of India (SEBI). and non -convertible debentures. but also have emerged as key elements for internal debt management. The inception of corporate bond has witnessed greater innovations. it is not much popular may be due to unawareness about its product range. The benefits of modernizing 21 . government and investors alike as a critical constraint on India's economic growth -could be an important catalyst for the development of the debt market. Total trading in corporate bonds increased by 116% from an average of Rs1. The debt market performance is directly related to the interest rate movement and this is reflected in the yields of government bonds. as we all know higher returns are always associated with higher risk.5 trillion. If we compare equity market & the bond market during the past decade. This resul ted in a reduction in liquidity in the equity market and a substantial improvement in liquidity in the Indian bond market. It includes government securities. Although India has a vibrant equity market. The development of bond market in India. The corporate debt market in India has seen growth of asset backed secu rities which were found to be quite innovative in the recent past. ormally the Government Securities are issued to meet the short term and long term financial goals of the government. Average daily trading has not exceeded 1 billion (around Rs 4. and companies. they are not only used as instruments for raising debt. Although debt market is much convenient and suitable for Indi an investors. 356 crore in March 2010. then in maximum countries. This may be due to its hype about higher returns. corporate debentures. f inancial institutions. This was not the case with the Government of India (GOI) bond market as it experienced an increase in market size due to large scale fiscal deficits. from 2 per cent of GDP to 36. Rise in recent numbers shows that there's different activity happening in the corporate debt market. Indian debt market is largest debt market in Asia and it is the crucial source of capital funds. Investment by Foreign institutional investors (FIIs) so far this year is R s 70 crore in Indian debt market as compared with Rs105 crore in 2009. step redemption bonds. Government and Sebi are taking steps to develop debt market but still there is an absence of bond market which is required for funding of long -term infrastructure projects.6 per cent in 2000-01. other government bodies. convertible bonds. This is the total amount that has been reported in the ational Stock Exchange and the Bombay Stock Exchange as well as the Fixed Income Money Market and Derivatives Association of India.440 Crore) where the global average is 1. Instruments such as floating rate instruments.

the World Bank also estimates that infrastructure investment needs to rise by three to four percentage points of GDP over the medium term if India has to sustain current growth rates. the increment in a bond market is critical for India's success. it is a challenge but many things can be done for faster development of this market in India. Again as a common Indian investor we are hoping to see some progress in Indian debt market soon. Moreover. Striking a cautionary note. So. 22 . the World Bank estimates that a 1% permanent increase in the infrastructure stock is generally associated with a 1% increase in the level of GDP. infrastructure debt should find natural buyers in the pensions and insurance funds that are seeking long duration and implicit inflation links. drawing on institutional investors' pricing expertise and improving transparency around projects and p ricing. the country needs to invest 475bn in infrastruct ure over the next five years. by matching long-term projects with long-term investors.and expanding India's inadequate infrastructure could be sizeable. The debt market makes a natural home for infrastructure financing. Because development in debt market will develop Indian investors and Indian investors will develop India. According to the Indian government estimation.

7 billion in 2010. and since the interest on dollar loans is lower than rupee loans. UTI and LIC are actively accessing the wider credit spectrum. The most hailed candidates for these bonds are companies with a credit rating h igher or equal to the sovereign rating. they provide liquidity for investors. public sector units and banks. making it a win-win situation for both. 31. CRISIL believes that the Indian banking sector`s incremental credit -deposit (CD) ratio will moderate to less than 9 0% by the end of March 2011. In 2010. South Asia. Innovative trades are also gather ing pace. says David Greenbaum. external commercial borrowings and the bonds. Union Bank and mutual funds like Religare. coupled with improvement in retail deposit mobilisation. For the nine months e nded Dec. What's interesting is that regulator -backed products like repo in corp orate bonds and interest rate futures have not made much headway. on account of growth in loans to     23 . reflecting the inadequacy of retail deposits to support credit growth. Tightening of liquidity. less er-rated infrastructure companies issued bonds to Tax free infra bonds. bankers said. because of higher lending rates. 2010.CURRENT DEVELOPMENTS IN THE DEBT MARKET  Activity in the Indian bond market saw a 30% jump in 2010. ³Banks are not able to lend enough to the corp orate and there are corps who are out with a different rating structure. maturity and tenor to the private market. Birla Sun Life Insurance says. acting in 13 issues worth over 1. the incremental CD ratio rose sharply to 105%. A high incremental CD ratio indicates weakness in the sector`s resource profile. and thinned out when cash dried up. And not just volumes widening. The gap between tenures of credit and deposits. credit spectrum and innovative issuances point to a steady evolution. and a few retail debenture issuances by companies like the Tatas have also boosted interest. VikramKotak . 2011 could see over 10 billion worth of dollar and euro bond issues for the country. and more will follow.´ There is always appetite from different class of investors and not everyone follows a AA+ or AAA. But others say the first few steps towards a deeper market have already been taken. The Indian bond market may have taken its time getting started. The bank was one of the largest facilitators for such bond issues. They have a number of options such as equity-linked convertible loans. because they are traded. but it is clearly picking up speed. Indian companies have been making large acquisitions and investments in overseas operations across sectors. The bonds present longer-term borrowings at fixed costs reducing variable elements for companies amid volatile market conditions. If trends continue. at Deutsche Bank. or P1+ norms. hardening interest rates on rupee loans and an international demand for Indian debt instruments are driving top Indian corporate houses and banks to the G3 bond market this year. Deutsche Bank. India.Public sector banks like SBI. From a near non-existent presence in the tradable bond market in 2009. Bank of Baroda.CIO. say bankers. many prefer to raise funds overseas. Indian banks and corporate leaders like Reliance Industries and Aditya Birla Groups have set benchmarks for investors and issuers from India alike. But are these trends sustainable? Some say a majority of these category issuances came when liquidity was not an issue. Yet. head of Cross Border Debt Capital Market Originati on. because of recent deposit rate hikes. This will be driven primarily by CRISIL`s expectation of lower credit growth. so there r many investors with different kind of objectives of investments. Investors are no longer hiding behind safe top -rated paper.

The new base rate regime for bank loans and the government¶s decision to raise foreign institutional investment (FII) limit in debt have been the clear game changers.  The corporate credit market is booming like never before with foreign institutional investors pumping money into Indian debt and companies looking to raise more funds through overseas borrowings and commercial papers. CRISIL believes that active steps to develop the bond markets are needed to mi tigate the impact of such emerging ALM risks. poses a longer term challenge of increasing asset liability mismatches (ALM) in the banking system. however. The new RBI guidelines permitting repurchase of corporate bonds could broaden th e corporate bond market further.infrastructure projects. 24 .

and adds a significant cost to bond issuance.    25 . and other regulators. the most significant of which is to place a maximum amount of tax payable on a si ngle issue. it has n ot been as successful in developing ways to manage interest rate risk. SEBI is examining the prospects for changi ng the disclosure requirements. In consequence. Stamp duty is complex and variable between locations. inflexible. such as the insurance regulator (IRDA) and the Department of Commerce.MICRO-BARRIERS ± INSTITUTIONAL ISSUES Much analysis has been devoted to micro -barriers to development of the bond market. The issuance process is perceived to be risky. While the Indian market has been innovative in developing products that add efficiency (such as CLBOs). or that aid the equity market (for example. public bond issues areplace ments dominate the market. The most significant of these are as follows:  The disclosure requirements for public issues are very great and do not make allowance for previous disclosures. Regulatory overlap exists. and private consequence. as corporate bonds tend to fall between several regulators: SEBI. as the capital markets regulator. as the regulator of banks (who are the main investors in corporate bonds). public bond issues are extremely rare. and restrictions on the participation of banks imposed by the RBI. There are discussions and proposals significant cost to simplify and reduce the stamp duty burden. the RBI. exchange -traded derivatives). The main barrier t o developing interest rate derivatives has been a combination of lack of diverse views. cumbersome and expensive. Lack of risk management products (both derivatives and grey markets ) is a significant barrier both to the primary and secondary markets.

mean that government demand is falling relativerapidly growing GDP. means that their fixed income investment tends to be in gilts or short term bills. Corporate borrowers have traditionally had little need to diversify their financing. which limit their ability to invest in corporate debt. private placement of bonds to a single or limited number of investors. and both it and the private funds are governed byhighly r estrictive. As well as excluding a possibly si gnificant group. The life insurance sector is dominated by a single state -owned entity. Legislation. and this. Exchange control rules place an aggregate limit on the amount of investment that foreigners can put into domestic bonds. at 90%. foreign investors are an important catalyst for change and innovation. mainly other banks). Despite this. where the range of options offered by banks to their corporate clients includes a mixture of loan and pseudo -loan finance (that is. there is a growing market for private savings/pension arrangements as wealth increases. Mutual funds are often treated as short-term investments by investors. This continues to be the case in India. and a desire to control the deficit. The following lists the key macro problems:  Crowding out has been a persistent threat to Indian market. however. Although insurance and pension fun ds are still largely state -controlled. and are less likely to be addressed directly or independently of larger issues relating t o India¶s economic development. together with their conservative investment policies. and the level of debt to GDP is very high. government imposed investment mandates. the level of issuance of government bonds remains high. rather than corporate debt. (especially the Fiscal Responsibility Act).    26 .MACRO BARRIERS ± DEMAND AND SUPPLY The macro problems are more serious. which at least might offer a countervailing investment view. as ample bank finance has always been available.

For capital-scarce counties this means expansion of capital formation and higher optimal borrowing. in effect. where the market interest rate is lower.ross External ebt is the amount. owever. at any given time. or to pay interest. increase economic welfare in both the borrowing and lending countries. it must also introduce debt management as a major policy concern. the stock of foreign debt stood at $ 8. The objectives of debt management policy are to achieve the benefits of external finance without creating difficult problems of macroeconomic and balance of payments stability. An i Foreign Borrowing allows a country to invest and consume beyond the limits of current domestic production and. with or without principal ross ebt is the stock of liabilities. Foreign borrowin can g lead to more rapid growth. lobal capital markets allow enterprises and governments in capital scarce countries to borrow from capital-abundant countries. billion at the end of e cember . increase the interest that lenders in the capital-abundant countries can earn and reduce the interest paid by borrowers in the capitalscarce countries. According to the latest status paper prepared by the nion Finance Ministry.EXTERNAL E T E l i ii According to a orking group formed by four organi ations namely The orld Bank. Inappropriate and excessive foreign borrowing will generate debt service obligations that will constrain future policyand hence growth. partly on account of fresh loans and partly on account of $ billion between of exchange rate movements. The BIS Bank f International Settle ments). with or without interest. on which debt service is calculated. International lending can thus. in effect. orld capital markets. the total debt has fluctuated between $ billion and $ 27 ¦ Map of countries by foreign currency reserves and gold minus external debt based on data from ¥ ¤££¢ IA actbook . n E nal in India IT IS A source of some comfort that India's external debt continues to be at a stable level. After a substantial increase and . The IMF The International Monetary Fund) and The E rgani ation For Economic o-operation And evelopment External ebt can be defined as follows . of disbursed and outstanding contractual liabilities of residents of a country to non-residents to repay principal. finance capital formation not only by mobili ing domestic savings but also by tapping savings from capital surplus countries. if a country borrows abroad.

per cent). Thi s press release relates to India¶s external debt at end -September 2010. India's position has improved globally. 28 . Going by a numb er of indicators. The ratio of short -term external debt to foreign exchange reserves was 22.6 per cent) at end -March 2010. per cent to US 66. which was as high as 35 per cent in 1990-91. the valuation effect arising f rom depreciation of the US dollar against major international currencies accounted for US 6.4 per cent of total external debt) at end -September 2010 as against US 67. as was the practice for decades.5 per cent to US 229. per cent at end -March 2010.3 billion at end -March 2010. on that count. At end-September 2010. today it is ranked ninth. per cent). In absolute terms as well. more relevant is the weight this debt imposes on the economy. per cent over the level of US 262. The Department of Economic Affairs. the share of commercial borrowings stood highest at 27. The share of US dollar denominated debt was the highest in external debt stock at 53. billion reflecting an increase of 12.5 billion in India¶s external debt at end -September 2010. The long term debt increased by 9.Of the total increase of US 33. Ministry of Finance has been compiling and releasing quarterly statistics on India¶s External Debt for the quarters ending September and December every year. even as the stock of outstanding has remained more or less constant. per cent). Argentina and Indonesia now belo ng. Overall.7 per cent was long-term debt.3 per cent of India¶s total external debt while the rest 77. Annual repayments of loans and interest as a percentage of current receipts ² the debt service ratio.1 billion (25. India is now classified by the World Bank as a "less" indebted country. followed by the Indian rupee (1 . And. Short-term debt accounted for 22. India was the third largest debtor in the world. while short -term debt showed an increase of 25. which is two rungs below the extreme category of "severely" indebted countries.0 billion. has been held under 3 per cent. India¶s external debt stock was US 295. billion.6 per cent). per cent followed by RI deposits (16. Debt as a percentage of the gross domestic product has nearly halved since the early 1990s.5 per cent at end September 2010 as compared to 1 .2 billion.billion since 1995. per cent) and Euro (3. Component -wise.3 billion (1 .9 per cent at end-September 2010. Government (Sovereign) external debt was US 72. which crossed 10 per cent in 1990 -91 and precipitated the Bop crisis of tha t year. has fallen to 13 per cent today. Japanese Yen (11. And the short -term debt to GDP ratio. While the absolute size of foreign debt is important. which is where Brazil. the burden has become lighter and lighter. the increase in external debt would have been US 27.3 billion (24. per cent). All this has taken place in spite of the fact that new loans are increasingly being raised o n commercial rather than concessional terms.9 per cent) and multilateral debt (15. Excluding the valuation effect. India's external debt situation is far better today than it was during the balance of payments (Bop) crisis of 1991. In the mid -1990s. SDR (9.

the need for asset securitization is being felt in three major areas .FUTURE OF DEBT MARKET The present scenario of debt markets around the world reflects the vulnerability of government/bond issuer defaults. Though one side of coin throws optimism by way of near double digit growths in BRIC nations an d signs of recovery in developed world the other side cautions us because of high inflation. The extant law provides for securitization of debt by Asset Reconstruction Companies (ARCs) and ational Housing Bank. the resources needed for infrastructure development. regulatory. they provide debt financing for infrastructure projects largely only to the extent that they are able to participate in loan syndicates led by a handful of specialists. There exists a strong case for creation of specialized long term Debt Funds to cater to the needs of the infrastructure sector. Pension Funds and new pension rules 29 . Securitization Another important and a related issue for the infrastructure financing is the n eed for a market in securitized products. Infrastructure Sector and other Asset Backed Securities (ABS). In India. Considering the long gestation period involved in infrastructure projects and given their liabilities (mainly deposits) which are short to medium term in nature. Thi s certainly requires bond financing. A regulatory and tax environment that is suitable for attracting investments from Qualified Investment Banks is key for channelling long term capital into infrastructure development. the Government has decided to suitably amend the SCRA to define securitized assets as a security.Mortgage Backed Securities (MBS). new pension system and the developing market for securitized products. Secondary market trading is not possible since these instruments are not listed in the stock exchanges. securit ized debts are not included under the Securities Contract Regulation Act (SCRA) and hence cannot be listed on the stock exchanges for trading. rising concerns about the asset l iability management on the part of banks/financial institutions along with the development of derivatives market should see the bond markets grow exponentially in the future. As such. Infrastructure financing through Debt The resource requirements for infrastructure development in India are enormous. However. psychological and other issues. Some of the developments in each of these areas are narrated in the following par agraphs. most banks lack in±house capacity to evaluate project finance risk. there were a number of lega l. Factors that would cont ribute to the development of debt markets Looking ahead. Currently. corruption in almost all parts of the world and uncertain crude oil prices. However. Recently. which can be listed on the stock exchanges and traded as any other marketable instrument. Facilitating the creation of infrastructure focused Debt Funds and making it easier for banks to participate in such funds would allow much larger volumes of debt financing from the banks to be deployed to infrastructure development while distributing the associated risks more evenly across a greater variety of projects. the requirement of mutual fund industry. banks are constrained to finance this sector since their asset liability side is short term in nature. An estimate indicates that the requirements are to the tune of US 150 billion or more during the next five years. which needed to be sorted out to facilitate the growth of securitization.

Currently. Regulatory caps should be fixed for such cross investments so that other participants are given an opportunity to subscribe to these bonds. despite the recent hike in the limit up to which FIIs can invest in corporate bonds (USD 1.  Development of derivatives market 30 . Government is favouring defined contributory schemes. Some of the foreign funds do feel that. the debt market assumes an even more important role in assuring fixed returns. Implementation of Basel II might remove this anomaly over a period of time. with the gradual dilution of the joint family system. they should be allowed to issue bonds of maturities over 5 years subject to their asset liability matching norms. However. pension planning has begu n to assume greater importance. To encourage small investors. the investment p ortfolio (banks¶ investments in corporate bonds) has to be marked to market whereas the same constraint is not there in the case of a loan extended to the same corporate. Since banks are one of the leading issuers of bonds. this amount is too small for taking any active interest in this market meaningfully. In light of this excessive addiction to safety. The investment guidelines for the provident and pension funds need to be rationalized and they should be allowed to invest on t he basis of rating rather than in terms of category of issuers. The Joint family system that is characteristic of Indian households has been the primary reason behind a laggard retirement investment structure. most pension funds in India invest heavily in Government sec urities. the bond ma rket structure should emulate the equity market structure in the sense that a retail investor should be able to buy and sell bonds without any restriction on the minimum market lot. As has been said earlier. disclosure and listing of corporate bonds and they should be made simpler. due to growing fiscal concerns. This is likely to create greater demand for corporate bonds. Given the nature of returns required from pension fund investments. The development of an interest rate derivatives markets is a major pr erequisite to facilitate this. Further. What needs to be done?  Investor base needs to be broadened Banks¶ investments in corporate bonds need to be encouraged especially by bringing in changes in the prudential regulatory mechanism which treats loans portfolio on par with investment portfolio. Currently banks are allowed to issue bonds of maturities over 5 years only for financing inf rastructure sector. This along with the entry of private pension funds requires other investment avenues to enhance their risk return universe.Retirement planning in India is still in its infancy and is quite far away from the level of sophistication it has seen in most of the developed countries.5 billion). banks are one of the major issuers of bonds to augment their tier II capital and these bonds are in turn subscribed to by other banks (cross holdings). investment restrictions imposed by statutory bodies (statutory bodies only exacerbate pension fund investment in other sections of the capital market like corporate bonds and equity). FII¶s nee d to be given higher limits for investments in corporate bonds since this is one major investor class which can bring volumes to the corporate bond markets.  Widening the issuer base There is a need to review the current guidelines for issuance. Currently an investor can buy even one share in the equity market. The emergence of the Pension fund industry has certain obvious forward linkages with the capital market of any country. However. Such a change will also benefit these funds which can enhance their returns. This may encourage these funds to invest in high quality corporate bonds.

Various regulators should direct the regulated entit ies to report all the transactions done by them to the trade reporting system. The RBI has already initiated certain steps in this direction but a lot needs to be done in this aspect which only can assure a deep and vibrant debt market. However. The shut period (for reckoning the registered owner of the bond for payment of coupons) is very long in the case of corporate bo nds and needs to be brought on par with that for the government securities. anonymous screen based order matching trading systems should be encouraged. disseminate the same and keeps a data base of trade history. Like in the case of government securities. Currently the day count conventions in the market differ depending upon the nature of the instrumen ts and the nature of the transaction. Simultaneously. the derivatives market for hedging interest rate risk is not fully developed in India. the authorities should keep in mind that multiple trading platforms also have the potential to impact the liquidity adversely. there listing norms should be simpler.Though the interest rate risk is mainly managed through interest rate swaps and forward rate agreements. rating should form the basis for placement. they have to be taken into confidence to achieve this objective. On the other hand. clearing and settlement mechanism For improving the transparency and efficiency to the transactions in corporate bonds. which is one day. unlisted companies issuing bonds to institutional investors and QIBs. This requires incentivising large financial intermediaries like primary dealers to take up this job. they should be allowed an abridged version of disclosure. One way is to encourage the investment bankers involved in the placement of the bonds  Addressing price distorting issues There is a need to ration alize and reduce the stamp duty. It is also necessary to standardize the day count conventions. Privately placed bonds should be mandatorily listed within 7 days from the date of allotment. Further there is also a need for a market for short selling and when issued market for better price discovery and hedging. Stamp duty also needs to be rationalized with regard to securitized debt. Debenture trusties should be made more responsible and accountable. the development of clearing and settlement 31 .  Trading. However.  Developing a trade reporting system There is an urgent need to put in place a mechanism that captures all the information relating to trades in corporate bonds. The practice of suspension of trading/delisting of securities in case of non -compliance with listing norms by an issuer needs to be replaced by heavy penalties on the prom oters and directors of the erring company. Since stamp duty is a levy by the State Governments.  Market making Market making should be encouraged for promoting the corporate debt m arket. Allowing repos in corporate bonds is also necessary to improve interest in them. as is the case with public issues. which distorts the pricing of bonds.  Listing norms to be eased For already listed entities. companies which are not listed and which are opting for the private placement mode should be subjected to stringent disclosure norms. TDS needs to be abolished in the case of corporate bonds . They also should ensure that important information such as rating downgrades should be disseminated to the investors.TDS is another issue.

 Developing a market for debt securitization Apart from reducing the stamp duty on debt assignments.  Specialized debt fun ds for infrastructure financing As recommended by the High Level Expert Committee on Corporate Bonds andSecuritization (HLECCBS). 32 . the government should also endeavour to resolve the uncertainty in taxation issues pertaining to securitized paper. With a view to remove any ambiguity in this regard. ovation and multilateral netting should form the backbone for risk mitigation and enhancement of liquidity.mechanisms should be commensurate with IOSCO standards. Such Debt Funds registered with SEBI should be given the same tax treatment as the one extended to venture capital fund s. there is a case for creation of specialized Debt Funds to cater to the needs of the infrastructure sector. pass through certificates(PTCs) and security receipts. the Central Government should consider notifying PTCs and other securities issued by securitization SPVs / Trust as ³securities´ under SCRA.

because no politician wants to tell the people that their pension benefits are being cut in order to control the deficit. . billion average daily trading volume in the .Securities Industries and Financial Markets Association). It¶s a real pickle.S. Public debt should not be confused with external debt. primarily corporate. of which the si e of the outstanding . owever. So. a small number of bonds. ith the exception of war. because the risk of not doing so is enormous. Following is a list of countries by public debt as listed by CIA's orld Factbook . trillion. It is the cumulative total of all government borrowings less r payments that are denominated in a e country¶s home currency. 33 § § Public ebt as a Percentage of P orld Map    / © ¨ . trillion according to SIFMA . sovereign debt abroad and at home) is the single greatest risk to capital markets. overthe-counter TC) market. But these bailouts are occurring with borrowed money. In a Bloomberg survey of investment professionals. which reflects the foreign currency liabilities of both the private and public sector and must be financed out of foreign exchange earnings. The problem the world continues to face with this issue is that the fixes so far have been for other countries to pool their resources and bail out the offenders. bond market takes Nearly all of the $8 place between broker-dealers and large institutions in a decentrali ed. the si e of the worldwide bond market total debt outstanding) is an estimated As of $8 . trillion according to BIS or alternatively $ .WORLDWIDE SCENARIO OF DE T ARKETS The immediate risk facing the world is of sovereign debt defaults. there is a situation where bailing out poorly managed countries is being done so by piling debt upon debt without really addressing theother side of the equation spending. bond market debt was $ . are listed on exchanges.S. a majority of those surveyed believe that reece and Ireland will default on their sovereign obligations sometime this decade. This is an issue that has to be dealt with this decade.

Estimated tax evasion costs the Greek government over 20 billion per year.European Debt Crisis The Greek economy was one of the fastest growing in the Eurozone during the 2000s. the government of George Papandreou revised its deficit from an estimated 6% ( % if a special tax for building irregularities were not to be applied) to 12. "Investors placed about ¼20bn ( 2 bn. four times more than the (Greek) government had reckoned on. "Athens sold ¼5bn (£4. while hiding the actual deficit from the EU overseers. successive Greek governments have. Two of the country's largest industries are tourism and shipping. According to an editorial published by the Greek newspaper Kathimerini.7%. however Greece was seen as the worst case. Accumulated government debt is forecast. In the beginning of 2010. In 2009.6% which is one of the highest in the world relative to GDP. To keep within the monetary union guidelines. the Greek government deficit was estimated to be 13. The Greek government bond market is reliant on foreign investors. Greek government debt was estimated at ¼216 billion in January 2010. Since 1993 debt to GDP has remained above 100%. especially Italy. again according to the Financial Times." 34 . Initially currency devaluation helped finance the borrowing. from 2000 to 2007 it grew at an annual rate of 4. according to some estimates.2% as foreign capital flooded the country.5bn) in 10 -year bonds and received orders for three times t hat amount." In March. After the removal of the ri ght leaning military junta. the government wanted to bring disenfranchised left leaning portions of the population into the economic mainstream. Greece was initially able to borrow due to the l ower interest rates government bonds could command. According to the Financial Times on 25 January 2010. The purpose of these deals made by several subsequent Greek governments was to enable them to spend beyond their means. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. In order to do so. usage of derivatives and "massaging" of statistics (to cope with monetary union guideli nes) that have also been observed in cases of other EU countries. The global financial crisis that began in 200 had a particularly large effect on Greece. £17bn) in orders for the five -year. with some estimates suggesting that up to 70% of Greek government bonds are held externally. Greek government bond auctions have all been over -subscribed in 2010 (as of 26 January). After the introduction of the euro in Jan 2001. to hit 120% of GDP in 2010. fixed-rate bond. Despite the crisis. large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974. the government of Greece has been found to have consistently and deliberately misreported the country's official economic statistics. run large deficits to finance public sector jobs. and both were badly affected by the downturn wit h revenues falling 15% in 2009. and other social benefits. In May 2010. among other things. The emphasis on the Greek case has tended to overshadow similar irregularities. pensions.

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