The Development of India’s Corporate Debt Market

February 2008

The Development of India’s Corporate Debt Market
Executive Summary

February 2008

The Development of India’s Corporate Debt Market
Executive Summary
ICMA Centre University of Reading Reading RG6 6BA Tel: 0118 378 8239 Fax: 0118 931 4741 www.icmacentre.ac.uk

February 2008

The Development of India’s Corporate Debt Market is published by the City of London. The authors of this report are the ICMA Centre, at the University of Reading. This report is intended as a basis for discussion only. Whilst every effort has been made to ensure the accuracy and completeness of the material in this report, the authors, the ICMA Centre at the University of Reading, and the City of London, give no warranty in that regard and accept no liability for any loss or damage incurred through the use of, or reliance upon, this report or the information contained herein. February 2008 © City of London PO Box 270, Guildhall London EC2P 2EJ http://www.cityoflondon.gov.uk/economicresearch

.... 5.........1 Interest rate futures ………………………………………..................................... 5...1 Equity markets …………………………………………………...........................1 Stamp Duty …………………………………………………................................................... 3.....................2 Interviews ……………………………………………………….............6 Regulatory background …………………………………........... 6...........5 Infrastructure finance by securitisation ………………...............2 Tax deducted at source (TDS) …………………………........2 Investors in securitised bonds ……………………………....... Indian capital markets ……………………………………………......... 4.............................................2 Interest rate futures ………………………………………............4...... 6.......................4......................................................6 Euro issues ………………………………………………………...............................2 Many are not issued by corporates ……………………....................... 4........2 Auction pricing …………………………………………….................2......................................4.3 India’s need for a corporate bond market ………………....................7 The result of reform ……………………………………….....1 The report’s recommendations ………………………………......................................... 4......2 Why do countries need corporate bond markets? ……...................... Micro-barriers – the effect of institutional rigidity …………….............1 High and complex taxation …………………………………................................ 6........................1.1 Issues are not bonds ……………………………………….......................... 4.........4 Originators …………………………………………………..................................3 Lack of liquidity ……………………………………………..... 3.... 3 4 5 6 ........2 Lack of risk management products ……………………………............................................. 4............. 4. 4................................................................ 4............................................. 5.......... 4............ 5..................... The Patil Report ……………………………………………………...............7.............................................1 Risk of over-reliance on a weak banking sector …….........7...........4 Fragmented issues ……………………………………….5 Repo and financing ……………………………………….......................... 2...1 Desk research …………………………………………………….................1........................................... 4.........3 Auction timetable ………………………………………….................................................2............ 4............................ 6.......5... 4... Project design ........................7..4...............................1 Government funding and debt issuance …………….. 4......4.............3 Risk structures ………………………………………………......5......................3 Implementation of the report ………………………………...5....1 Assets securitised …………………………………………….......... Corporate bond markets …………………………………………....................................3 Government securities model ……………………………….......7.................... 4............. 4............................... 4..... 3...1 Features of corporate debt markets ……………………….... 6..4 Recent developments in the government bond market ................................................ 4...4 Parallels with equity market development ……………….. 4...................................................... 3.. 4.............5 The Indian corporate bond market …………………………........... 3 5 7 7 8 11 11 12 12 14 16 16 17 19 19 19 23 23 24 25 25 25 26 29 30 32 33 34 35 35 35 36 36 37 39 39 41 41 42 43 43 43 44 44 44 44 …………………………………………………………........................4..........2................. 4.......... 4..... 4....2 Progress since the report …………………………………........ 4........ 6.............. 2.................2 Derivative markets …………………………………………….....7 Securitisation and structured finance ……………………….....................7..............................Table of Contents Foreword Executive Summary 1 2 Introduction …………………………………………………..........................................................6 Short selling …………………………………………………..4.......7.

.......3 Non DvP settlement ………………………………………....... 6................ 6....... 6.3 Lack of clear regulatory structure …………………….... 8.. 7....... 7.......5 No universal conventions ………………………………...................... Summary and recommendations ……………………………….................................7.............................1 Macro-economic factors ………………………………... 6.................................. 6............5.........1 Government borrowing crowding out ……………………..........4 OTC derivatives and swaps ……………………………......7 Barriers to securitisation ………………………………………............. 6..........2 Life insurance companies ………………………………......5...............6 Long shut period ………………………………………….....................5 Registration ………………………………………………….................7.......... 6.7........7..................................... ..................2 No market makers …………………………………………...........3......2 Recommendations ……………………………………………....................... 8...............................................................2 Micro-barriers – institutional issues ……………………....................................3.......................1 Limited transparency ……………………………………................................................. 6.................................1 Stamp Duty …………………………………………………......................1 Public issues are difficult ………………………………….....3...............3 Macro-barriers – demand and supply ……………….....4 Tax ……………………………………………………………....... 7... 6...............2 Limited demand for bond finance ………………………….1 Current status ………………………………………………..2 PTCs not securities ………………………………………….............2 Private placements are easier ………………………….. 8......... 6..................................5........4 Lack of regulatory clarity ……………………………………....................5 Secondary market and pricing issues ……………………...........................................1 Practicable recommendations …………………………..................................................6 Restriction on short selling gilts ………………………………... 6......................................5..4 Exchange control ………………………………………………........................................................... 7.....................6............................2........1.. 6............... 8............ 45 45 46 46 47 47 48 48 48 49 49 49 49 50 50 50 51 51 51 51 52 52 53 55 56 57 59 59 60 62 62 62 62 63 64 64 65 65 67 69 8 Annex 1 Appendix A ………………………………………....... 8..........3.............. 6.............4 Retail participation ………………………………………......3 Repos ………………………………………………………...........2....3 Pension funds ……………………………………………….... 6. 8......3. 6.............1 Summary …………………………………………………………..................................................5.... Implications and opportunities for the City of London Key references .......3 Cumbersome public issuance process ……………………................. 7.... 6..............................................................2........................................ 6....5........ 7 Macro-barriers – low levels of supply and demand …………........... 7......3 Limited investor base …………………………………………...7............1.............. 6..2........ 6............................... 7.......1............ 8....................................3........1...... 8...... 7...........1 Mutual funds ………………………………………………......4 No database of issues ……………………………………....4 Securitisation – a special case? ……………………….................

Policy and Resources Committee City of London The resilience of emerging markets to US growth slowdown is a striking development and the associated strong and positive global growth trends of the emerging ‘BRIC’ markets. In this role India provides a complementary role to China which is becoming the manufacturing and assembly workshop for the . In view of the uncertainty created by the collapse of the sub prime sector in the USA.Foreword Michael Snyder Chairman. India has reaped the rewards of such policies in its recent development. It shows a number of areas in which the City and India could help repair these omissions and benefit from collaborating. India presents a huge potential market for corporate financial services paralleling its corporate sector’s growing contribution to the global economy as an increasingly effective provider of both primary and higher value added products and services. These include advice and issuance expertise. while building on the advantages of the historically strong links of the UK to India. Politically stable. and the provision of education and training in the management and operation of corporate debt markets. These reinforce the comments of the R.H. increasingly open to markets (though the pace of change remains a cause of concern in the financial services sector). it is especially important that at this time we emphasise the considerable advantages offered by the free-trade model. This latest report reviewing the corporate debt market in India and prepared for the City of London by the ICMA Centre at the University of Reading is therefore timely. represents a significant offsetting influence on global growth. The Report of the High Powered Expert Committee on Making Mumbai an International Financial Centre identifies three ‘missing markets’ that handicap Indian international financial services development: a corporate and sovereign bond market. the provision of structured finance and credit management. and derivatives markets. Patil Committee Report on domestic debt markets. Among the array of evidence that can be assembled to support this position we can point to the particular experience of India. a spot currency trading market. led by China and India. The rapid growth of India in particular and its substantial progress towards becoming a major global trading economy and financial services centre presents a particular opportunity and a challenge for the City of London. and keen to facilitate the free movement of capital and people. The opportunity is to play a pivotal role in providing expertise in global financial services to an economy that is rapidly growing its share of world trade.

and in particular. the provision of effective futures and derivative markets. Efficient capital markets ensure resources are well directed to sustainable development. more effectively by borrowings from domestic banks and financial institutions but with a sharply rising share of loans raised from abroad. ICMA identify a range of factors that have kept the sector immature in India. with its well-educated workforce. The authors identify the inhibitory effects of state-domination of the banking system and exchange controls.without these key participants. In making the transition to being a more important financial centre. who in other markets are the prime investors in corporate debt.world. however attractive the trading environment may be. India needs to see Mumbai’s increased integration into the network of international financial centres. The report shows that corporate bond markets in India remain modest in scale in comparison with corporate bond markets in the most developed countries. has made a particular impact by its focus in providing high technology products and business services. In Mumbai we have an international financial centre that the recently published Global Financial Centres Index report indicates has considerable potential. The report's authors stress that the most pressing need is to reduce the barriers to institutional investors. India. These include the factors that we know inhibit any capital market and to which all regulatory authorities and markets need to respond – the complexities of taxation. the market cannot succeed. India has had a bank-dominated financial system with the corporate sector served relatively poorly by the domestic capital market. As they note . The connectivity between financial centres and specialisation in particular services are important supports to the efficient use of capital. 2 . the way stamp duty is applied. and proportionate regulation. improved issuance processes.

● ● Our analysis. suggests that there are two groups of factors which have hindered Indian corporate debt market development: ● Micro-effects – these are market-specific issues which could be addressed relatively easily.Executive Summary This project arose from discussion at the City of London Advisory Council for India. often just a single bank – thus they are closer to syndicated loans than bond issues. however a corporate debt market would provide an additional source of finance. and the conditions that might promote this. the absence of parallel debt-oriented risk 3 . Access to capital markets for smaller firms. ● ● Indeed. Their deliberations revealed an interest in the potential for development of the market for corporate debt in India. It is important to understand the likely benefits to be derived from the creation of a corporate debt market: ● Access to new sources of capital for existing. The development of a competitor source of alternative funding to the (dominant) banking sector. In the absence of such a market. and is particularly important in the context of Mumbai’s development as a global financial hub. There is very little secondary market liquidity – partly because of the fragmentation of issuance and the small investor base. a high level group of Indian business representatives. The corporate debt market is anomalous among Indian financial markets in that it has not developed as rapidly. The Advisory Council steers the work of the City Office in Mumbai and provides guidance on the City of London’s engagement with India. Many larger Indian firms already raise capital without undue difficulty through the Indian banking sector and international debt issues. which reduces the pressure for innovation and the provision of new methods of finance for India’s growing corporate needs. Arguably the current market is not. although these are likely to be low rated. in fact. Most issues are either by public-sector entities or by financial institutions raising money to lend onwards. in that: ● Relatively few real corporates make debt issues. a true market for corporate debt. (in particular. or to the same extent. or comparable markets elsewhere. as other parts of the Indian financial system. consistent with a number of previous reports. a functioning corporate debt market is generally recognised to be a necessary component of a 21st Century economy. stamp duty). large firms. banks face limited competition. These include: complexities of taxation. Almost all issues are private placements to a small group of investors.

What is striking. government guaranteed. Over the last three years. the market. In particular. however. The following practicable recommendations are made. This produces distortions. tax burdens and the like. institutional and infrastructure barriers. savings vehicles available. 4 . These factors include: the continued crowding-out effects of government capital requirements. • Reform of regulations which currently exclude banks from derivative trading. while many institutional investors are prevented from broadening their portfolios.● management tools (in particular. the lack of bond futures. who in other markets are the prime investors in corporate debt. • Reform of regulations on the disclosure for public offers. however. is hindered by the same sort of barriers that more generally affect corporate bonds. however. the regulators have sought to address a number of legal. while active. limitations on international investment. notably simplifying the issuance process and reviewing Stamp Duty. As with corporate bonds. • Controlled and phased relaxation of the investment mandates of institutional investors. considerable efforts have been made to establish free and open debt markets. with no dates yet set for their implementation. the limited demand for bond finance. and structures are often driven by arbitrage rather than commercial needs. At present. is that relatively little has so far been done to reduce barriers to institutional investors. corporate bond repos and credit derivative markets). which we believe can be implemented reasonably swiftly: • Rapid implementation of the reform of stamp duty • Relaxation of exchange controls on corporate bonds. many companies’ financial decisions are motivated by the desire to avoid regulatory restrictions. the state-dominated nature of much of the banking system (although the number of active privatesector banks is now increasing rapidly). Macro-effects – these are economy-wide factors which hinder the development of the corporate debt market. and the issuance process itself when compared with the speed and flexibility of private placements. Structured finance has been growing in India and securitisation is seen as important in the financing of the enormous infrastructure needs of the country. The nature of the Indian savings market means that individuals already have very attractive. At present. Structured finance remains confined to certain parts of the market. many of these changes remain proposals. with the result that genuine corporate debt issues are often the least-favoured option. regulatory conflict. and the remaining effects of exchange control. but are unlikely to be addressed simply to free this market.

restricted and illiquid. but which are unlikely to provide the initial stimulus for a new market. We should note at this point that we are not aware of any significant opinion that there is a single factor. University of Reading to produce a research report on the development of the Indian corporate debt market. the theme of this report is that. may appear less significant. that many “bonds” issued in India are really renegotiable. that trading systems are unlikely to have much impact on the overall supply and demand for corporate bonds. syndicated loans). Whatever their cause. Limited demand for corporate bonds as investments. The objective of this project is more realistic. International experience suggests. Whilst the Indian capital market has developed rapidly over the last two decades. This results in part from the relatively easy access to bank credit which corporates can obtain. namely to examine some of the many factors that have already been 5 . there are significant structural problems – many of which are really larger issues to do with India’s macro-economic development and transition from a more centralised economy. which proposed the research as likely to address a key area in the further development of Indian capital markets. the corporate debt market remains small. as far as corporate bond markets are concerned. where there is genuine demand. Equally. despite considerable attention. We believe that there has been a tendency to focus on factors that might facilitate the development of an already existing market. The focus of this report is to identify which of the many problems identified in previous work are responsible for this lack of progress. many of the barriers which are described below and on which much of the existing policy focuses. Similarly the focus on the fact that the corporate bond market is largely a private placement market (that is.1 Introduction The City of London Corporation commissioned the ICMA Centre. for example. These are undesirable features which persist. ● Experience in other countries suggests that the market will not develop until there is a real demand for a corporate bond market – it cannot be created by government or regulatory action. these structural problems lead directly to: ● Limited supply from issuers. the removal of which would immediately unblock the corporate debt market. has distracted attention from the larger picture. Thus. The request originated with the City of London India Advisory Council. In particular we note the dominance of the public sector in pensions and life assurance provision and the restrictive investment mandates which are imposed on life assurance and pension providers (both public and private sector).

● Chapter 3 explains the value of corporate bonds for developing countries and follows this with a brief comparison of India to the position of other economies that have established corporate bond markets. and opportunities for. and government and corporate bonds market. the City of London from further development of the corporate debt market. The section also reviews structured finance and the securitisation market in India. and contains a fuller discussion of the supply of corporate debt and the demand for bonds by financial institutions. its incremental content and the methodology adopted. ● Chapter 6 presents fuller discussion of the principal “micro-barriers” to development. ● Finally. the Patil report. ● Chapter 7 focuses on “macro-barriers” to development. These barriers are those that affect market infrastructure for trading. ● Chapter 4 examines the current status of the Indian markets for equity. The structure of the report is as follows: ● Chapter 2 describes the purpose of the research. which is widely regarded as the benchmark in the analysis of the Indian corporate bond market. We wish to express our gratitude to Dr Ajay Shah and Dr Susan Thomas of the Indira Gandhi Institute for Developmental Research. which offers some suggestions as to the possible impact on. and which are likely to have the more modest effect of facilitating trading and reducing costs once the market is established. Chapter 8 documents the conclusions of the report and suggests a limited number of key recommendations Whilst the main body of the report focuses on conditions in India. and examines progress in implementing its recommendations. Mumbai for their insights into the Indian market and for their assistance with some parts of the field work. 6 . ● Chapter 5 summarises the Report of the High Level Expert Committee on Corporate Bonds and Securitisation. derivatives. clearing and regulation.identified and thereby to indicate which are likely to affect the establishment and growth of the market. we also include an annex to the report.

We also examined material relating to developments in comparable debt markets.1 Desk Research This part of the research was designed to provide points of comparison with related work in related markets. As a result.2 Project design The study of corporate debt market development is by now quite well established. the 2001 ADB report on India (in which we were involved) was used to provide an independent point of reference for the position of the Indian corporate debt market. which has developed much faster than the corporate market since 2001. progress that has been made towards implementing the recommendations made in those reports. This means that many of the issues relating to development are known. and the importance of relaxing exchange control. we made use of material relating to securitisation. Finally. and that the challenge facing researchers is the ordering of issues facing each jurisdiction rather than the establishment of new topics. The outcome of this research is the conclusion that there is a significant difference between policies designed to enhance an already existing and active market and those required to induce the market to become active in the first place. and their differing regulatory and institutional needs. to collate the key issues identified by previous research. and which is listed in Appendix A. the research was divided into two parts: 2. and to examine. In this context. on which we could build in this report. The Patil report.3. Thus.4. Our explicit research plan was to build on existing reports for India and other markets so as to avoid re-covering old ground. these reports are listed in Appendix A. where possible. A listing of the more significant references in each of these areas is contained in sections 1 and 2 of Appendix A. including those of China and Thailand. which is discussed below. The RBI reports provided an update on the government securities market. Other relevant material is contained in reports which form part of the ongoing European debate on bond markets and their transparency. which has largely been produced independently of the bond market discussions. European markets are generally in the first category 7 . This material is particularly useful in highlighting the importance of the distinction between retail and wholesale markets. Much of this research was focused on the principal previous reports relating to the Indian corporate debt market. provided a more detailed view of the market and showed the developments that had been made in the corporate debt market since 2001. These reports enabled us to bring an alternative international perspective to the Indian markets and they highlight areas where solutions being strongly pressed by some in India had not succeeded elsewhere. with large numbers of studies conducted by local and international bodies in respect of many countries worldwide.

Where possible. but would be used to inform the researchers’ own arguments. and so we did not discuss the general economic development of India. Interviewees understood that their views would not be reported directly. It was agreed that all questions should be addressed to all interviewees. we stayed away from matters peripheral to the specific project brief. accepting that each would wish to focus on one or other set of concerns. nor do we make use of direct quotes. These interviewees were chosen on the basis of the advice of the India Advisory Council’s representatives and were chosen so as to provide a good cross-section of opinion within the appropriate industry sector on the chosen topic. Markets such as those in India and China are in the second category. which could lead to the identification of the interviewee concerned. 2. Interviews were conducted confidentially to ensure that the views expressed were as open as possible. as well as specific questions on the individual items identified as potential barriers to development from the desk research. To this end. An informal set of questions and areas to be discussed was developed in advance of the interviews. we do not attribute views in the report. All of the representatives were senior within their organisation and all had sufficient experience and authority both to represent the views of their organisation and to offer views that were based on their own experience with the debt market. including. trading systems and transparency. they lie outside the scope of the present project. While these are interesting topics. a series of semi-structured interviews were also conducted.(already active) and policy discussion is focussed on improvements to market infrastructure. for example. and the changes required for those markets are more related to reform of laws. Of the initial list. however. To discover participants’ views on the relative importance of the issues. we did not record the discussions and did not take a verbatim record. The principal purposes of the interviews were: ● ● ● To discover whether new issues or factors not identified in the desk research have arisen. seven institutions were initially available to meet the researchers and of these we met five in Mumbai and 8 . its broader infrastructure needs and its emergence as a truly global power. In keeping with this. These questions included general topics to elicit interviewees’ views on general corporate debt market development. The interviewees were selected in two stages: ● The City of London Corporation in liaison with the India Advisory Council developed a list of interviewees. although handwritten notes were taken. regulation and market custom than to infrastructure.2 Interviews To complement the desk research. To discuss participants’ views on progress being made towards addressing these objectives.

As a result. the industry-spread was felt to be too narrow to give the market wide perspective required for this project. infrastructure providers and independent analysts. The interviews were between 45 and 90 minutes long and took place in the interviewees’ offices. consisting of non-bank practitioners. and to a lesser extent. government debt markets. Once again. be less concerned about the development of the corporate debt market than were other market participants. while the participants were all senior and eminent. As noted. In total. All interviewees were senior representatives of their organisations. therefore. 26 individuals participated in the discussions. these representatives were all senior and had experience of corporate debt markets and the issues surrounding them in India. A common set of ‘discussion topics’ was developed. individuals also had experience of regulatory standard setting in this area and were able to comment on the practicability of reform. derivatives. additional interviewees were sought from the researchers’ existing contacts to ensure a broader coverage of market participants.exchanged email correspondence with the others. our earlier work and the desk research undertaken for this project showed that the banking sector was the main supplier of corporate funds and might. The researchers added a further eight institutions to the list of interviewees. In addition. No members of the India Advisory Council themselves were on the list of participants. and all had specific views on corporate bond markets. ● The India Advisory Committee list was entirely drawn from the banking and regulatory sectors. We were particularly keen to interview infrastructure providers who have already provided much innovation in the Indian equity. This included: ● General ○ An invitation to comment on the state of India’s capital markets ○ Specific introduction of the condition of the corporate bond market ○ Whether the interviewee regarded this market as important for the development of India’s financial markets and economy ● Market Infrastructure ○ Trading platforms ○ Settlement arrangements ○ Pricing and the existence of a reliable yield curve ○ Bond issues versus private placement ○ Stamp Duty and taxation on issuance Market participation ○ Supply of debt by firms ○ Levels of institutional demand ○ Degree of retail involvement ○ Crowding out ○ International Participation Securitisation ○ The desirability of securitisation in Indian markets ● ● 9 . Where appropriate.

regulators were more interested in infrastructure and retail participation. 10 . Broadly. we can report that all interviewees agreed that the market was under-developed and that none of the items of those that we discuss below was regarded as completely irrelevant by anyone. while participants and traders regarded these as of lesser importance.○ ○ ● Constraints on firms ability to securitise The impact of Stamp Duty on asset transfers The Environment ○ What prevents faster reform ○ Regulatory arbitrage ○ Regulatory conflict While we report a consensus view of the interviewees and do not attribute opinion to any individual. The differences of opinion emerged in the rankings of the issues.

however. especially in developing markets. the US has a ● ● ● 11 . Government stocks may be traded more actively.3 Corporate bond markets This section outlines what corporate bond markets are and then moves on to the issue of why growing economies are often encouraged to develop them. Individuals will invest in equities where they perceive there are prospects of large profits and similarly in derivatives. This contrasts with equity markets. whilst almost all developed markets have corporate bond markets. higher risk. For small and medium enterprises (SMEs). The percentage returns from bond investment are generally small. banks have an obvious informational advantage in that they see and control the cash flows so that the cost of monitoring is lower than it would be for a bond-holder. take an active involvement in the company – they are legally bonds but in economic terms they are syndicated loans. companies do access bond markets. Investors. in many cases. where retail interest is frequently a significant proportion of the market. It is noticeable that the active markets are often those that developed in response to a failure of the local banking sector to adequately fund corporate expansion. Functioning corporate bond markets for high yield issuers are rare. but otherwise the bonds are usually seen as buy-and-hold investments. though trading is usually highly concentrated in a few runners with the rest of the government stocks being inactive. it is appropriate to note some of the key findings from analyses of international corporate bond markets. rationally invest in simple deposits and mutual funds (including bond funds). We summarise these here and return to them in the context of Indian markets below. 3. Thus. Where smaller. Finally. while countries with historically strong banks have often managed with only limited use of corporate bonds. ● Few bond markets are substantially used by any but the most highly rated or large corporates. and few retail investors choose to participate. There are very few bond markets in which retail interest is substantial. relatively few are regarded as large or active. There are very few liquid secondary bond markets.1 Features of corporate debt markets Although this report is concerned with the establishment of a successful corporate debt market in India. Private placements are taken up by a small number of investors who. Coupon payments or credit events may spark some trading. Even the largest issues in the largest markets trade for a brief period after issue and rarely thereafter. they do so through private placements (a topic of special relevance to India).

it is important to develop other avenues of corporate finance. and in particular the corporate bond market. This suggests that it is not necessarily a reliance on bank finance that hinders economic growth or causes instability. As we discuss below.large and active corporate bond market.1 Government ownership In many markets the government is. in turn.2. while that in the UK is smaller. While this may have been seen as beneficial from a crisis-management point of view.2 Why do countries need corporate bond markets? Many international agencies strongly recommend the development of corporate bond markets as a key part of countries’ capital market development. India largely escaped the worst effects of that crisis – mainly because at that time it was not part of the global financial system. Often in developing markets there is an absolute shortage of assets for long-term investors to acquire (often not helped by legal investment mandates which prevent them investing in equities). rather it is a reliance on a banking sector which is intrinsically weak that creates the systemic risk in a credit crisis. rather than the necessity of one particular form of debt finance. there is often a view that retail investors may be attracted into bonds as an alternative to deposit investments. that what matters for economic growth is the availability of capital for firms. It is therefore more open to profiting from involvement in global finance but is. India is now very much a part of the global economy and the global financial structure. but not dominant corporate debt markets. The following subsections outline some of the principal reasons for this. 3. outside the USA. Often those that are not owned by the government are owned by 12 . India’s relative detachment from the global economy has since been seen by the authorities as a barrier to national development. This suggests. As a consequence of the accelerating liberalisation that began in the early 1990s. In large part this recommendation was prompted by the events of the Asian financial crisis in 1997. tend to rely heavily on the banking sector for debt finance and tend to have active. Developed markets. is rarely achieved. or has been. the owner of many of the banks.1. Corporate bonds are particularly important for the development of long-term institutional investors such as pension and life insurance funds. Banking sectors in developing markets have tended to suffer from structural weaknesses that have made them vulnerable to crises. at the same time.1 Risk of over-reliance on a weak banking sector In markets with weak banking sectors. no longer immune from problems caused by residual weaknesses in its financial structure. 3. during which many countries suffered as a result of an over-reliance on weak banking sectors for the finance of corporates. 3. Bonds provide an alternative to bank deposits for investors. but this. as noted.2.

2. or were considered to have some form of government guarantee. They were slow to adopt new techniques such as risk management and credit scoring.1.2 Implicit or explicit guarantees Banks which were either state-owned. More recently. were given explicit mandates to lend to sectors that could not attract commercial lending. The regulatory weaknesses have been particularly pronounced in respect of: 13 .other entities such as the military or local authorities. Often their lending decisions were influenced by non-commercial factors. Again these bonds are unlikely to be repaid.4 Weak banking regulation Banks are usually under the control of the central bank which is responsible for monitoring compliance with capital adequacy/solvency requirements. 3. but cannot be marked to market without disrupting the banks’ capital adequacy margins. Credit skills were often poor. Lack of competition has deterred them from innovating or improving their efficiency. indeed often the only.1. Most of the countries affected by the Asian crisis have adopted restructuring strategies. such banks often have a significant proportion of non-performing loans (NPLs) on their books. when banks were instructed to lend to fund infrastructure. Some banks. together with their nationwide network and the relatively low incomes of the population has meant that banks are the dominant. In some countries. essentially bail-outs. the growing wealth of the population together with a growing awareness of investment opportunities has attracted investment into other vehicles.3 Dominance of retail deposit market The perception that the banks had government guarantees. but at the same time they remain as a drag on the balance sheet. balance sheet size is still generally seen as a mark of stability for developing country banks. 3. to rescue the banks. There is little chance of these loans being repaid. repository for individual savings. information was rarely complete and the bank staff had few incentives to turn away business. such as Indonesia.1. In developing markets. In addition. the skills for regulation are usually in short supply although the central bank often has the best of those available. but banks still dominate the market for savings in terms both of money value and the number of customers. This ownership structure led to a number of failings: ● ● ● ● The banks were fundamentally inefficient. These are a hangover from directed lending policies of the past. being overstaffed and slow to adopt new technologies.2. many banks were owned by industrial conglomerates that used the bank subsidiary as a source of working capital for the conglomerate. and often without adequate data relating to the borrowers. the so called policy banks. often engaged in lending without adequate evaluation of the risks. Additionally banks may have policy loans/bonds on their books. 3. As a consequence.2.

These banks remain: ○ Dependent upon the state for business. but they still carry many legacy loans/bonds. which are both fixed at attractive levels and for which there are significant political barriers to change. Many of the bonds are not marked to market. The key structural features are: ● The development banks have been transformed from agencies for directed lending in support of infrastructure development. While the Indian banking sector has shown significant progress. This latter is partly funded by the banks through the Statutory Liability Reserve. The commercial banks remain closer to the state sector. The structure of managed interest rates is gradually being dismantled and most wholesale rates are now market-determined. Enforcing suitably robust treatment of defective assets. with Moodys/ICRA reporting that banks hold around 90% of the assets of the financial sector. They have moved into the private sector and in many cases become something close to investment banks (ICICI is probably the best known example of this). India is a bank-dominated market. The non-performing loan (NPL) situation of the banks has improved substantially in recent years. however. they have often competed aggressively for corporate business and this suggests that there is at least a measure of competition to supply funds. RBI figures show that in 2006/07. it is still in a transition stage. in particular marking to market – in the face of political issues or a desire not to destroy the capital base of the banks. state-owned banks retained a 72% share of the financial assets of the banking system. being in the non-trading (that is. While banks have been the main source of corporate credit. such as the post office savings and provident fund rates. Their focus is on corporate finance and raising money in wholesale markets. to around 3% of assets. which requires them to keep 25% of their deposits in government bonds. (Reserve Bank of India. Poorly capitalised with significant holdings of bad and doubtful debts. The implementation of Basel 2 (which among other things requires loans 14 ● ○ .3 India’s need for a corporate bond market As is true of many Asian countries. especially with regard to the transformation of the development banks. and are unlikely to be repaid. especially when they were state-owned and did not conform to normal banking or accounting practices. held to maturity) portfolio. 3. The state remains a significant borrower both through state-owned enterprises and through the government deficit. A number of key retail rates remain controlled. figures for 2005/06 give an average of 3. RBI.7%).● ● Gathering adequate information from the banks.3% across all banks – state-owned banks have a larger proportion at 3. Credit demand is growing rapidly but remains low by Asian standards.

putting pressure on the liquidity of banks. A legacy of explicit and implicit government guarantees remains present in the market. convinces many investors that the banking sector and the state-controlled part of the investment sector will be supported in any eventuality. either by encouraging direct retail participation in bond markets or. Rapid economic growth. by encouraging the development of indirect investment vehicles. Bank credit is currently expanding at the very rapid rate of 30% per year. ● The risk culture in India is not well developed. more likely in our view.000bn). ○ Somewhat inefficient. which is expected to continue. This is common in transition economies such as China. the experiences of repeated government interventions (for example. All so-called “corporate bonds” in China are required to have a bank guarantee. to rescue the Unit Trust of India). Despite the growth of the private sector. The rapid growth of the economy is driving up consumer and corporate demands for credit.to be marked to market as well as bonds) begins in 2008. starting in 2008. is expected to put pressure on conventional (largely bank-based) sources of finance in the future: ● Future infrastructure demands are enormous – estimated to exceed $300bn over the period 2007-11 (GDP in 2006/07 was approximately $1. will put further pressure on bank balance sheets. The implementation of Basel 2. ● Finally. but at the same time under increasing commercial pressure because of the large number of banks competing for limited (albeit rapidly growing) consumer and corporate business. the development of a corporate debt market can also be seen as a way of mobilizing savings. a successful corporate bond market might also increase the supply of investment capital to firms. while the deposit base is only expanding at 20%. which is in turn taken as an implicit government guarantee. Thus. which has an even less well-developed corporate bond market. 15 . and policy statements to the contrary. but it is not clear how these remaining NPLs will be dealt with.

BSE. NSE. We begin with equity and derivative markets. (Although India has many stock exchanges. before moving on to the market for securitised finance.1 Equity markets The Indian equity market has grown rapidly since the reforms to the equity trading infrastructures and the setting up of the National Stock Exchange of India. and we spend some time discussing the remaining rigidities in this market and their ongoing reform.Equity Values on Indian Exchanges Market value of equity listed on main Indian exchanges 900 800 700 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Bombay SE $bn National Stock Exchange India Source: World Federation of Exchanges (WFE) 16 . Although these may be seen as peripheral to the corporate debt market. Chart 1 shows the growth in the market value of equities listed on the Bombay Stock Exchange (most major stocks are listed on both exchanges so the market values of the two exchanges are very close). in 1992. In the final part of the section.4 Indian capital markets This section of the report presents some background to Indian capital markets. The revolution in Indian equity markets over the last ten years has been immensely successful. the Bombay Stock Exchange. We then move on to the market for Indian government debt. and the NSE now account for almost all the business conducted). Chart 1 . which has been significantly reformed as part of India’s liberalisation policy. and this has emphasised the weakness of the corporate debt market. A well-functioning government debt market is a prerequisite for a corporate debt market. Market value has expanded at a cumulative rate of about 60% a year over the period covered by the chart. we discuss the international debt market. equity is one of the fundamental sources of capital and therefore provides one of the major alternatives to debt issues for firms. 4.

The NSE has been particularly successful in developing single stock futures. NSE.Turnover on Indian Exchanges Equity turnover on main Indian exchanges 450 400 350 300 250 200 150 100 50 0 2002 2003 2004 2005 2006 Bombay SE $bn National Stock Exchange India Source: WFE In regional terms the market value of the Indian equity market is similar in size to that of Korea. as shown in Chart 2. about half the size of Korea and China.2 Derivative markets The National Stock Exchange of India has been very successful in developing equity derivative markets. In terms of turnover it is similar to Australia and Hong Kong. 17 .Turnover has similarly expanded. aided by advanced IT infrastructures supporting the trading and settlement of trades. 4. slightly smaller than China and Australia. Chart 3 shows the growth over the last five years. Chart 2 . has seen more rapid turnover growth than the BSE which has only relatively recently adopted electronic trading and moved to a demutualised structure. the first exchange in India to adopt electronic trading. the trading volumes of which significantly exceed that in other countries.

but these have not been successful in attracting activity.Chart 3 – Equity Derivatives Trading Equity derivative trading . and most global.600 Contracts (LHS) Underlying value $bn (RHS) Source: WFE International comparisons of underlying value of trading in equity derivatives show the NSE as of comparable size to the other major derivative exchanges in Asia (except for Korea which dwarfs all other Asian.000 U/L Value $bn $45 tr 2.800 1. equity derivative markets).India 250 Contrcts traded (m) 200 150 100 50 2002 2003 2004 2005 2006 1. Chart 4 – Asian Derivatives Exchanges Equity derivatives .000 0 Australia Hong Kong Korea Singapore Tokyo NSE Source: WFE The NSE also offers interest rate futures – short (3 month) and long (10 year).200 1.000 1.000 800 600 400 200 Underlying Value $bn 1.400 1.Underlying Value 2006 3. for reasons that we discuss in the following sections. 18 .

Poor tax collection results. partly as a result of an underdeveloped structure. and the exigencies of the funding requirement were making the Reserve Bank of India.4 Recent developments in the government bond market This section describes the major developments. which offers trading functionality. Banks are required to maintain a Statutory Liquidity Requirement. The prohibition on short selling was hampering liquidity and imposing an impossible task on primary dealers who were required to quote firm. RBI. This efficiency has not always been present in India. The fragmentation of the gilt issuance with a large number of outstanding issues (116 in 2001). the RBI has introduced the NDS-OM system. ● ● ● ● ● It should be noted that a process of reform had started before this. 4. ● 19 . The lack of a clear auction timetable meant that the market could not plan for government issues. The auction prices were distorted by repeated interventions in which the RBI subscribed to the auction to ensure that it produced the correct price.1 Government funding and debt issuance Borrowing by the Indian government in the late 1990s and early 2000s was large and growing rapidly. was a barrier to increased liquidity.4.3 Government securities market The government securities market provides the underpinning for a successful corporate debt market. 4. by providing the benchmark yield curve and a low default-risk tool for portfolio management. The deficit was driven by: ● Rapidly growing expenditure. which was largely a reporting and settlement platform. In 2002. in the government securities market. two-way prices. of 25%. and partly because of collection difficulties. the RBI also introduced the Negotiated Dealing System. SLR. NDS-OM has gained significant market share and is widely regarded as very successful. and the report by the Asian Development Bank in 2001 noted that: ● The heavy demands of the government funding requirement were risking crowding out other borrowers. through reform actions or other influences. More recently. NDS. The restricted and insecure repo market was hampering the role of primary dealers as providers of liquidity. many very small. It is important that the government market functions freely and offers adequate liquidity for this benchmarking to be effective. Government deficits in this period were large and the revenue deficit exceeded 5% of GDP in the fiscal year 2001-02. especially in grants from central to state government and the heavy involvement of the government in the economy through subsidies and direct ownership.4. with the introduction of auctions supported by primary dealers to replace the previous system of allocation. over-cautious in its approach to market reform. but could not sell stock they did not own.

000 600.000 0 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Budget Revision Actual Source: Ministry of Finance Note: One crore = 10.000 300. and how expenditures were rising more rapidly than revenues at that time. Chart 5 – Government revenue Central govt.000 0 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Budget Revision Actual Source: Ministry of Finance Note: amounts in crores of Rupees.000 400. The figures show the budget estimates. 20 .000 Rupees Chart 6 – Government Expenditure Central govt. The result was a rapidly rising deficit.000 300. as shown in Chart 7 and Chart 8. the revised budget estimates and the actual outturn (figures follow the Indian practice of measuring in crore and use Indian financial years which run from 1 April to 31 March).000 200.000 Rs Crore 400.000 100.000 500.Chart 5 and Chart 6 show the revenue and expenditure trends.000.000. current revenue 600.000 200.000 Rs Crore 500. current expenditure 700.000 100.000 The revenue and expenditure data illustrate how the Indian government overestimated revenues in the early part of the decade. 1 crore = 10.

Additionally the government is 21 .000 Chart 8 – Deficit as % of GDP Current govt.0 2.0 3.0 5.0 1.0 % of GDP 4.000 0 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Budget Revision Actual Source: Ministry of Finance Note: One crore = 10.000 20. current deficit 140. and was recognised as such by the Indian government.Chart 7 – Indian Government Deficit Central govt.000 Rs Crore 80. deficit as % of GDP 6. The act requires the government to follow a strategy to reduce the current fiscal deficit to less than 3% of GDP by 2009.000 40. The enactment of the Fiscal Responsibility and Budget Management Act (FRBM) in 2003 was the culmination of a lengthy process of attempting to devise a control strategy for public finances.000 120.000 60.000 100.000.0 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Source: Ministry of Finance The situation was serious in the early part of the decade.0 0.

in which it explains the sustainability of current policies. it is currently more manageable than before.6 2.1 2.1 1.7% and in the next two years it made projections of 2% and 1. The discipline which this has imposed has led to improvements in tax collection and some rationalisation of central government funding of state governments. central government borrowing to fund the deficit may have stabilised albeit at a high level and. In turn. the percentage has declined substantially and is now below the FRBM target for 2009. For each year it shows the projection for the current year. As a consequence.0 0.0 1.7% of GDP. As noted. For 2005-06.1%. which suggests that the target of eliminating the current deficit by 2009 is on course. how they are consistent with the FRBM. the sharp acceleration in GDP growth has led to major decline in the deficit as a proportion of GDP.5% target set in 04-05. From its peak in 2001-02. the MTFPS set a target of 2. given the rapid growth of GDP.required to produce a Medium Term Fiscal Policy Statement (MTFPS) as part of the annual budget. For example. More importantly. at a falling proportion of GDP.0 1.6 2.7 2.1 2. 22 . there must still be some caution. Table 1 below shows the projections made in the MTFPS since the enactment of the FRBM. slightly above the 2.5 Actual for previous year Current target Target for next two years Budget year 04-05 05-06 06-07 07-08 Key: 08-09 09-10 0.0 0. the current year projections are close to the out-turns. as the sharp rise in the absolute deficit in 2005/06 and the upward revision of budget estimates for 2006/07 raise doubts about the budgeted reduction for 2007/08.0 Source: Ministry of Finance Whatever the future movement of the deficit. however. as Chart 9 shows. this led to the possibility of stabilising the absolute deficit – although it has shown considerable volatility over the past few years. and makes projections for the current and following two years. Generally.7 2.8 1.5 1. the out-turn for the previous year and the projections for the next two years. Table 1 – Fiscal Policy Medium term fiscal policy statements Year 03-04 04-05 05-06 06-07 07-08 3. the Medium Term Fiscal Policy Statement in fiscal year 2005-06 (left column) showed the previous year out-turn as 2.8 2.

We understand that the RBI now publishes annual timetables for T-Bills and for dated securities.5 1 0. There is discussion concerning transferring the RBI’s role in the entire auction process to an independent Debt Management Office.3 Auction timetable In 2001 there was a published timetable for Treasury Bills but not for longer dated securities (so-called “dated securities”). The objective of this would be to ensure a price-taking rather than a price-making role in the auction for the RBI. In part this was a consequence of weak control of the budget deficit. and transferring the role might expedite this change in perception. including the UK.4.2 Auction pricing The RBI no longer intervenes in the auction. Usually law or the constitution of a DMO requires it not to intervene.5 2 1. so assisting the development of the market.000 60.000 4. 4.000 0 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 (budget) 5 4. An argument for an independent DMO in India is that it would take some time for the non-interventionist credibility of the RBI to be built up.000.5 0 Market borrowing (LHS) Market borrowing as % of GDP Source: RBI Note: One crore = 10. similar to that in other countries.000 Market borrowing Rs Crore 100.4.Chart 9 – Government Borrowing Market borrowing to fund deficit 120.000 20. Whether or not a DMO is established.5 4 % of GDP 3. 23 . which meant that there were frequent revisions in the funding requirement during the course of the year.000 80. the removal of RBI intervention will reduce the cost of funding and encourage the primary dealers to bid more actively.5 3 2. DMO. except in extreme circumstances.000 40.

Thus in 2009-10.stocks by maturity 35 USD bn (Nominal) 30 25 20 15 10 5 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22 2023-24 2025-26 2027-28 2031-32 2034-35 Indian Fiscal Year Source: Reserve Bank of India By way of contrast. The RBI has adopted a policy of passive consolidation. The splits in each bar represent the value of each individual stock maturing in that year. actively consolidated by calling in existing stocks. while India has eight stocks maturing in 2009-10. meaning that it re-opens existing lines of stock for further issues rather than starting an entirely new line for each issue. The government bond market now comprises 105 issues with a total face value of Rs 12 trillion. In consequence the issuance remains very fragmented.4. Australia has concentrated all the liquidity into a single stock. It has not. To illustrate.4. It is clear that in most years there are several issues none of which are very large (or therefore very liquid). and the pattern in other markets has been to try to focus the market into a small number of highly liquid benchmark issues. highly liquid benchmarks. eight of the stocks currently in issue are due to mature. This limits liquidity in the market. It should be noted that such consolidation can be expensive if done by tendering for existing stocks and then re-issuing.4 Fragmented issues India has many legacy issues of debt – many of which are very small. Chart 10 shows the number and nominal value of stocks maturing in each future year. Australia has made a point of aggressively consolidating issues into a few. Chart 10 – Indian Debt by maturity Indian government debt . 24 . Each bar represents the total value of the government stock outstanding which matures in that year. The Australian government has followed a market-driven approach whereby market participants are invited to submit proposals for consolidating bonds. however. Chart 11 shows the same chart for Australian government debt.

when the RBI permitted a limited amount of intra-day short-selling by primary dealers and banks (other investors are not permitted to sell short). Other investors are still not permitted to sell short.6 Short selling Short selling of gilts was prohibited until March 2006. which is open to banks and primary dealers.25% of an issue.stocks by maturity 8 7 USD bn (Nominal) 6 5 4 3 2 1 0 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22 2023-24 2025-26 2027-28 2031-32 2034-35 Indian Fiscal Year Source: Reserve Bank of Australia 4. Both repos and CLBOs are discussed in more detail later in this report. 4.Chart 11 – Australian Debt by Maturity Australian government debt .7 The result of reform Chart 12 illustrates the effect of the reforms discussed above. Thus. of no more than 0. for up to five days. This restriction has now been eased and banks and primary dealers may run short positions. 4. while restrictions remain.4. repo trading has outstripped outright trading. which have become a more secure and flexible alternative to repo finance.4. The call-market now operates freely in a corridor of rates between the RBI’s repo and reverse-repo rates. and since mid-2003.4. the direction of policy is clear and the barrier caused by short selling restrictions is becoming progressively less important. CLBOs. 25 . In addition the RBI has been supportive of the development of collateralised lending and borrowing obligations.5 Repo and financing The RBI has freed the call money market. Turnover steadily increased up to 2003 as the market was reformed and liberalised.

000 100.000 400.000 0 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Outright Repo Combined Source: Reserve Bank of India (RBI) As Chart 12 and the discussion show. 26 .000 Rs crore 300. but the market remains underdeveloped. such as a risk-free yield curve and credit rating agencies (linked to global agencies). the reforms have had a beneficial effect on liquidity in the government bond market.outright and repo 500.000 200. there is still work to be done before the market can be regarded as fully liberalised. Table 2 shows the relative size of bond markets in a range of developed and developing countries. 4.Chart 12 – Gilt Market Monthly gilt turnover . India has successfully developed some of the critical infrastructure requirements. its corporate debt market has not flourished. however.5 The Indian corporate bond market While the rest of India’s capital market has forged ahead and now offers a world class market. As all concerned with the market acknowledge.

1% 41.8% 46.9% 31.0% 38.4% 150. 27 .9% 54.0% 21.8% 39. Corporate bonds briefly became visible on the graph in the mid to late 90s but have now almost disappeared. There has been a gradual.2% 39.3% 12.2% 21.6% USA UK Germany France Spain Korea Japan Thailand India China Hong Kong Singapore Australia Indonesia Brazil Source: World Bank The data indicates that while India has a government (public) bond issuance which is not much out of line with the rest of the world. and where the market has been marked by catastrophic failures .8% 9. government bonds have declined from 31% to 22% of domestic financial assets. Chart 13 shows the movements in the relative importance of different asset classes in India over the longer term.Table 2 – Outstanding Bonds Public Private bonds bonds outstanding outstanding / GDP% / GDP% 111. Over the whole period.2% 20. its corporate bond issuance is very much lower than the norm.0% 44.1% 18.1% 42. reduction in the relative importance of bank deposits from 44% in 1990 at the start of the reform program to 28% in the latest figures. Equity has generally expanded.4% 15. It is below even that of Indonesia. It should be noted that in May 1992 the ceiling on rates payable on corporate debentures was removed. but with a halt in the early 2000s when world equity markets were falling and the Indian government’s debt was rising strongly. which suffered severely in the Asian crisis.1% 34.4% 53. but consistent.6% 2.4% 16.most recently when its bond mutual funds collapsed after a sharp rise in interest rates.1% 1.0% 41.0% 32.8% 42.6% 12.2% 17.9% 10.3% 15.

Chart 14 – International Sources of Finance Sources of corporate finance 2005 100% 80% 60% 40% 20% 0% India Indonesia Japan Hongkong Malaysia Singapore Thailand China Korea Germany USA UK Corporate bonds Equity Bank deposits Source: World Bank 28 .Chart 13 – India Domestic Financial Assets India Domestic Financial Assets 100% 80% 60% 40% 20% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: World Bank Govt bonds Corporate bonds Equity Bank deposits To provide an international comparison. Chart 14 shows the pattern of financing in Asian and some developed markets.

Table 2 actually overstates the size of India’s corporate bond market because: ● ● ● Many issues are not true bonds. professional investors). Each of these is discussed below. Hong Kong has not suffered notably from its lack of a corporate bond market and has a corporate finance structure similar to that of India. and by having lower regulatory hurdles (similar to Rule 144A issues in the US). by having limited disclosure requirements. which offsets the higher issuance costs. 29 . viewed by investors as more attractive. 4. This leads to lower cost of capital.1 Issues are not bonds There are almost no public issues in India. Private placements are characterised by being only offered to no more than 50 “Qualified Institutional Buyers” (that is. and there seems to be no direct link between economic success and the structure of corporate finance. therefore. ● ● The oddity in India is not that there are private placements. even by large corporates. Special offerings linked to a particular project. There is only a limited secondary market.What is clear is that relatively few countries have a truly substantial corporate bond market. Almost all corporate bond issues are made as private placements. Chart 15 shows the growth in number and value of private placements in the last ten fiscal years. It is not a significant market for corporate issuers. better liquidity and better disclosure. in other markets. ● Although this suggests that India’s economic growth need not be hindered by its low level of corporate debt. that is. In other markets.5. because of the wider spread of investors. private placements tend to be used in specialised areas such as: ● Issues by small or poorly rated corporates – where the small investor base means that the investors can have more involvement in the company and can better monitor cash flows and the like. with a large corporate bond market. but that there are so few true public offerings. where they are offered to a wide range of investors and conform to the regulatory standards required of public issues of bonds. Smaller issues. These features of private placements lower the issuance costs but public issues are. for example: ● ● China is experiencing massive growth but has a far higher reliance on bank debt than any other country. which would not justify the distribution costs of a public offer. and Taiwan. with a much smaller one. Only in the USA and Korea does it exceed 20% of the total. albeit with a much smaller and entirely different economy. have both experienced considerable economic success. Korea.

the separate issues will all go to practically the same investors and will usually have similar terms. sometimes on the same day. The conclusion is that many of the “bonds” that are issued are actually syndicated loans – an impression confirmed by the fact that the largest investors are banks. with an average of Rs4. These issues were relatively large. represented 35% of the value and 39% of the number.000 120. largely banks raising money to lend on to clients. 4.000 800 600 400 200 0 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 60.000 40.000 140.000 0 160.000 20.number and value 1800 1600 1400 1200 Number 1000 80. At the same time. They show that public sector entities accounted for 42% of value of issues and 8% of the number of issues. source of capital for Indian corporates. In fact.5. non-financial corporate issuers represented only 23% of 30 .000 Value Rs crore Number Value Rs crore Source: RBI Private placements are a growing.Chart 15 – Private Placements Private placement . 400 crores ($107m).2 Many are not issued by corporates Chart 16 and Chart 17 show how the 2006-07 issuance of Rs145. with an average size of Rs850m (approximately $20m).000 100. although still small. 571 crores ($35bn) in 1. The issues are also mainly quite small. only two companies have made public issues in recent years.678 issues was split between different categories of issuer. Since the number of investors is limited. corporates wanting to raise a larger amount may well make a number of separate placements. Private. Private financial companies.

value. but 53% of the number indicating an average value of Rs37 crores ($10m).Value of Private Placements by Issuer Type – 2006/07 Value of private placements by issuer type Public non-financial 8% Private financial 35% Public financial 34% Private nonfinancial 23% Source: RBI Chart 17 – Number of Private Placements by Issuer Type – 2006/07 Number of private placements by issuer type Public financial 6% Public non-financial 2% Private financial 39% Private non-financial 53% Source: RBI 31 . Chart 16 .

and hence little incentive to trade.000. Until 2007. In contrast.3 Lack of liquidity As noted.500 3.000 4. The number of participants in the market is relatively small.000 1. however.000 crores per day. Chart 18 shows the monthly turnover figures. there is little diversity of view.500 2. as published by SEBI.5. Commentators suggested that there is relatively little liquidity in the corporate bond market because: ● ● ● The total issuance is highly fragmented because of the dominance of private placements.400 crores (approximately $100m).500 4.000 3.000 Current volumes are running at around 150 transactions per day. launched initiatives to ensure more comprehensive reporting of the OTC bond market. 4. where the bulk of the trading occurs.000 6. Most buyers intend to buy and hold.000 8.000 10.500 1. private sector. Chart 18 – Corporate Bond Turnover Corporate bonds .000 12. SEBI has.000 14. information on Indian turnover was incomplete and largely anecdotal.000 500 Jan-07 Jun-07 May-07 Jul-07 Aug-07 Sep-07 Mar-07 Feb-07 Oct-07 Apr-07 16. with a daily value of Rs350 .000 Trades 2.000 2.000 and Rs15. non-financial).monthly turnover 2007 4.This shows that the issuers who are the main participants in other corporate bond markets (that is. gilt turnover (outright plus repos) is running at between Rs12. 32 . corporate debt markets worldwide typically have low liquidity. represent only a small proportion of the corporate debt issues in the Indian market.000 Value Rs Crore Trades (LHS) Value Rs crore (RHS) Source: SEBI Note: One crore = 10. in 2007.

The Exchange Control Board (ECB) regulations were relaxed in 2004 to allow Indian companies to issue in foreign currency to finance foreign acquisitions. Chart 19 shows the issuance of Eurobonds by Indian issuers over the last ten years.0 Source: Bank for International Settlements (BIS) Value Rs bn Mar 2007 11. representing only 12% of the issuance in the private placement market in 2006/7.7 20.7 Total 10.8 26. These bonds have been issued with 33 . food (tea) and a range of other industries.2 16. have used this vehicle to raise capital.4 30.7 Foreign currency convertible bonds (FCCBs) have become a popular vehicle for Indian corporates to access foreign capital markets. major corporates. but also in steel.9 14. however. particularly in IT.4.7 12. they have been increasingly able to access Euro markets.6 Euro issues As Indian conglomerates have come on to the global stage. Euro issuance remains small. This is an area where major Indian companies have come to the fore in recent years.7 Jun 2007 14. A number are listed on the London Stock Exchange. Table 3 – International Debt Outstanding International debt securities by Indian issuers: amount outstanding ($bn) Dec Dec 2005 2006 Financial institutions 4. such as Tata and Reliance.2 Corporates 6. Chart 19 – Euro issues Euro isssues by Indian issuers 180 160 140 120 100 80 60 40 20 0 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 60 50 Number 40 30 20 10 0 Value Rs bn (LHS) Number (RHS) Source: RBI The BIS figures shown in Table 3 confirm the increasing interest in this form of finance.0 7. and shows the sharp increase in the use of Euro markets since the ECB relaxation.

namely to borrow at a reduced yield on the basis of investors’ expectation of a rise in the share price of the issuer. MBS. including a significant volume of single loan securitisations in 2006/07. showing steady growth to 2005 but since declining. Chart 20 – Structured Finance Structured finance issuance 250 200 Rs bn 150 100 50 0 01/ 02 02/ 03 03/ 04 04/ 05 05/ 06 06/07 Asset backed securities Mortgage backed securities CDO/CLO Partial Guarantee Others Source: ICRA The figure also shows the different patterns of growth. which is given on a case-by-case basis. Other assets have fluctuated. reaching a total of Rs370 bn in 2006/07. Initially these started out as loan sales usually with recourse or other originator support. Approval can be automatic. as shown in Chart 20. but with a common motivation. in the case of some industries (manufacturing industry and infrastructure) meeting specific conditions. with mortgage backed securities. with asset-backed securities (predominantly backed by auto loans). That rise has happened. CDO/CLO.a wide range of structures and coupons. being the main type of securitisation.7 Securitisation and structured finance India began securitisation early among Asian markets with transactions going back to the early 1990s. There has also been an upsurge of collateralised debt and loan obligation. and so the coupon discount that investors are willing to allow on convertible bonds has declined and the issuance has slowed The issuance of FCCBs is subject to substantial regulation and requires RBI approval. Growth accelerated from 2000. and securitisations. but otherwise requires explicit approval. 4. especially over the last couple of years. 34 .

7. each bearing a different level of risk.7. whose economic benefit is hard to see. ● over collateralisation. 4. ● cash collateral. the originators have mainly been banks and non-bank financial institutions. There has also been a limited amount of future flow securitisations. others would be subordinated. Some tranches would be very secure and gain a high rating. and former development banks that have been privatised and which have become major players in the consumer lending market. As the nature of the securitised assets suggests. These even have included single loan securitisations.3 Risk structures One attraction of securitisation is the ability to split the bonds issued by the SPV into a number of tranches.7. Credit card securitisations have not featured. is still relatively small. partly because of stamp duty difficulties (as we discuss). such as toll receipts. Insurers are subject to restrictive investment mandates (discussed below). successful issues require very substantial levels of credit enhancement. has not developed asset-backed commercial paper conduits in any of the variants that have evolved in other markets. and some infrastructure financing. and so the securitised assets are structured to achieve a very high rating and. and therefore be lower rated. These include housing finance companies. These transactions. perhaps fortunately. again with substantial credit enhancement. and so more risky. To gain these ratings. tend to be less highly rated and so are mainly attractive to banks as investors. The latter reason has been affected 35 . while growing fast. The demands for infrastructure financing in India are now recognised and it is expected that securitisations of receivables from those projects should expand rapidly. which involve less (or no) diversity in the assets and higher granularity.2 Investors in securitised bonds The investors in the securitised paper are predominantly banks and insurance companies. and they are still a rarity because there is little investor demand for such subordinated and hence lower-rated paper. Mortgage securitisations have mainly been residential rather than commercial. often. Methods of enhancement have included: ● straight recourse to the originator (often structured as put options). Mortgage backed securities have been restricted by the difficulty of reconciling investors’ preference for fixed rates with the typically variable rates used on residential mortgages. 4. ● originator or third party guarantees.1 Assets securitised Securitisations have been backed predominantly with auto loans and mortgages. India. Until recently subordinate tranches were not offered in India. but also because the credit card market in India. to minimise prepayment risk.4. and because there was no capital penalty for the originator retaining the first loss tranche. There has also been some securitisation of corporate loans.

by the RBI guidelines described below, and the market is now seeing some use of subordinated tranches. India does not currently have credit insurance or an active market for credit derivatives. This means that these risk management tools are not available for use in structuring deals. It also means that the use of credit swaps to create synthetic securitisations is impracticable in India, although these have proved to be useful elsewhere, when tax or other considerations make transfer of assets to Special Purpose Vehicles, SPVs, difficult or costly. 4.7.4 Originators

The number of originators remains small; ICRA estimates that the top five issuers account for about 80% of issuance. Motives for securitising vary. The main motivations seem to be liquidity in some cases, and the desire to crystallise a profit by selling assets that have increased in value. In other markets, banks have securitised to get loans off their books or to profit from the reconstruction of assets to create a more highly-rated asset. These do not appear to be major drivers in India because: ● Indian banks are not especially eager to divest themselves of what they see as the better assets on their balance sheet, and the amount issued so far would not be material for most banks anyway. NBFCs and some of the more highly leveraged banks may have incentives to reduce their balance sheet size, but this does not appear to be a significant motivation. The unwillingness of investors to buy lower rated tranches means that profits generated by structuring assets into packages with different risks have not been available in India.

4.7.5 Infrastructure finance by securitisation India recognises that very large investment in infrastructure is required over the next decade. There are several methods of financing infrastructure spending: ● Issuing straight government debt. This may be difficult in India, given the substantial amount of government debt currently issued and the restrictions placed by the RBI on foreign investment in Indian debt. These would probably have to be Issuing infrastructure bonds. guaranteed (explicitly or implicitly) by the government, so that these would have similar standing to government bonds, and be subject to the same objections. Private-public partnerships. The private sector takes a large stake, usually involving private sector operation of the infrastructure facility. Where this approach has been used, it is less for the financing side, and more because it removes the responsibility for management control and labour relations from the government. Our interviews did not

36

suggest that this is an option that is of substantial current interest in India. ● Securitisation of future flow receipts has been used in a number of countries, including India, as a way of attracting external finance, while retaining government control. Infrastructure financing differs from conventional securitisation because there is no asset (mortgage or other debt instrument) to sell to the SPV. Instead, a right to the future cash flows is transferred to the SPV (so-called future flow securitisation is used), rather than the asset itself, which remains in government ownership. As the future flows are not linked to a prescribed payment schedule, such as a mortgage, and as the operation of the asset may retain in the government’s control, the future flow is more risky than in conventional securitizations and so the structure needs to reflect this with substantial credit enhancements. The bonds issued are still domestic bonds and so would be subject to the sovereign rating ceiling (that is, they would have a yield higher than domestic government bonds). It might be noted that offshore securitisations have allowed some governments, such as Brazil, to pierce this so-called sovereign ceiling. This is only possible when the cash flows are offshore, however, so they can be insulated from any transfer and convertibility risk, and where the operation of the asset is largely outside the control of the government. 4.7.6 Regulatory background

India, being a common law country, has been able to develop structured finance and securitisation without the need for a special law to define structures such as SPVs, as would be required in statute law jurisdictions. The main legislative instruments relevant to securitisation are: ● ● the Securities Contracts Regulation Act (SCRA), which is the main capital market law; and the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest (SARFAESI) Act, which was intended to clarify the status of securitisation but which experts consider has had little effect.

SPVs in India are usually set up as single purpose trusts. India’s trust law is similar to English trust law, and the preference for trusts reflects the fact that corporate SPVs would be subject to corporate income tax, whereas trusts are not (although the tax position is not entirely clear, see below). Trusts are used for a single transaction (that is, they are not master trusts that run a number of distinct SPVs). Regulatory responsibility is not clear in that the SCRA is currently being amended to make SEBI the regulator for securitisations. As was the case with straight bonds, however, the involvement of banks means that the RBI also has an interest, and its regulations will have an important impact on the market. In February 2006, the RBI issued “Guidelines on Securitisation of Standard Assets”, before which there had been little regulation and banks

37

were able to move assets off balance sheet. This reduces their capital requirement, while retaining the first-loss portion or some similarly risky credit enhancement. Basel 2 addresses this point by imposing higher (potentially much higher) capital requirements on such first-loss tranches, but the RBI felt the need to act more quickly. The effect was to sharply increase the capital requirements associated with securitisations and to impose requirements that are, in some circumstances, more strict than those of Basel 2. The following example illustrates this effect. It assumes a bank securitising a pool of 1,000 in personal loans and providing credit enhancement by retaining 100 on its balance sheet, 50 as first loss and 50 as second loss: Table 4 – Capital Requirements Example Before RBI guidelines 9%*1000=90 9%*100=9 Post RBI guidelines 9%*1000=90 100%*100=100 Basel 2 9%*(125%*1000) = 112.5 (100%*50) +(9%*50) = 54.5 58

1. Capital relief on assets moved off B/S 2. Capital requirement for credit enhancement Net capital saving = 1. minus 2.

81

–10

Source: Vinod Kothari website Note: Negative number indicates increase in capital requirement

The increase in capital required after the RBI guidelines reflects the higher risk that the bank has taken on through credit enhancement. The greater severity of the RBI requirement as compared to Basel 2 arises mainly because the RBI imposes a 100% risk weighting on all credit enhancement, whereas Basel 2 only imposes the 100% on the first loss component. The issuing of the guidelines has caused a slowdown in the market, especially that relating to personal loans, although opinion is that capital saving was probably not a major motivation for securitisation in India. Not unexpectedly, the market also responded by developing structures that circumvented some of the requirements of the guidelines. For example, the guidelines state that they only apply to securitisations, which the RBI defines as a structure involving an SPV. This has caused a growth of “direct assignments” (that is, bilateral transactions of assets and cash flows), which are unregulated and do not involve any capital market issues of securities. It is expected that the RBI will act on this, and, in any case, Basel 2 will treat direct assignments in the same way as securitisations, so this is a likely to be a short-term phenomenon.

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Secondary Market and Securitisation) as are used in the Patil report. The report made a number of recommendations to address failings in the corporate bond market. 5. Finally. was published.H. section 5. under the chairmanship of Dr R. We discuss many of these recommendations later in this report. These are divided into the same three broad areas (Primary Market. Patil. The key recommendations are summarised in the next section. the Report of the High Level Expert Committee on Corporate Bonds and Securitisation.3 addresses some of the reasons why implementation may not have produced the buoyant market expected at the time.5 The Patil Report In December 2005.1 The report’s recommendations Table 5 summarises the issues and recommendations contained in the Patil report. set maximum for an issue Apply the same rules (that is. section 5. Table 5 – Summary of Patil Report Recommendations TOPIC PRIMARY MARKET Stamp duty Tax Deducted at Source Enhancement of the issuer base Standardise nationally.2 outlines the progress made since then towards implementation of the report’s recommendations. exemption) as for government bonds Reduce time and cost of public issuance Simplify disclosure and listing for private placements Substantially reduce disclosures required for already listed issuers Enhancement of the investor base Reform provident/pension funds’ investment guidelines towards risk(ratings) rather than specific types of assets Encourage retail investors to access market through mutual funds and exchanges if preferred Steady increase in total investment allowance in corporate bonds by foreign institutional investors Consolidate fragmented private placement bonds Use stamp duty cap to encourage re-opening of existing bonds Guidelines on number of separate issues in a quarter Bond database Stock exchanges should compile and publish list of available bonds and update for credit events RECOMMENDATION 39 .

000 Repos Market lot size SECURITISATION Stamp duty Taxation Work towards consensus on appropriate rates nationwide Clarify and make explicit the tax treatment of pass through payments No withholding tax as most investors are Qualified Institutional Buyers. Our research suggests that the level of documentation is now appropriate. QIBs. and tax exempt Listing Widen investor base Define bonds issued by SPVs legally as securities so they can be listed Allow larger NBFC and non-NBFC corporates to invest in securitised paper Source: Patil Report These recommendations are all appropriate to the development of the corporate bond market. ● More substantively. FIMMDA. we are concerned about the enthusiasm for direct retail involvement in this market. While it is tempting to see all financial markets as comparable and to take lessons from equity participation rates. We note here: ● The proposal to increase the documentation requirements on private placements.TOPIC SECONDARY MARKET Trade reporting system Interest rate derivatives RECOMMENDATION Increase transparency by ensuring all trades are reported Increase transparency for OTC trading Introduce exchange traded interest rate derivatives Market makers Clearing and settlement Trading platform Market conventions Develop framework of incentives to encourage large intermediaries to act as market makers Upgrade procedures to conform to international standards of Delivery versus Payment. should lead adoption of standards for day count and actual/actual accrued interest calculation RBI to permit repos in corporate bonds Reduce to Rs100. we note that few. corporate bond markets worldwide 40 . if any. DvP Develop order-matching platform to support market Fixed Income and Money Market Dealers Association.

at least in theory. the government clarified SEBI’s position as the regulator of the primary and secondary corporate debt markets (exchange and OTC) to address the lack of co-ordination between two regulators when banks regulated by the RBI were the main users of a market regulated by SEBI. To explore the reasons why this may not have occurred. in most markets. Regulation of corporate debt derivatives and unlisted debt securities would be decided as required. so there has been a significant increase in market transparency. ● ● ● 5. legal barriers or lack of market venue. SEBI mandated changes to the shut period. as yet.have significant retail involvement. SEBI has also published several updates to its report. The RBI then set up a committee to examine the SEBI committee’s report which reported in July 2006. through which trades in corporate debt can be reported. The RBI was confirmed as the regulator of the market for repo and reverse repos on corporate debt. SEBI. BSE and FIMMDA) are now licensed by SEBI and are operational. The point is also discussed further later on in this report. The government is examining the proposal to simplify and reduce Stamp Duty on corporate bonds. the Securities Exchange Board of India.3 Implementation of the report Given the progress made towards implementing the Patil report’s recommendations. Following this. In practice. The result is that information on trading is now available where it was not before. Much effort has been spent on developing appropriate trading systems for corporate bonds. 41 . it is useful to note that. the barriers to market development fall into two classes: ● Micro-barriers – relatively minor impediments such as tax. Other significant progress has been made in the following areas: ● SEBI is in the process of simplifying the disclosure requirements. key points of dispute are. 5.2 Progress since the report In January 2007. They are minor in the sense that. The government is progressing amendments to the Companies Act required to allow shelf registration. however. unaddressed and it is likely that ambiguity in terms of regulatory responsibility may remain. day count conventions and lot size. set up an internal committee which reported in March 2006. although there is no published timetable for the introduction of change. although this is little used. The Patil report was accepted by the Union government in February 2006. it is perhaps surprising that the corporate debt market has not ‘taken off’. whilst this may appear to resolve the issue. In April 2007. they are reasonably simple to address. with the result that three trading/reporting systems (NSE. Both the NSE and the BSE also offer trading functionality. As we discuss.

that the demand for and supply of equity was always present. the opening of the economy. The implications of this are also explored. ● Macro-barriers – more significant barriers. 42 . which wanted to diversify away from the guaranteed investment products which it had traditionally been offered. Equally.even seemingly minor changes in the law can take a very long time in most countries. it is true that the macro-barriers may be impossible to address in the short-term. whilst the micro barriers can be. There may be a view that doing the same for the corporate debt market would achieve a similar result. Supply largely came from corporates keen to improve their balance sheets as economic reforms. opaque. they are unlikely to be sufficient in themselves to initiate the corporate debt market. we discuss these two categories in more detail. but the market was seen as inefficient. As such.4 Parallels with equity market development Whilst we believe that there are significant similarities between the needs of all financial markets. as a result. we also believe that there is a danger in simply applying methods that worked for one market to another. the likelihood of success from simple infrastructure reform may be limited. As we go on to discuss. however. India has successfully developed its equity and equity derivatives markets by improving their infrastructure. and which was prepared to accept more risk in exchange for the possibility of large gains. and possibly unfair. In particular. We note that most of the developments in response to the Patil report fall under the first of these. lack of demand for investments. it is not clear that this underlying supply and demand are present for corporate bonds and. 5. Examples include: lack of demand for capital market finance because alternatives are easily available. and improved growth. significantly improved their long-term prospects. while at the same time making them more subject to commercial disciplines. In the following chapters. in the sense that they require development of other parts of the market before they can be removed. and governance problems. It is critical to note. There was significant demand from a retail market.

following the approach of the Patil report. they appeared in a different form (such as the impact of stamp duty being upon the transfer assets rather than the creation of instruments). it seemed that while some of the issues were related to those in the wider bond market.1 High and complex taxation Two significant tax issues have a special impact on corporate bonds: 6. The securitisation market also does present some new issues which do not affect conventional bonds. specific issues are also presented in descending order of importance.6 Micro-barriers – the effect of institutional rigidity In this section we discuss the institutional reasons.1. although the regulators tended to see the points related to secondary market and investor protection related to issuance procedure as being more significant than did the others. and. The level and complexity of stamp duty encourages an arbitrage-based approach to corporate finance. we note that it corresponds broadly with that of our interviewees.1% duty. however. and the fact that the practitioners we spoke to seemed to see it as somewhat separate from the mainstream discussion of bond markets. While this ordering is ours. The existence of Stamp Duty may encourage the borrower to go for a loan instead. typically 0. for the lack of development of the Indian corporate debt market. there is no volume discount. as it is strictly ad-valorem. advanced both in the Patil report and in our interviews.1 Stamp Duty Stamp duty is high. This would be a significant enhancement to the market. Additionally. is encouraging. In addition. since it would require changes to the Indian Stamp Act of 1899. promissory notes bought by commercial and some other banks are subject to only 0. 6. compared to 0. Within each area.5% if issued to other investors). The problem has been known for a long time. 43 . so that decisions may be tax-driven rather than strategy-driven. probably by introducing a standard national rate with a maximum cap. We have treated securitisation and barriers to its rapid development as a separate discussion. six months to one year.375% for debentures (that is. The sub-sections discuss these in decreasing order of importance. the rate of duty is variable depending upon both location (various states have set their own rates) and the nature of the issuer. as recommended in the Patil report. It may also vary with the nature of the investor to whom the bond is initially sold (for example. and the timescale suggested to us. and so we discuss the more significant issues first. There is a stated intention to reform stamp duty. on creation of corporate bonds) and. progress may be slower than the market would like.

itself but in changing the risk profile of the portfolio using risk management tools – derivatives.2. but is paid at the end of the tax year by the holder on that date. as they become responsible for the tax payment. the precise definition of the underlying asset). and set a corridor between the repo and reverse-repo rates where the call money market operates. Whilst India has world class markets in equity derivatives. unless bank participation is allowed on a freer basis. but the RBI considers 44 .2 Repos The gilt repo market is open to primary dealers and banks. The corporate bond market is under the general regulatory view of SEBI. Exempt investors are sometimes reluctant to buy stock from non-exempt investors. This means that the market is limited. despite being themselves exempt. Therefore a buyer may have to collect the tax from the previous holder. Gilt repos are almost exclusively between the market and the RBI and there are few third-party repos. need a mix of hedgers and speculators to generate adequate liquidity. The RBI also uses repo and reverse-repo to conduct money market operations. The limiting factor to date has been one of regulatory co-ordination. stock lending and borrowing (SLB).2 Tax deducted at source (TDS) Bond interest and tax on bond interest is calculated on an accrual basis. whatever the justification for this restriction.6. but. the NSE’s interest rate derivatives have so far been relatively unsuccessful. Daily rates are announced. (for example. There is currently a high-level committee looking at interest rate derivatives. who are required to maintain a Statutory Liquidity Ratio of 25% (although most actually hold more than 25%). and arguably all financial markets. and suggests that.1 Interest rate futures Interest rate futures were introduced for trading on the NSE. practitioners suggest that the problem is not technical but simply lack of players.2 Lack of risk management products Liquidity in bond markets is often not about trading the cash bond. Much of the committee’s focus is on technical issues. The previous holder remits the tax owed by him for his holding period plus tax claimed from the previous owner in respect of the current tax year and so on. it meant that the market was limited to matching hedging transactions. So. it remains in place for corporate bonds. Repos are only permitted in government bonds. repos and swaps. An additional complication arises because some entities. Although government securities have been exempted from TDS. and they are free to repo their non-SLR holdings. it has had mixed success in developing risk management tools for debt markets. Derivative markets. however. are tax exempt. 6. however. in contrast. mainly mutual funds and insurance companies.2. As a result. it is unlikely that interest rate futures will succeed. 6. the volume of repos has grown sharply in recent years. As Chart 12 previously demonstrated. This will in turn have a negative effect on the corporate bond market itself. however. The RBI restricted regulated banks to only using interest rate futures for hedging purposes.1. 6.

Pledged collateral is held in the depository. and the market operates through an electronic auction. and are open to a wide range of participants. with banks and primary dealers the main borrowers (73% in 2006/07). automated stock borrowing and lending infrastructure for equities. They offer secured (against government bonds) lending. India does have an efficient. mutual funds are the main lenders (62% in 2006/07). but general market illiquidity makes it impracticable.3 OTC derivatives and swaps Forward rate agreements (FRAs) are regularly traded and there is a reasonably active OTC swap market in India. CLBOs are only permitted on government stocks. because of the collateralisation. Collateralised lending and borrowing obligations are an Indian initiative introduced by the Clearing Corporation of India (CCIL). which was introduced when badla was outlawed in the early 2000s. Currently. This leads to the possibility of establishing a domestically based swap market. and recently a gold contract priced in Rupees has been introduced in Dubai. because the tradability of the CLBO means that parties can close out positions by trading the CLBO. 6. 6. primary dealers and mutual funds. 45 .4 Credit insurance Credit insurance is not available in India. since they would affect bank liquidity. including banks. The pledging of stock provides a tradable instrument. the CLBO. however. matching the bids and offers for CLBOs. It is worth noting that badla was a feature of most markets in the sub-continent.2. Such insurance is provided elsewhere by global monoline insurers – MBIA and Ambac are the industry leaders. Volumes have grown rapidly since introduction and now exceed repo volumes. Conventional stock borrowing is theoretically available. (see below). These firms have not yet expanded their operations into India. The growth and opacity of badla led SEBI to finally ban the practice and force the unwinding of positions. but no implementation timetable has yet been published. rather than waiting until the end of the term as is normal with repos. and this is absent in India. Essentially they are a negotiable and tradable third-party repo. and those pledging are allowed to bid for loans up to a value determined by the collateral. and therefore also to fall within its regulatory scope.2. There are no credit derivative products or credit insurance in India. which would add further costs to insurers entering the Indian market. however. CLBOs offer greater flexibility than repos. There is also an OTC swap market for Indian interest rates (and currency) in Singapore. although the RBI is currently consulting on this. As well as the advantage of security. It is also true that the basic data on bond issues and defaults does not exist in comprehensive form. but not for corporate bonds. A strong OTC swap market tends to require a wholesale exchange traded interest rate derivative market where swap counterparties can lay off their risk. Essentially it involved the carrying over of positions rather than settling them – in effect unmargined OTC futures.corporate bond repos to be money market instruments. There is reported to be active consideration of corporate bond repos.

do highly rated. irrespective of whether the company already has an equity listing or not.1 Public issues are difficult. has been. and remains. Public bonds also have to remain open for subscription for a month at a fixed price. which involves substantial risk for the issuer. This is unusual. the regulatory processes for issuing a bond take a matter of days.3 Cumbersome public issuance process The corporate bond market is. There is neither a grey 46 . Table 6 shows a comparison of the Indian market with a generic bond market to illustrate its unusual nature. or less if issuers use shelf registration.6. largely a private placement market. taking several months for an issue to go through the entire process. There is no provision for shelf registration. large Indian corporate issuers prefer to make private placements when in other markets they would be making public offers? 6. means that compiling the prospectus is slow. The disclosure requirements for prospectuses are identical. given the amount of information it contains. Throughout the fieldwork we were told that the level of detail required is excessive (although it is not unusual for issuers and investment bankers to complain of excessive disclosure requirements). In other markets. and is not normal international practice. ● The issue process is reportedly slow. Although a detailed evaluation of SEBI’s disclosure requirements is beyond the scope of this report. some of the comments are suggestive: ● ● The size of the prospectus was reported to be of several hundred pages. but the amount of information required.3. then. Table 6 – Breakdown of Indian Corporate Bond Market ISSUER Generic bond market High rating Medium rating Sub investment grade Indian bond market High rating Medium rating Sub investment grade Large Public Public/PP PP Medium Public/PP PP PP Small N/A PP PP PP PP (possibly) N/A PP (possibly) N/A N/A N/A N/A N/A Source: Asian Development Bank (ADB) Note: PP = Private Placement Why. whereby a programme of tranches can be covered by a single prospectus. slow. The prospectus examination is relatively quick. risky and inflexible A public issue requires a prospectus to be submitted to SEBI. expensive. and the need to get valuations from government offices.

the strength and consistency of the view convinced us that there is a perception of poor regulatory co-ordination. Both types of issue are usually listed on a stock exchange. which interviewees regarded as appropriate for the circumstances. The small number of investors (no more than 50 are permitted). it would be impractical to renegotiate terms with all the bond-holders. or on conflicts between agencies. the regulatory actions of the RBI also have a significant impact. however. ● Indian regulators were also accused of “shooting from the hip”. the documentation for a private placement is small. nor any interest rate derivatives for hedging. the documentation runs to about three or four pages.unless a public bond had specific provisions in the prospectus for resetting the coupon.2 Private placements are easier. with book building and pricing usually completed within a day. As the banks are major players in the corporate debt market.3. Placements can be issued very quickly. although the documentation requirements have been increased in recent years. makes it relatively easy to renegotiate terms. SEBI is the regulator charged with responsibility for the primary and secondary market. cheaper. Typically we understand that a change in interest rates will lead to a renegotiation of the coupon on a placement during the currency of the issue. It also emphasises the similarity in India between corporate bonds and corporate loans. This makes private placements very flexible in comparison . The delay in implementation of even some of the less contentious recommendations of the Patil Report is widely blamed on failures of regulators to co-ordinate their activities. a recurring theme of our discussions with practitioners was a perception of ongoing friction between regulators. in which underwriters can lay off this risk. meaning that they tended to be reactive and that the effects of their reactions on the 47 . or even conflict. 6. as do the investment mandates of most institutions. In contrast with public issues. Whilst regulatory agencies are adamant that there is co-ordination between them.market.4 Lack of regulatory clarity The corporate bond market is affected by a number of regulatory agencies. Estimates vary. for which the actions of the RBI have been blamed for creating obstacles. Currently. as RBI regulations restrict banks’ ability to invest in unlisted bonds. A number of examples suggest that this perception may not be entirely mistaken: ● The failure to develop a corporate bond repo market. Five years ago. the term sheet sent out to potential buyers was little more than half a page and many key pieces of information were omitted or implied. faster. 6. safer and more flexible. but cost estimates for a public issue average out at about 4%. While the practitioners’ view is predictable (and is often raised by practitioners in other markets).

The consequence was that trades that would previously have been transacted OTC. calibrating the precise amount to mandate is a much harder task.5. A number of issues. and did not cover so-called “spot-trades” between two investors. The rule only applied to trades transacted through brokers. it was little used for order matching. attempts by the regulator to force business on to that platform are unlikely to be successful. however. have been raised both by the Patil committee and during the discussions that we had with practitioners. For example. were no longer even being reported. the regulators action had inadvertently led to a reduction rather than an increase in transparency. As an example of this. The result was an upsurge in spot trades. SEBI issued a regulation requiring trades in listed bonds to be transacted through an exchange trading system. Where electronic trading systems have made inroads into bond markets it is by offering broader functionality such as Request for Quotes. and had persistently tried to force the market into certain ways or down false trails. whilst the NSE offered an order-matching system (Wholesale Debt Market. It is true that such trading platforms have been highly successful for equity trading. in contrast to that established in Indian equity markets. the judgement on bond markets is less clear. there was very little transparency in the secondary market for corporate bonds. the regulator has consistently tried to force corporate bond trading on to a conventional order-driven platform.market are not always thought through. often assisted by brokers but without the broker issuing the contract note. In particular. There is a worldwide debate on the merits of transparency and. but well used for reporting and publication of trade data. detailed below. like the RBI’s own NDS and NDS-OM systems. whilst it is easy to have a predisposition towards transparency. there were comments that the regulators seemed to have some mistaken perceptions about the organisation of bond markets. Finally.1 Limited transparency Until relatively recently.5 Secondary market and pricing issues The secondary market for corporate bonds is highly illiquid.5. Thus. and its recent initiatives mean that the level of post-trade reporting is now substantially higher. and reported to the exchange for publication. and may lead to perverse effects (one example of which is described above). SEBI has tried to increase transparency by increasing the number of reporting venues. The consensus is that the volume figures published by SEBI do now capture the bulk of the market. 6. while the consensus is that equity markets should be very transparent.2 No market makers The market lacks formal market makers but a number of players are reported to act as informal market makers. As this system has not been successful in attracting trading. 6. WDM). and this function is widely recognised in the 48 . Thus. 6. but the success of conventional order-exposure trading systems has been less clear in bond markets.

it is hard to see that this represents a major constraint on development. Yet. so the system is not true DvP.5. also. provided in the gilt market for OTC transactions through the NDS system. is available for trades transacted on the stock exchanges’ dealing platforms (that is. to commit to making firm quotes at all times). 6. and it is perhaps surprising that standard setting. (that is. SEBI and RBI produce statistics on new issues of bonds. because the market is. which smooth trading in bond markets by reducing the need for negotiation. however. there is no central counterparty to novate the process and so reduce settlement risk). Sellers instruct the Clearing Corporation of India. to move stock before they have the funds from the buyer. CCIL. but not of credit events or the total outstanding. which is one of the basic functions of a trade association. Extending the existing arrangement to offer DvP for OTC transactions in corporate bonds would not seem to be a major task. DvP is. Corporate bond OTC transactions (most of the market) are settled bilaterally between the counterparties.4 No database of issues There is no single database of issues of corporate bonds or of credit events affecting those bonds. limited to a small number of major players. (that is. 6. There is a bond market association. has yet to be completed. This interval is long enough to necessitate cash payments 49 .3 Non DvP settlement Corporate bonds have been held in dematerialised form since SEBI mandated this in the early 2000s.5 No universal conventions Bond market conventions are largely absent. DvP. while other regulators see the benefits of offering DvP to the OTC market. but this has yet to be implemented. While the absence of standardised conventions may be surprising. The likelihood of persuading firms to act as formal market makers. given the ease of adjustment between conventions and the small number of participants in the market. but this is not yet a complete record. Fixed Income and Money Market Dealers Association (FIMMDA). then it would require a better settlement infrastructure. If the market were to expand to encompass a wide range of investors.6 Long shut period The period between books close and payment of coupons is longer than for government bonds. in practice.5. and sellers are at risk during settlement.5. seems low. 6. given the low levels of liquidity and the absence of hedging tools. such as standardised day counts for calculation of accrued interest. PRIME runs a proprietary database. This might be because some in the regulatory agencies wish to encourage OTC business to move on to exchange platforms where DvP is available. 6. by order matching) but not for OTC trades. the risk is manageable.market (a similar phenomenon is found in many other markets worldwide).5.

6 Restriction on short selling gilts An important part of price formation is the ability of intermediaries. not permitted to sell short. As noted. which are subject to stamp duty. short selling of gilts was prohibited until March 2006.25% of an issue. 6. enabling them to exploit smaller arbitrage channels. and so will need to short sell.1 Stamp Duty Stamp Duty is a major barrier to the development of securitisation. Intermediaries try to minimise their risk and maximise the efficiency of their capital usage. some states have responded to criticism of the effect of the duty by offering special rates of 0. Their need to work their capital and minimise risk. however. since intermediaries have better access to the market and face lower transaction costs. The usual pattern for corporate bond traders is to trade the corporate bonds one way and offset this with transactions in government bonds (that is. Transfers of assets require written instruments. to arbitrage anomalies.) The barrier of Stamp Duty is thought to be part of the reason why credit card receivables have not been securitised in India. More recently.7. Other investors were. securitisation structures tend to be based on assets in those states.25% of an issue can be restrictive in the case of the many small issues that still exist). when the RBI permitted a limited amount of short-selling by primary dealers and banks. rather than the location of the SPV.to settle the interest payment (on top of the cash payments to settle TDS). means they will often not own the sovereign bond. Note that it is the location of the asset. trading the risk spread). as a result. the prohibition on short selling across trading days has been relaxed. and are still. This often means buying the corporate and selling the sovereign. This ensures that asset prices stay in line and eliminates pricing anomalies. Market opinion is that the remaining restrictions still pose a significant barrier (for example. This usually involves them arbitraging through offsetting transactions in different assets.1% for securitisation transactions and. The direction of policy is clear. Recently. 6. This adds a small amount of complexity to the management of bond portfolios.7 Barriers to securitisation 6. the limiting of short positions to a maximum of 0. however. but are generally high – most states charge between 3% and 16% on the value of the property being transferred. such as primary dealers. Banks and primary dealers were only allowed to sell short intra-day and could not short sell more than 0. allowing banks and primary dealers to run short positions for up to five days. It tends to be the function of intermediaries rather than investors. whereas in other markets they 50 . that determines the jurisdiction for Stamp Duty purposes. Rates of duty on asset transfers are variable between states. and the barrier caused by short selling restrictions is becoming progressively less important.

7. and a major driver in developing those markets. 6. 6. a significant administrative burden when securitising a pool of mortgages. or mortgages on such property. securitisation paper is rarely a liquid instrument. They cannot therefore be listed.4 Tax There are no clear rulings on the taxation of SPVs.are one of the first things to be securitised. require registration.5 Registration Transfers of immovable property.2 Pass Through Certificates not securities The SCRA does not define Pass Through Certificates (PTCs.7. and current opinion. is that taxation of interest paid on SPV bonds will be levied on the investors.7. but also because of the nature of the investors. Market practice. trading is limited. 6. An amendment to the SCRA to address this lack is in progress. Even in other markets. and consequently. however. 51 . partly because of the small sizes of issues imposed by tranching structures.3 Lack of clear regulatory structure The amendment to the SCRA also makes SEBI the principal regulator. the RBI will retain a significant role because banks are major users. as securities. 6. although. the normal type of bond issued for securitisations). and there is an unquantifiable risk that the tax authorities may challenge this in the future and apply a change retrospectively. This is a cost and. more importantly. as with corporate bonds.7. This has not been tested. rather than being paid by the SPV.

and may increase market activity. or takes so much as to push the price beyond the willingness of the private sector to borrow. government bonds become the only debt investment option. where interest rates have been falling and. ● This chapter outlines some of the constraints on demand and supply of corporate debt. In most cases where unusual market structures exist. one way or another. 2. with the total outstanding debt at over 90% of GDP. or because institutional investors are prohibited from participating in the market. Addressing these factors leads to more efficient markets. It can also affect investment decision making. Banks are required to maintain 25% of their net current and deposit account balances in government securities as part of the Statutory Liquidity Requirement. (reduced from 31. In fact most hold more. although rapidly growing demand for credit has seen banks reduce their excess SLR holdings. in most non-Indian financial markets. 7. because corporates have alternative sources of capital. with an average of 31%. at least until the recent growth in demand for credit. SLR. the government’s demands on the market remain very large. bond-based debt finance in India. 52 . That said. and corporate supply of. but does not explain why the markets became established in the first place. either because retail investors have more secure and attractive alternatives. The government has historically financed the deficit by borrowing from banks and financial institutions. and little demand to hold debt.7 Macro-barriers – low levels of supply and demand The micro-factors considered in the previous section have the common property of being found. These are considered in this chapter. To create a thriving corporate bond market requires consideration of the factors which limit investor demand for. either because of directed investment and/or low-risk investment mandates and/or because investors do not develop the skills necessary to evaluate risk. In effect. The main feature of Indian debt markets is that there appears to be: ● little corporate supply of debt. We noted earlier that there has been significant progress on the government deficit. It can mean simply that the government takes all available liquidity. traders simply work within the structure available to conduct the business that they wish to transact.1 Government borrowing crowding out Crowding out can happen in two ways: 1. This does not seem to be the case in India. there was abundant liquidity in the banking system.5% in November 2001).

Table 7 – Breakdown of Indian Banking Sector Profit per employee (Rs lakh) 20 66 113 477 73 Type State Bank of India and Assocs. Until recently.2 Limited demand for bond finance There is limited corporate demand for genuine bond finance (as opposed to loans disguised as bonds). (banks own over 50% of all government securities). and advances for each category of bank.840 895. has encouraged a number of regulatory restrictions. levels of credit risks.104 261 58. banks have been liquid and keen to lend to good quality. 53 .000 Number 8 20 25 29 82 Branches 14. In addition. 7. it may have been instrumental in discouraging the development of a true credit culture.155 Chart 21 shows total deposits. as described below.144 27. Indian corporates have borrowed from banks to meet their financing needs. These include directed lending and restrictive investment mandates for financial institutions. Table 7 shows the structure of the Indian banking sector giving the number of Indian banks in each type together with some efficiency metrics.898 7.456 36. with the skills to assess. investments. and respond appropriately to. Traditionally.947 138. As already noted.As well as the possibility of crowding out other borrowers. Nationalised banks Other Scheduled CBs Foreign banks Total Source: RBI Note 1 Lakh = 100. and makes clear the continued dominance of SBI and the nationalised banks. This continues to be the case.224 472. banks account overall for 90% of financial assets. corporate borrowers. and bank credit continues to dominate corporate debt funding. the dominance of the government in banking.719 Total employees 256. and state-owned banks represent 75%.

000 1. They finance themselves not through deposits. which they are generally barred from taking. Thus. Investments and Advances by Bank Type Key measures for Indian banks by category . We have noted the dominance of private placements in debt issuance. a bank that wanted to offer a very tight rate to a highly rated corporate borrower would present the loan as a bond.000. but the prohibition did not apply to investments in private placements. ● 54 . The development banks are active in the private placement market. as we have noted.000 Rs crore Deposits Investments Advances 500. Interest rate expectation may influence the choice.Chart 21 – Deposits. but through debt issues. but are now aggressively private and dominate corporate lending.000 The main source of finance for smaller companies is development banks. as they have been for several years. and the fact that usually banks or even a single bank will subscribe to the issue.000. But. Banks Source: RBI Note 1 crore = 10.500. When rates are falling. commercial banks do relatively little corporate lending. the private placement bonds are regarded as renegotiable in the event of unanticipated interest rate changes. The development banks have emerged from the state-owned development banks.000 SBI Nationalised Other Fgn banks banks Comm. borrowers will prefer a variable rate loan and lenders a fixed rate bond.2006-07 1. The decision as to whether to issue a bond or take a loan is determined by non-strategic factors such as: ● At various times the RBI has prohibited banks from lending at rates below their Published Lending Rate. borrowing wholesale to lend on to smaller corporates.

1 11.9 22.9 33. It can be more tax efficient to issue a bond.0 76.5 27. whereas bonds are. grade No.4 0.8 0.8 9.2 17. Table 8 shows the split by rating of private placements: Table 8 . again giving banks an incentive to grant loans but present them as bonds. there is scope for manipulation and window dressing.2 75.1 1. in the absence of reliable secondary market prices.4 10.2 1.7 3.0 1. and appear to be largely indifferent between them at the strategic level.4 24. Private placement investments are not subject to the same scrutiny (or delay).7 3. and.1 24.inv.1 4. As banks are the main providers of loans.7 7.8 7. tend to be based on regulatory and tax arbitrage considerations.1 3.6 33.6 83.5 7.7 25. A 55 .0 77. they naturally see loans and bonds as alternatives. corporates tend to regard loans and bonds as interchangeable. usually by the board or a board committee.8 0.1 27. as already noted.3 31.3 1.8 1.5 72. 7.4 3.0 0.4 56.0 2.8 14.7 54.1 7. Bonds are marked to market.8 13.9 0.4 30. Only the largest corporates are likely to achieve an AAA rating.5 6. Loans may be preferable for banks since they are not currently marked to market (but will be under the Basel 2 rules).3 6. however. The full range of corporate finance options available to Indian corporates is beyond the scope of this project.6 1. ● ● Similarly. A Value No.Distribution of corporate bonds issued by rating Non. with banks being the main investors in corporate bonds.0 38. that all but the top corporates are excluded from the bond market.0 18. This occurs to some extent in most markets.3 Limited investor base The investor base for corporate bonds is limited.3 6.6 50.1 25. Value No.3 11.0 Source: SEBI The data shows that the number of sub-investment grade issues is minimal. and the proportion below AA is small (8% by value in 2006-07).6 0.● Large bank loans are required to pass an internal approval process. but in India there seemed to be a strong focus on managing the sort of micro-issues described above.0 21.7 45.1 1.4 6.3 0.4 0.3 0. It is clear. BBB Value 35. AA Value No.6 76.8 6.6 9. Others are therefore excluded from the bond market and obliged to rely on bank finance – a not unusual phenomenon in other markets.8 1.3 7.8 22.6 61. Value AAA % of total 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 No. Decisions.8 9.0 16. since loans are not subject to Stamp Duty.

Assets under management by end of this phase had risen to approximately Rs 47. 56 .3. ● ● ● In contrast to the life insurance sector. were permitted. but these are relatively undeveloped and restricted in India.805 crores (of which UTI represented Rs 44. The troubles of UTI.successful corporate bond market needs to attract non-bank investors. UTI mainly offered guaranteed return funds. A phase of consolidation followed among private sector funds. Assets under management by the end of this period were approximately Rs 6. regulated mutual fund.700 crores. sales and redemptions for the 12 months to June 2007. have removed the dominant state-owned player from the market so the market is largely private sector. and their resolution. The other became UTI Mutual Fund Ltd which operates as a conventional. which is discussed below. Assets under management by end of 2003 were Rs 121. SEBI issued regulations but these exempted UTI. the mutual fund sector is much less dominated by the public sector. were allowed to offer mutual funds. managing a total of Rs 400. By June 2007. including banks and the government-owned insurance companies. including joint ventures with foreign funds.541 crores). Phase 3 1993–2002 – private sector mutual funds. and was split into two parts. there were 32 funds. Phase 2 1987–1992 – various public sector entities. Phase 4 2002 to date – UTI faced consistent problems as it became progressively more difficult to meet its guaranteed commitments. One part took over the guaranteed return liabilities and no longer operates as a mutual fund. The Indian mutual fund industry has a number of distinctive features that mark it out as different to the industry in other countries – particularly the short investment horizon of its investors. Table 9 shows assets under management.004 crores. 7.842 crores under 772 schemes.1 Mutual funds The Indian mutual fund (unit trust) market has evolved through a number of phases since its beginnings in 1963: ● Phase 1 1963-1986 – the Unit Trust of India was established by the government to operate as the sole mutual fund in India.

Mutual Fund Data H2 2006 .878 2.5 78.Table 9 .5 -8. Mutual funds have a strong preference for shorter duration issues.0 3.2 Life insurance companies In other markets. 7.512 2.000) The data indicate the short-term nature of mutual fund investment in India. Historically this was supported by a tax advantage as mutual fund profits were exempt from tax for corporates.428 67.689 460.586 8.8 30.513 280 5 275 3.418 1. Surplus funds are parked in money market mutual funds.220.929. they are not permitted to invest in loans but have become indirect investors in loans through single-loan securitizations. but is also apparent in income funds.986 361.122 962 2.092 4.866 1.8 44. but are also investors in gilt and equity funds. but the practice of corporates investing in mutual funds has continued. insurance companies are major investors in corporate bonds – which allow them to match long term assets and liabilities.363 91.907.498 83. As Table 10 shows. What is not clear from the table. the Indian life insurance market is growing rapidly but penetration remains relatively low: 57 .H1 2007 Sales + Net sales Redmptns / Assets / Assets under under mgt% mgt% 21.382 -21.831 318 4. In addition.581 -703 4.7 12.3 79. This is no longer true. which are redeemed when the need arises.0 172.646 1.813 93.330 2.342.5 7.034 Sales Redemptions Net sales 308.5 18.4 Fund style Income Growth Balanced Money mkt Gilt ELSS Gold ETF Other ETF Total Managed Assets 428.861 217.410 38.160 2. as described above.964 1.5 12.517 Source: Association of Mutual Funds of India (AMFI) Note all amounts in crores of Rupees (1 crore = 10.3 11.314.3. Corporates naturally focus on money market funds.2 -6. Churn rates are very high. given the investment style of their customers. This limits their ability to participate in the corporate bond market.336 16.522 351 7.4 22.014 1.1 4. is that the corporate sector uses the mutual funds as a way of managing their corporate treasury. with an overall churn rate of 172%. It is clear that investors use mutuals as short-term homes for investable funds. This is very apparent in the turnover of money market funds.3 72.000. but was found from field research.1 527.476 36.

Table 11 shows the size and nature of investments of LIC and other participants Table 11 . was the only life company allowed to operate. the dominance of the Life Insurance Corporation of India continues. While there is a growing involvement of private companies.685 115 43.6 2.000.16 10.419 4.072 Total 389.53 1. which is government-owned. In terms of assets held.Investments of life companies State Govt.69 5. and other Approved Securities 43.800 LIC Other Central Government Bonds 197.000) In terms of investment.638 Other 100.15 3. but the category of “approved investments” only includes bonds rated AA or above. In practice Life Insurance companies hold less than 7% in unapproved assets.Table 10 .05 4. Investment regulations governing life business require that at least 65% of assets be held in various types of public sector bonds.456 49.182 1. LIC.678 Infrastructure and Social Bonds 48. The market remains relatively undeveloped in terms of structure. including foreign joint ventures. Bonds below AA (which are rare in India). can be held in unapproved assets.740 397. but total unapproved assets cannot exceed 15% of the portfolio and are subject to exposure norms limiting exposure to any company or sector. roughly 75% of the assets are in public sector bonds. Funds are permitted to invest in corporate bonds.Insurance penetration 2005 Life premiums/GDP% North America Europe Asia South Korea Thailand Malaysia India China (PRC) Source: World Bank 4. which tend to be more aggressive.188 Source: Insurance Regulatory and Development Authority (IRDA) Note all amounts in crores of Rupees (1 crore = 10. 58 . The market has now been opened to private sector companies. including the foreign joint ventures.78 Life Insurance Corporation of India.910 102. LIC represents 98% of the market.259 201.61 3. however.162 1.448 7.

In practice. The funds of the EPF/EPS (historic contributions total some Rs2 trillion) are invested according to the law as follows: Table 12 – EPF/EPS Investment Ratios 1 2 3 4 Central Government securities State Government and Government guaranteed securities Bonds and securities of Public Financial Institutions Any of the above three categories Source: Iief. the EPF is invested largely in government bonds and state bonds.7. In part. bonds are rarely 59 . government employees were covered by a pay-as-you-go scheme. Private sector employers offered provident funds. Indian experts believe that retail investors form a natural part of the market. bonds are seen as buy-and-hold investments. need to invest in corporate bonds or other risky assets.com 25% 15% 30% 30% The trustees may invest up to a maximum of one third of funds from category 4 in Table 12 in private sector bonds/securities which have investment grade rating from at least two credit rating agencies. whose investment was largely government managed. and that retail trading could become a significant factor in corporate (and government) bond markets if the right environment were created. It is likely that any move towards a more active investment policy by EPF would require additional skills correctly to assess these new asset classes. Scheme members can withdraw funds early with no tax penalty and most do so. currently 8. At retirement the scheme delivers a lump sum for purchase of an annuity. and there is little gain to be made from the sort of regular trading that is a feature of retail-dominated equity markets. however. and funds in the interim period are managed centrally and earn a basic rate. Essentially. The government scheme has (for employees joining after 2004) been replaced by the New Pension Scheme (NPS).5%. This collects contributions and invests them.3. As a result. which is planned eventually to offer individual. International opinion is that bond and equity markets are different. selfmanaged pension funds. The scheme is currently in transition. therefore.3 Pension funds India has traditionally had two pension structures for the formal sector (the informal sector is not included).4 Retail participation One feature of the debate about corporate bond markets is the extent to which retail participation in this market is either desirable or necessary. currently 8%. this is supported by the high level of retail participation in the equity market in India. It is not absolutely clear what would happen if the investments of EPF were insufficient to meet the guaranteed rate. 7. The fund has no obligation to maintain actuarial solvency and does not. Private sector employees are obliged to belong to a notionally funded scheme known as the Employee Provident Fund/Employee Pension Scheme. worldwide. but a government guarantee is widely assumed to exist.3. lump sums are small. but offers a guaranteed rate of return to contributors.

where 60 . (which are large). and the percentage gains are likely to be small. Clearly. that true retail demand for corporate bonds. Historically. This is especially the case in India. frequently providing counterweights to one-way local opinion. as most retail investors tend to have small portfolios. FIIs are required to be authorised by SEBI to enter the Indian market. It may be. as well as being significant catalysts for reform.instruments for direct retail investment. which suggests that the authorities do not yet see them as being met. These arguments suggest that the regulatory thrust over the years to create a bond market environment where retail investors could operate without disadvantage may be misplaced in that. even if the trading and disclosure environment were appropriate.4 Exchange control Foreign institutional investors (FIIs) have been increasingly active in the Indian market. Bond investment requires substantial portfolios. whereas foreign inflows into bond investment. in India as elsewhere. which are outside the scope of this report. the Tarapore Commission re-iterated these preconditions. retail customers simply have neither the interest nor the funds to participate. and have become significant holders of Indian equity. This represents a fraction of the annual issuance. this raises potential risks and costs to investors. they prefer to invest in equity. many in Europe argue that the natural avenue for debt investment for retail investors is through bond funds rather than the bonds themselves. Indian retail investors also have access to attractive risk-free rates. In addition.5bn (approximately Rs 60bn) in corporate debt securities and $2bn in government securities (approximately Rs 80bn). and the need to improve the fiscal position of the government have been seen as the preconditions for any further relaxation. thus further fragmenting the limited liquidity. foreign investors have proved to be valuable participants in bond markets in other countries. Where they are. One effect of the limitations imposed on FIIs is to force Indian issuers who want to access foreign investors to issue in the Euromarkets rather than domestically. 7. however. and exchange control regulations limit foreign investors to a cumulative total of $1. so it is unlikely that foreign investors will become significant while the current exchange control structures are maintained. so the possibility of higher yields in corporate bonds is not especially compelling. It is curious that foreign inflows into equity investment. As a result. but there is a strong government/RBI perception that the remaining controls on capital account are required to protect the financial system against external shocks. where the term ‘retail investor’ encompasses a wider spectrum of the population than is true in many other Asian markets. India has gradually relaxed its exchange control structures. are relatively unrestricted. it usually follows either a tax break (such as in the US for the municipal bond market). will remain small. or a tax advantage (as in the bearer status of Eurobonds). Consequently. As recently as 2006. the need to strengthen the banking system (particularly its capital base and NPL position).

The point is that exchange controls make a country less attractive as an investment destination. Malaysia has similarly had to work hard to attract foreign investors back. for the time being. partly because of the growth of the Indian and Chinese markets. in order to comply with the letter of the exchange control regulations. aside from equity inflows which are relatively free. In terms of its share of global indices it is shrinking. Thailand has been mentioned above. no guarantee that foreign investors would want to hold significantly more Indian corporate debt. of course. which are extremely complex and add significantly to the costs of any transaction. and it is instructive to consider the effect of exchange controls there. It is important to understand that. are much more restricted. 61 . Thailand. This does not apply to equity inflows. foreign investors would be a useful source of capital to finance India’s huge infrastructure plans. The fact that the current limits have been reached suggests that there is unsatisfied demand. after its experiment with controls on repatriation of foreign investments. The deposit scheme was applied to equities. Its market has underperformed for several years. Clearly. especially since so much is judged on a case-bycase basis by the RBI. Frequent mention was made of transactions being structured in ways that were not optimal. capital and current account transactions are restricted. for example. The Bank of Thailand takes a similarly cautious line to the RBI and. prepared to ‘manage’ the barriers.foreign investment is unlikely to become especially large. however. mention has been made of the arbitrage motivation for transactions – to minimise tax or circumvent regulations. they have a more pernicious effect in distorting markets and increasing costs. This inconsistency is not confined to India. but is gradually losing its appeal. Thailand has long been an attractive destination for investors. There is. has a one year 30% deposit requirement for inflows into bonds (and property. At several points in this report. which have always been very much larger. but after a day of market collapse it was withdrawn. India needs foreign inflows and its size and current rapid growth mean that foreign investors are. while exchange controls are inevitably a barrier to development of the capital market. with Thai P/E ratios now at about half those of its neighbours. This is also true of the exchange control regulations.

“direct assignment” rather than securitisation. that reform in respect of the main barriers described above is not as rapid as many market participants may wish.1 Current status The Indian corporate debt market remains small despite: ● The rapid development of other parts of the Indian capital market. Examples of this include. and presenting bonds as loans to avoid stamp duty. Regulatory agencies also maintain that they are acting on a number of fronts to address some of the barriers that have been identified with regard to the development of a corporate bond market. exchange control and taxation.8 Summary and recommendations India rightly considers that it has been successful in developing world-class infrastructures to support its capital market. While this sort of distortion occurs in every market. ● The growing demand for credit to fund industrial investment and infrastructure.1.2 Micro-barriers – institutional issues Much analysis has been devoted to micro-barriers to development of the bond market. The true corporate debt market is even smaller than it appears at first sight.1 Summary 8. in terms of regulation. It may be. The most significant of these are: 62 . followed by a set of policy recommendations arising from this work. are mindful of the need to preserve financial order. and the only question is which is most efficient from a tax or regulatory point of view. This chapter provides a brief summary of the results of this report. Indian regulators. to avoid RBI guidelines. In effect. 8. there are almost no public offerings. and there are no more than a handful of private offerings below AA rating. 8. We agree with both of these assessments. “spot trades” to avoid SEBI rules. From a corporate strategic view. particularly the RBI. the environment for financial markets remains complex. because much of what is classed as corporate debt is either raised by the public sector or by financial institutions to lend on to the corporate sector. it remains a prominent feature of the Indian market. the market is currently limited to private placements by highly rated entities.1. all of which have been mentioned in this report. and consider that this has priority over the development of the corporate bond market. This complexity has led to distortions and to an undue focus on arbitrage transactions designed to exploit anomalies in the system. In spite of India’s reform process. presenting loans as bonds to avoid approval processes. therefore. it makes little difference whether finance is from loans or bonds.

and the level of debt to GDP is very high. and other regulators. where the range of options offered by banks to their corporate clients includes a mixture of loan and pseudo-loan finance (that is. mainly other banks). and a desire to control the deficit. Legislation. as corporate bonds tend to fall between several regulators: SEBI. as the capital markets regulator. and private placements dominate the market. private placement of bonds to a single or limited number of investors. and adds a significant cost to bond issuance. Corporate borrowers have traditionally had little need to diversify their financing. Although insurance and pension funds are still largely state-controlled. mean that government demand is falling relative to rapidly growing GDP. Despite this. as the regulator of banks (who are the main investors in corporate bonds). Regulatory overlap exists. There are discussions and proposals to simplify and reduce the stamp duty burden. however. inflexible. such as the insurance regulator (IRDA) and the Department of Commerce. or that aid the equity market (for example. The life insurance sector is dominated by a single state-owned entity. Macro barriers – demand and supply ● ● ● 8. the most significant of which is to place a maximum amount of tax payable on a single issue. The issuance process is perceived to be risky. Stamp duty is complex and variable between locations. it has not been as successful in developing ways to manage interest rate risk.● The disclosure requirements for public issues are very great and do not make allowance for previous disclosures. there is a growing market for private savings/pension arrangements as wealth increases. exchange-traded derivatives). and restrictions on the participation of banks imposed by the RBI. cumbersome and expensive. at 90%. Lack of risk management products (both derivatives and grey markets) is a significant barrier both to the primary and secondary markets. While the Indian market has been innovative in developing products that add efficiency (such as CLBOs).3 The macro problems are more serious. In consequence. as ample bank finance has always been available. (especially the Fiscal Responsibility Act). The main barrier to developing interest rate derivatives has been a combination of lack of diverse views. public bond issues are extremely rare. the level of issuance of government bonds remains high. This continues to be the case in India. and both it and the private funds are governed by ● ● 63 . the RBI. SEBI is examining the prospects for changing the disclosure requirements. and are less likely to be addressed directly or independently of larger issues relating to India’s economic development: ● Crowding out has been a persistent threat to Indian market.1.

This section contains practical recommendations that can.highly restrictive. particularly supply. which limit their ability to invest in corporate debt. stamp duty is the main barrier to extension of the asset-backed market. Securitisation – a special case? 8. which would have a major impact. These have yet to have an effect in India. a mainstay of asset backed finance development in other markets. 8. 64 . together with their conservative investment policies. and most Indian banks are not. Once again. but were desirable to demonstrate a clear intent to regulate the market. we believe. rather than corporate debt. which at least might offer a countervailing investment view. be implemented without risk to other parts of the economy. a main issue is demand and supply. then securitisation is a costly option which is unlikely to be taken. Recent guidelines from the RBI had a depressing effect on the asset-backed market. The impact of stamp duty in the securitisation market is different to that in the wider bond market since it applies to the transfer of assets to the SPV as well as to the issue of bonds. The issue is therefore less likely to be addressed purely by the recommendation to cap the amount of duty payable on a single bond issue. foreign investors are an important catalyst for change and innovation. as it has been in many other Asian jurisdictions. Of the micro-barriers noted above. Arbitrage gains have been common in other markets. possibly because there are no takers for the higher-risk tranches. the effect of stamp duty is so strong that it is claimed as the major barrier to securitisation of credit card receivables. ● Exchange control rules place an aggregate limit on the amount of investment that foreigners can put into domestic bonds. are unlikely to be implemented speedily because of their effects elsewhere in the economy. Indeed. Mutual funds are often treated as short-term investments by investors. As well as excluding a possibly significant group. means that their fixed income investment tends to be in gilts or short term bills. especially as no specific securitisation law is required. where the addition of lower-rated first-loss tranches has reduced the overall funding cost. others. that the corporate bond market suffers more from a lack of supply and demand than from a defective market infrastructure. They are founded on the principal conclusion above.1.4 Securitisation offers significant potential for financing India’s infrastructure plans. government imposed investment mandates.2 Recommendations Some actions that are feasible to implement are unlikely to have much effect. and will require specific changes tailored to the structure of securitisations. and this. If potential originators are not under pressure to reduce their balance sheets.

and take a major role in corporate lending. in that it is more onerous than the corresponding restrictions on foreign investment in equities. Relax exchange controls on corporate bonds. we are forced to make some recommendations which would involve changes to legislation. the dominance of the state sector and. especially compared to the potential benefit. The macro-economic risks from relaxing this aspect of the exchange control regime seem slight. The key changes that would. to be particularly onerous. and that the maximum payable should be capped.1 Macro-economic factors It is first worth commenting on two issues which. in our view and in the view of the majority of practitioners we met.2. Another difficult issue for India is the continuing weakness of parts of its banking system. its culture persists. therefore. to allow for disclosures that are appropriate for public issues into a largely professional market by entities that are already well-known to the investment community. With regard to India. on foreign direct investment. and on foreign investment in derivatives. The Patil report recommended that there should be a standard rate. They are thus unlikely to – and maybe should not – be addressed merely because they are a barrier to development of a particular market. because they are so critical to corporate bond market development. however. and its abolition is unlikely to be hastened by the wish to develop the corporate bond market. while important to the success of the corporate bond market. more importantly.2.2 Practicable recommendations Sometimes in discussions of development it is seen as wise to avoid recommendations that involve changes to primary legislation. We believe that these proposals are of equal importance and feel. Reform disclosure for public offers.8. especially considering the lack of quantitative controls on other capital flows. as this is a slow process everywhere. We agree with this conclusion and urge a rapid implementation of the reform. Stamp duty was the issue raised most frequently in the interview field work as the largest barrier to development of both the corporate bond and the securitisation markets. We believe that current regulations should be reformed. While vibrant private sector banking entities have developed. We are aware that the RBI is conscious of the weakness and considers that it is operating policies that will lead to strengthening of the sector. are also part of the macro economic picture. The restrictions of exchange control on corporate bonds do seem. in particular Stamp Duty. 8. To comment on those policies is outside the scope of this report. The restriction on foreign holdings of corporate debt is anomalous. are: ● Reform stamp duty. The regulations ● ● 65 . Exchange control is a significant plank in a government’s macro-economic policy. that it would be unwise to rank them in any particular order.

in that they can be addressed without affecting the broader questions of India’s infrastructure development. To avoid the risks of too rapid a relaxation of investment mandates (the experience of UTI is relevant here). The Indian life assurance and pension sectors institutions are subject to strict investment mandates. Discussions about re-introducing exchange-traded derivatives have tended to be focused on technical aspects. to allow techniques such as shelf registration. Derivative markets will not develop in such an environment. As a result. and these based on credit risk. we believe that the reforms proposed here are practicable. Institutional investors are the main support for corporate bond markets in most jurisdictions.should also be changed. these recommendations are all practicable. banks. Such guidelines can only be useful. are excluded by regulations that limit their participation to hedging. 66 . can be implemented reasonably swiftly and. all fall within the scope of the relevant regulatory authorities to implement. Develop and enhance related derivatives markets. when the relevant skill set within the institution is at an appropriate level. even if this would require changes to the Companies Act. ● Less rigid investment mandates. ● As noted. Relevant derivatives include not only exchange traded interest rate derivatives. when complete. will encourage the corporate debt market to join the other parts of India’s financial sector at the forefront of the world’s financial markets. the investment mandates of investment institutions. bond-related derivative markets are small and OTC. we propose a controlled and phased relaxation. however. Currently. specifically the Indian Stamp Act and the Companies Act respectively. only the proposals in respect of stamp duty and to disclosure requirements will require changes to primary legislation. and the introduction of risk-management products. and the regulations should be changed to allow banks to take a more active role in them. The amendments to the exchange control regulations. but also OTC products (futures and swaps). and the historic data on risk is available. is that the natural constituency for derivative trading. In addition. which mean that they have a limited ability to invest in non-government debt instruments. however. The main problem. The Patil Committee recommends using risk-based guidelines and we support this proposal.

Indian corporates have been offshore issuers to fund their increasingly diverse international operations. as the home of a major part of global cross-border investment and already an established player in the Indian market. which place a barrier between the domestic and international capital markets. This means that there should be opportunities for London based institutions to participate in moves to stimulate the Indian corporate debt market. some of these are described below. Direct opportunities for the City could come from participation in a well developed Indian corporate debt market. partly because of the large non-resident Indian business population in the UK. the strengths are reinforced. The main opportunities will come during the liberalisation phase of the Indian market. or affect specialised functions. There are. which either affect the whole market. however. then London would have clear opportunities. UK players are generally extremely aware of the direct investment and other opportunities presented by the growth of the Indian market and it would be presumptuous to say more about these opportunities. Currently 28 Indian companies have equity listed on the London Stock Exchange’s main market or AIM with a total market value of nearly £5bn. Four Indian companies have listed convertible debt securities in London. foreign investors are restricted in their access to the Indian market. as it becomes increasingly integrated into the global market in which the City is a dominant participant. FIIs’ exposures are separately limited in debt and equity markets. By way of comparison. the Indian market is still relatively restricted by exchange control regulations. but also because of its historic links and cultural ties. since it is the global centre for international bond issuance and trading. As noted previously. London has been at the forefront of global involvement in the Indian market. NYSE Euro next has eleven Indian companies listed and Nasdaq has three. 67 . London is a natural home for any offshore business. and must be SEBI-registered to get direct access to any part of the market. Many Indian companies have looked to the London market as a place to list shares and raise capital. however. Gains from market expansion Currently. In the case of India. and its global banks now have a significant presence in India in trading and corporate finance. partly because exchange control regulations restrict their overseas borrowing to overseas investments.Annex 1 Implications and opportunities for the City of London Whilst the primary focus of this report is the development of the corporate debt market within India. areas where there may be other opportunities. If the market were to become more open to foreign investors.

It should also be noted that recent global and UK events may have impacted on perceived respect for the UK regulatory model. and deals are often structured to avoid tax or regulatory barriers. especially as tax and regulatory reforms reach fruition. the size of structured finance deals that will be required to finance infrastructure projects suggests that there will be a need for significant foreign. will offer opportunities for City firms. but the market remains constrained by regulation. The UK securities market and regulatory structure has considerable respect in India and is widely admired because of its flexibility. members of the market. as well as domestic. would have an advantage as the market grows. While there may be some drawing back in the global market. with greater trading and advisory opportunities for City-based firms. and in which UK firms are already prominent. UK firms. with respect to the range of structured products and also the integration of structured products between the domestic and global markets. especially if these were part of a coordinated attempt to promote a UK approach to markets and market regulation. Structured finance The securitisation market in India is not well-developed. although there may be a lack of understanding regarding how these things fit together and how they might be accessed. In addition. that domestic practitioners quickly catch up. rather than purely for economic benefit. once the market has stabilised. Equally. There is a clear awareness of the UK model and of the quality of UK training. in which Indian corporates manage their currency and interest rate exposures. it is also likely to lead to a general expansion of interest in Indian debt. the restrictive domestic regulations have provided opportunities by pushing some business offshore. there is the likelihood of gains for increased corporate finance and related work. Of itself. however. as in other fast-developing markets. and that any initial advantage may be short lived. there is interest in alternative regulatory models. Education and training and consultancy The growth of the corporate debt market also offers opportunities in regulatory and financial training. (and other foreign firms). 68 . currently very small. There is a fairly active offshore market in rupee swaps and similar derivatives. involvement. this growth of the market. Structured finance deals are growing in India. The narrow focus of the current securitisation market in India suggests that there may be a concomitant expertise gap in India. consequent upon the sub-prime problems.Whilst development of the local bond market in India might divert some activity from the international market. and profitable. In India. Finally. UK firms’ early involvement would establish them as significant. securitisation is expected to become a vital part of the infrastructure investment in India over the next five years. In the period after a relaxation of restrictions. Experience in similar situations suggests. In addition. as the pool of activity in the local market becomes larger.

2007 New Era for India’s Economy Spurs Need for More Varied Debt Markets. Hong Kong Institute of Economics and Business Strategy. IFC. November 2007 A. Asian Development Bank. (Asean). January 2004 The Structure and Characteristics of East Asian Bond Markets. Dr T. World Bank.C. Alison Harwood.An Asian Perspective. 2004 The Report of the High Level Expert Committee on Corporate Bonds and Securitisation (the Patil Report). February 2006 Factbook 2007. Ismail Dalla. Asian Development Bank.C. Asian Development Bank (ADB).Non-India focused reports The Case of the Missing Market: the Bond Market and why it Matters for Financial Development. Ministry of Finance. Eichengreen and Luengnaruemitcha. Arner. 2002 Asia's Debt Capital Markets Appraisal and Agenda for Policy Reform. Ito and Park Y. Chan and Mays. (eds. Qiao. Jim Turnbull. February 2007 Development of the Corporate Bond Market in India: Tasks Ahead. Lejot. Clearing Corporation of India Limited. Asian Development Bank working paper. October 2007 Developments in the Corporate Bonds and Securitisation Markets – An Update. Market in India and the Road Ahead. Herring and Chatusripitak. Why Doesn’t Asia Have Bigger Bond Markets?. Rakesh Mohan. 2000 Harmonization of Bond Market Rules and Regulations in Selected APEC Economies. SEBI. Nair. January 2007 High Level Expert Committee on Mumbai as an International Financial Centre. Ghon Rhee (in ‘Developing Asian bond markets’. 2004. T. 2000 Building Local Bond Markets . SEBI.). National Bureau of Economic Research working paper.1 . September 2001 A Decade of Reforms in Government Securities.Appendix A – Key references A. 2003 Study on Korea’s Corporate Bond Market and Its Implications on China’s Bond Market Development. Moodys. August 2007 India: CLBO Markets – a New Type of Funding for Securities Markets. Reserve Bank of India.2 . December 2005 Recent Trends in the Indian Debt Market and Current Initiatives. Reserve Bank of India. Ed. 2004 69 . Rakesh Moha.India related reports Development of a Secondary Debt Market.

Financial Services Authority. Background Paper.Making Markets: Reforms to Strengthen Asia’s Debt Capital Markets. June 2007 Transparency. June 2006 Supporting the Implementation of the Capital Market Development Master Plan. Asian Development Bank ADB TA 4826-THA. Markets in Financial Instruments Directive (MiFID). Arner and Qia. 2006 CESR’s Response to the Commission on Non-equities Committee of European Securities Regulators. November. September 2007 A. 2007 Asia bond Monitor/Asia Bonds Online. June 2004 Asian Local Currency Bond Markets. 2000 70 . Nomura Research Institute. New York University. 2006 European Corporate Bond Markets: Transparency Liquidity.3 . (Thailand). Financial Services Authority.EU Bond Market deliberations Transparency of Corporate Bond Markets. World Bank 2006 International Convergence of Capital Measurement and Capital Standards.Securitisation Rating Securities Backed by Future Financial Cash Flows. May 2004 European Bond Pricing Sources and Services: Implications for Price Transparency in the European Bond Market. BIS Quarterly Review. Arner and Qia. Sept 2000 Asset Securitization in Asia. 2004 Asia’s Bond Markets: Reforms to Promote Activity and Lessen Financial Contagion. Ian H. Hong Kong University. DP05/5. Fitch. International Organization of Securities Commissions (IOSCO). 2005 East Asian Finance – the Road to Robust Financial Markets. Lejot. 2004 Assistance for Developing Bond Markets. April 2005 Trading transparency in the UK secondary bond markets.4 . Efficiency. June 2004 Developing a Corporate Bond Market and Associated Derivatives Market in China – a Study of the Opportunities and Challenges. Asian Development Bank (various issues) A. FOA-UKTI. Lejot. BIS. European Commission. The Bond Market Association. Hong Kong Institute for Monetary Research. 2005 Trading Transparency in the UK Secondary Bond Markets . DP06/4. (Vietnam – Asean). Giddy. City of London. September 2007 ICMA’s Response to the Commission’s Call for Evidence on Bond Market Transparency.Feedback on DP05/5. Jiang and McCauley. International Capital Market Association.

ICRA. March 2005 Update on Indian Structured Finance Market. BIS June 2006 The Structured Bond Market in Thailand. February 2006 Securitization of Remittances. Japan Bank for International Cooperation April 2007 Indian Securitisation.Regulatory and Market Scenarios.Asset Securitisation. 2003 Why are Securitisation Issues Tranched? Jenkins and Firla-Cuchra. 2001 Basel Committee on Banking Supervision Consultative Document .Securitization of Future Flow Receivables: A Useful Tool for Developing Countries. IMF. August 2007 The Subprime Mortgage Crisis: A Synopsis. Development Bank. Vinod Kothari. May 2001 Assessing Public Sector Borrowing Collateralized on Future Flow Receivables. Vinod Kothari. Said Business School. July 2005 RBI’s Guidelines on Securitisation: Comments. Inter-American Securitisation in Asia and the Pacific: Implications for Liquidity and Credit Risks. April 2006 Nathaniel Jackson. IMF. Oct 2007 71 . Deutsche Bank.

whether it be policing and cleaning its streets or in identifying international opportunities for economic growth.000 acres of open space in and around it. innovation and flexibility – and it seeks to perpetuate the City’s position as a global business leader into the new century. Alongside its promotion of the business community. a respected ambassador for financial services who takes the City’s credentials to a remarkably wide and influential audience. It is also able to promote the City in a unique and powerful way through the Lord Mayor of London. it is the port health authority for the whole of the Thames estuary. It runs the internationally renowned Barbican Arts Centre.The City of London Corporation The City of London is exceptional in many ways. not least in that it has a dedicated local authority committed to enhancing its status on the world stage. however. Older than Parliament itself. The smooth running of the City’s business relies on the web of high quality services that the City of London Corporation provides. and it owns and protects 10. a byword for strength and stability. The City of London Corporation. the City of London Corporation has centuries of proven success in protecting the City’s interests. . never loses sight of its primary role – the sustained and expert promotion of the ‘City’. it manages a portfolio of property throughout the capital. the City of London Corporation has a host of responsibilities which extend far beyond the City boundaries.

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