BONDS AND RECENT By

RASHMI SHARMA
TRENDS IN BOND MARKET COMPANY SECRETARY
 WHAT ARE CORPORATE BONDS
WHAT ARE THE INTERMEDIARIES INVOLVED /AGENCIES
SPECIAL UNDESRATANDING OF CREDIT RATING

WHAT IS FLAWED CREDIT RATINGS AND CASE STUDY

BONDS PROCESS A BRIEF OVERVIEW
INCLUDE HOW BIDDING IS DONE

D WHO ARE MARKET REGULATORS

TRENDS IN BONDS MARKET
GREEN BONDS
A CONCEPT OF MARKET MAKING
 • Corporate Bonds are units of
specific Nominal Value issued by
WHAT companies to raise funds from
debt market
ARE • Investors lend money to the
company issuing the bond.
CORPORA • In return the company makes
TE BONDS commitment to pay interest
• to return the principal when the
bond matures
 MODE OF ISSUANCE
PRIVATE PLACEMENT BASIS
• Not a ‘public offering’.
• Issued to selected group of investors not exceeding 50 at a time and 200 on
a annual basis .
• Issued on basis of Information memorandum and shelf prospectus
• Exempt from filing an offer document SEBI for its comments
PUBLIC ISSUE
WE IN THDC FOLLOW “PRIVATE PLACEMENT” MECHANISAM
PRIVATE PLACEMENT Vs PUBLIC ISSUE for NCDs
SHARE OF
BONDS IN
TOTAL
BORROWING
S
WHY GO FOR PRIVATE
PLACEMENT

• Cost effective mechanism

• Lesser no of compliances
• Closed network of investors
 Five Series of Corporate Bonds by THDCIL till now

THDCIL had issued total five series of Corporate Bonds till date and raised Rs 4850 Cr.

NAME AMOUNT (In Cr.) Coupon YEAR

rate %
Corporate Bonds Series – I 600 7.59 2016
Corporate Bonds Series – II 1500 8.75 2019
Corporate Bonds Series – III 800 7.19 2020
Corporate Bonds Series – IV 750 7.45 2021
Corporate Bonds Series – V 1200 7.39 2021
All 5 series of corporate bonds of
THDCIL are Secured,
Redeemable, Non-Convertible,
and issued on private placement
basis
 TOTAL FUNDS RAISED – Rs 4850 Cr.
TOTAL FUNDS RAISED Rs 4850 Cr since 2016 WITH MAJOR PORTION AFTER 2019
1600

1400

1200

1000

800

600

400

200

0
BONDS SERIES -I (7.59 %) BONDS SERIES - II (8.75 %) BONDS SERIES - III (7.19 %) BONDS SERIES -IV ( 7.45%) BONDS SERIES -V (7.39%)

TOTAL FUNDS RAISED Rs 4850 Cr

LARGE CORPORATE ENTITY – THDCIL

Large Corporate Entity – Incremental borrowing

Borrowing of Rs 100 Cr or more minimum 25% through Bonds
in every financial year
THE INTERMEDIARIES / AGENCIES INVOLVED

Credit rating agencies

Debenture Trustees
Registrar and transfer agents (RTA)
Arrangers
Stock Exchange- BSE & NSE
Depositories –CDSL and NSDL
 In THDCIL they are appointed on the
HOW basis of ranking by Prime Database .
THEY Platform dedicated to the primary capital
market covering fund raising by the
ARE Indian corporate sector and government.
APPOINT
The data is available on an annual
ED ? subscription of prime database.
 • Arrangers are appointed to facilitate in
raising of funds by arranging the investors
for us .
Who are the • In private placement Company cannot utilize
any public advertisement, media channel to
ARRANGE inform the public at large about issue of
RS and securities.
their role • They do so by informing the investors about
the company and brand building.
• They also do risk profiling of the Company
on basis of ratings and company financials
 The arrangers also advise us on
market conditions , timings of the
issue , issue size , tenor etc.

ARRANGERS They are also appointed on the basis

of Prime data base ranking.

Arrangers who are major players in

long term debt market are ranked
Higher .
ARRANGERS

we appoint first 20 -25 ranked arrangers generally who play pivotal

role in our Issue Process I

Their role is from from Finalisation of private placement offer letter or

what is popularly known as prospectus to Demat credit of Bonds to
investors’ Demat account.
ARRANGERS

• They can directly bid less than 15 Cr

• Arrangers charge their fees in form of
Percentage of Commission on amount
arranged by them and accepted by
THDCIL.
 • Credit Rating Agencies assess
the creditworthiness of the
company and its ability to repay
the debt and also rate their
CREDIT credit risk.
RATING • Provide useful information to
AGENCIES the markets and help investors
save on research costs.
• All the credit rating agencies in
India are regulated by SEBI.
 • Credit Rating Information Services
of India Limited (CRISIL) ...
• ICRA Limited. ...
• Credit Analysis and Research
RATING limited (CARE) ...
AGENCIES • Brickwork Ratings (BWR) ...
• India Rating and Research Pvt. ...
IN INDIA • Acuite Ratings & Research
Limited. ...(SMERA)
• Infomerics Valuation and Rating
Private Limited.
PRIMARY Standard &
 

BOND Poor's Global Ratings

RATING  Moody’s,
AGENCIES Fitch Ratings
 • A company's rating is an indication of its
ability to repay its debt.
• Financials
• Operational health
CREDIT • Prospects of the company
RATINGS • Industry in which company is involved.
When company accepts the rating assigned, the
rating agency publishes the rating and it is
considered as final whereas in case of non-
acceptance of the rating, the final rating is not
assigned by the credit rating agency
 • Investment grade ratings mean
the investment is considered solid
by the rating agency, and the
issuer is likely to honor the terms
of repayment.
Rating • Speculative grade mean the
categories investment are high risk and,
therefore, offer higher interest
rates to reflect the quality of the
investments.
 INVESTMENT vs SPECULATIVE GRADE
Rating INDICATION GRADE

AAA Extremely strong capacity to meet financial obligations. Investment

AA Very strong capacity to meet financial obligations. Investment
A Strong capacity to meet financial obligations, but somewhat susceptible to Investment
adverse economic conditions and changes in circumstances.

BBB Adequate capacity to meet financial commitments, but more subject to Speculative
adverse economic conditions.
BB Less vulnerable in the near-term but faces major ongoing uncertainties to Speculative
adverse business, financial and economic conditions.
B More vulnerable to adverse business, financial and economic conditions Speculative
but currently has the capacity to meet financial commitments.
ADDITIONAL RATING
CATEGORIES
• Agencies may apply '+' (plus) or '-' (minus)
signs for ratings from ' AA' to ' C' to reflect
comparative standing within the category for
Example AA + OR AA - .
• They may assign rating outlooks for ratings from
'AAA' to ' B'. A rating outlook can be 'Positive',
'Stable', or 'Negative'. A 'Positive' or
'Negative' rating outlook is indicator or likely
change in rating in future.
RATING INDICATORS

A negative watch indicates that its ability

to repay may be deteriorating. A company's outlook may be
stable, under review, negative
watch, or negative.
THDCIL is currently rated as AA with “stable outlook”
by all
three ratings agencies
(ICRA , CARE , India Ratings )
 • Bond rating agencies were heavily
criticized early in the 21st century for
assigning flawed ratings
• Since the 2008 credit crisis, rating
Criticism of agencies have been criticized for not
identifying all of the risks that could
Bond Rating impact a security's creditworthiness.
Agencies • Bond issuers pay the agencies for the
service of providing ratings, and no
one wants to pay for a low
rating .Investors continue to be
concerned about possible conflicts of
interest
Criticism of Bond Rating Agencies
They were blamed for giving high credit
ratings to secured instruments that
turned out to be high-risk investments.
Ratings should not be the
only factor investors rely on
when assessing the risk of a
particular bond investment.
Criticism of Bond Rating Agencies
• Bond rating agencies have also been criticized for
causing financial losses by making dubious rating
downgrades. 
• Some innocent companies ended up paying higher
interest on their debts.
• Sometimes investor makes their own choices
The IL&FS Insolvency case
 IL&FS, India’s leading
Explainer: infrastructure finance company,
The IL&FS defaulted on payment to lenders,
triggering panic in the market.
Insolvency
case The dues stand at more than
Rs. 91, 000 crore.
 • IL&FS Group, was facing a severe liquidity
crisis between July 2018 and September

Explainer:
2018,
• Two of the subsidiaries of IL&FS Group

The IL&FS reported having trouble in paying back

loans and inter-corporate deposits to
banks/lenders.
Insolvency • Further, in early September 2018, one of

case
the subsidiaries of IL&FS Group was unable
to repay a short-term loan of Rs. 1,000
crore taken from SIDBI.
• Group companies defaulted in repayments
 The group was enjoying "AAA" - the
highest credit rating - until August 2018,
just before one of its subsidiaries, IL&FS
Transportation Network Ltd, defaulted on
its payment obligations.

Aug. 2018 8 Sep. 2018

Non-Convertible Debenture was first

downgraded by CARE on August 16, 2018.
ICRA downgraded the paper on
September 8, 2018. Strangely, just a
month back, from AAA to AA positive
SEBI ACTIONS

• SEBI had sent show-cause notices to rating agencies and started adjudication
• It imposed fine Rs 1 crore which is maximum limit.
• strengthened the rules of credit rating agencies.

Rating agencies ICRA and CARE have already sent their MDs on indefinite
holidays and India Ratings has already suspended some of its officials.
Outcome of Audit of the case

• Credit rating agencies for years assigned high ratings to India’s Infrastructure
Leasing & Financial Services (IL&FS) and its group companies despite its
deteriorating finances, according to a special audit.
 “Rating agencies need better market
intelligence and surveillance rather than
depending upon historical data and some
structure based on past estimates.“
THE ISSUE PROCESS: HOW THE
BONDS ARE ISSUED.

• Company decides its tenure, security , face

value in consultation with Board of Directors
• In order to make the process transparent, an
Electronic Bidding Platform is used by the
issuer through which an interest rate of the
bonds is discovered.
• Issuer has to obtain credit rating for the
instrument from at least one credit rating
agency registered with SEBI.
What is green shoe option

• The issue size is divided in two parts

• Base issue size and
• Green shoe Option .

The company has to issue securities up to base issue size and the
amount of green shoe option is optional. If interest rate is
favourable the company can accept green shoe option also .
What is green shoe option

• ISSUE SIZE :Rs 1500 Cr .

• BASE ISSUE Rs 500 Cr
• Green shoe Option Rs 1000 Cr
• Now company must accept at least Rs 500 Cr and its optional to
accept any amount out of balance Rs 1000 Cr . Suppose company
decides to accept Rs 800 Cr from Green shoe option, its final issue
size shall be Rs 1300 Cr (500+ 800)
Electronic
Bidding Platform
• Electronic Bidding
platform is a transparent
platform through which
bidding is conducted for
discovery of coupon
(Interest) rate.
• The platform brings
efficiency and
transparency in the
coupon discovery
mechanism
Electronic Bidding Platform

• Mandatory to follow electronic book mechanism (EBP) of all

issues of size above Rs 100 crore.

• We can use EBP of either NSE or BSE and designate one stock
exchange as designated stock exchange .

• They will make issue live atleast 2 working days before the date of
bidding
Electronic Bidding
Market based price discovery of coupon rate
Mapping Investors /Arrangers/QIBs
Making Issue live
Bidding time of 1 to 1.5 hrs
Investors bid the interest rates at which they are desirous to invest
their money in the company (for example, 6.84 percent, 6.85
percent, etc.)
Electronic Bidding

• Bids are arranged in ascending order and the cut-off interest

rate is arrived at the rate corresponding to the issue size, also
considering the green shoe option.
• The cut-off rate is taken as the coupon rate for the entire issue.
• Successful bidders are those who have bid at or below the cut-
off yield. Bids which are higher than the cut-off yield are
rejected.
 COUPON RATES ACCPETANCE AND DISCLOSURE

• We can accept or reject discovered interest rate within 1 hr from end

of Bidding
• Cut off rate id prescribed at the time of issue setup
• If rate discovered below cut off rates we have to accept the bids . If
we do not accept then we will be barred from issue atleastr for 3
months
• Bidding can be extended before 10 mins of end time
• Settlement in t+2 basis Next day demat credit and fund release
• Listing in T+4 basis
There are many factors which involve in
the discovery of interest rate such as
demand of the securities among
investors, confidence of investors in the
company, market sentiments, liquidity
in the economy, repo rate etc.
Regulato
r-SEBI
The Bonds market is regulated by SEBI.

SEBI notifies rules regulations for ISSUERS and also other market
players like arrangers , Trustees , Rating agencies
Functioning of bonds market is completely regulated by SEBI
Regulations .
In case company defaults in compliance it can be barred from
issuing bonds in market or huge penalties are imposed on issuer
GREEN
BONDS
Green bonds are debt
instruments, the
proceeds of which are
used for green projects GREEN
such as wind and solar BONDS
energy plants or projects
meant to reduce
greenhouse gas
emissions.
While green bonds do not
necessarily offer better
pricing — which is based on
the timing of the issue and
rating of the issuer — they
are becoming more popular
because many investors are
gradually paring their
investments in fossil fuel
companies and shifting to
green projects
Understanding Green Bonds

Green bonds work like regular bonds

with one key difference: the money
raised from investors is used
exclusively to finance projects that
have a positive environmental impact,
such as renewable energy and green
buildings.
• The market for green bonds is
growing exponentially.
WHY GREEN
• Green bonds must have a
positive environmental impact. BONDS
• Governments and companies
use the securities to finance
major sustainability projects.
 • Corporate and bank issuers in
India are likely to tap the climate-
related debt market more
India sets sights actively as the world's third-
largest emitter of carbon dioxide
on record green will need as much as $10 trillion
bond issuance to be carbon-neutral by 2070
entering 2022
• More issuers will also turn to the
offshore market where there is a
deeper and wider pool of
climate-conscious investors.
Greenwashing- A
CHALLENGE
• Making false or misleading claims about
the green credentials of a company or
financial product – is a major challenge for
the market in green bonds and other
sustainable investments.
• Further initiatives from the regulator is
needed
• Environment consciousness investors are
required
MARKET
MAKING
SEBI proposes MARKET MAKING mechanism
in corporate bond market

Market makers provide continuous two-way markets

for buyers and sellers.
HOW MARKET MAKING WILL
HELP

"Market making is a significant cog in the wheel which will not only enhance
liquidity, but also provide a fillip to facilitate market efficiency and
functioning," SEBI
WHO ARE MARKET MAKERS

• Market makers are entities that quote both a buy

and a sell price for corporate bonds in order to
create liquidity in the market.
• Generally, stock brokers double up as market
makers.
Entities eligible to act as market makers

SEBI-registered Stock Brokers or Merchant

Bankers (including Scheduled Banks or primary
dealers who are registered with SEBI either as stock
brokers and/or merchant bankers)
APPLICABILITY
• The proposed framework should be applicable to listed
issuers
• which have listed their non-convertible debt securities
and
• outstanding value of such debt securities should be at
least Rs 500 crore as on the
WHAT WE AS ISSUER HAVE TO DO
• Issuer should appoint at least two market makers before
listing.
• The details of the market making arrangement should
be disclosed accordingly in the offer document.
• An issuer would have to make arrangements for market
making corresponding to at least 25% of the amount to
be raised
MODES OF MARKET
MAKING
Mode-I Reservation in Primary issuance

• Portion of the primary issuance , whether public issuance

or private placement, shall be earmarked for subscription
by the market maker

• The market maker will make market in secondary market

with this inventory. The market maker buys bonds,
receives coupon and earns from the spread From the
transactions.
 • The issuer will subscribe to its own issuance to the
extent reserved for the market maker in the form of
treasury stock and keep them in an escrow
Mode – I account.
• Hence, ownership of bonds remains with the issuer.
SECONDRY • The issuer will make this inventory available to the
MARKET market maker who in turn will make market in
secondary market for pre agreed fees/ commission.
• Proceeds from these transactions will be passed on
by the market maker to the issuer.
The issuer buys bonds, receives coupon and earns
from the spread
Model II
Market maker will create its
inventory by purchasing bonds
in the secondary market and
make market in secondary
market.
The market maker buys bonds,
receives coupon and earns from
the spread from the transactions
MARKET MAKING WILL HELP
BRINGING MORE LIQUIDITY

• At present, the Indian corporate bond market, both

issuances and trading are limited to only a small
number of highly rated papers.
• About 86 per cent of the outstanding bonds is in
just the top three categories of AAA, AA+ and AA.
THANK YOU