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Indian corporate Bond market

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Indian corporate Bond market

This is the comprehensive and latest presentation on Indian Corporate Bond market. It starts with basic features, 3 Main pillars of Indian Corp bond market ecosystem & its importance. It then covers Primary Placement, Valuation/MTM as per RBI/FIMMDA norms, Valuation using excel IRR() function with example, Credit rating scales, Market timing & Reporting.
It also covers few topics like ISIN & ends with challenges and Limitation of India corp bond market.

This is the comprehensive and latest presentation on Indian Corporate Bond market. It starts with basic features, 3 Main pillars of Indian Corp bond market ecosystem & its importance. It then covers Primary Placement, Valuation/MTM as per RBI/FIMMDA norms, Valuation using excel IRR() function with example, Credit rating scales, Market timing & Reporting.
It also covers few topics like ISIN & ends with challenges and Limitation of India corp bond market.

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Indian corporate Bond market

  1. 1. Indian Corporate Bond Market – A Perspective ABHIJEET DESHMUKH www.abhijeetdeshmukh.com
  2. 2. Capital Requirements Government IndividualsCorporates
  3. 3. Corporate Capital Funding Sources Sources External Equity Debt / Corporate Debt Bank Borrowings Project Loans Syndicated Loans Working Capital Trade Finance Bonds Hybrid Internal Accruals Reserves
  4. 4. Corporate Bonds - Basic Features  Corporate Bonds are issued to the Public (similar to equity instruments)  Listed on Stock Exchanges and traded in Secondary Markets  are Transferable  Can be Secured or Non-secured  possess a Broad Base of Issuers (ranging from small companies to conglomerates and multinationals) and investors (including retail participants), and  are under the additional purview of the Regulators of the Securities Market other than the Central Bank or other Banking Supervisor.
  5. 5. Corporate Bond Market Ecosystem - Three Main Pillars The study of Corporate Bond Market is essentially the study of below three pillars, their roles, responsibilities and actions in the corporate bond market. Institutions – Regulations & Governance SEBI RBI Credit Rating Agencies Clearing Houses Stock Exchanges Participants Investor (Demand Side) Issuer (Supply Side) Securities Debentures (Fixed & Floating) Securitized Instruments Commercial Paper Certificate of Deposit
  6. 6. Corporate Bond Market - Importance  Corporate Bond market helps corporates funds at the low cost and take the benefit of their credit rating without diluting equity.  the corporate bond market in a country can substitute part of the bank loan market, and is potentially able to relieve the stressed banking system in a developing country of unbearable burden.  When bank lending and corporate debt is more balanced in an economy, the market gets an opportunity to assert itself, thereby providing a more effective hedge against systemic / Market / un-diversifiable / volatility risk.  Derivatives and Swap markets are critical for the development of corporate bond markets. These tools broaden the investor base and lend the much needed liquidity to the market. These instruments also play a pivotal role in reducing costs, enhancing returns and managing risk; particularly interest rate risk
  7. 7. Corporate Bond – Primary Placement  Bonds can be places as Public or Privately placed.  Market is dominated by the Private Placement  Private Placed Bonds are those where number of investors are not more than 49, Min Investment is 25 lakhs and multiple of 10 lakhs thereafter.  Sample Term Sheet Years Issues Amt (in '000 cr) % of Issue Issues2 Amt (in '000 cr)3 % of Issue2 2010-11 10 9.45 4.1% 1,404 218.79 95.9% 2011-12 20 35.61 12.0% 1,953 261.28 88.0% 2012-13 20 16.98 4.5% 2,489 361.46 95.5% 2013-14 35 42.38 13.3% 1,924 276.05 86.7% 2014-15 25 9.71 2.3% 2,611 404.14 97.7% 2015-(Aug15) 3 0.80 0.4% 1,509 216.11 99.6% Public Issues Private Placements
  8. 8. Corporate Bond – Valuation/MTM  As per RBI Master Circular on Valuations - “All debentures/ bonds should be valued on the YTM basis. Such debentures/ bonds may be of different companies having different ratings. These will be valued with appropriate mark-up over the YTM rates for Central Government Securities as put out by PDAI/ FIMMDA periodically. The mark-up will be graded according to the ratings assigned to the debentures/ bonds by the rating agencies subject to the following: -(a) The rate used for the YTM for rated debentures/ bonds should be at least 50 basis points above the rate applicable to a Government of India loan of equivalent maturity.”  The premium carried by a corporate bond over G-Secs represents the Credit Risk or Credit Premium. If the spread shrinks it denote bearish view on yield / light supply side / higher yield demanded by the investor for bearing the risk. Source: https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9027#371 http://www.fimmda.org/modules/bonds/corporate-bonds.aspx?m=btd
  9. 9. IRR() for Valuation Stock IDBI 2015 Coupon 9.35 FV 100.00 Price 102.15 Trans. Chgs 0.30 Maturity 31/12/15 9.35% IDBI 2015 -102.15 1-Jan-10 9.35 31-Dec-10 9.35 31-Dec-11 9.35 31-Dec-12 9.35 31-Dec-13 109.35 31-Dec-14 8.80% Last IP 1-Jan-10 Acc int 0.000 Quote 102.15 Stock IDBI 2015 Coupon 9.35 FV 100 Price 102.15 Trans. Chgs 0.3 Maturity 42369 0.0935 IDBI 2015 =-(C20+C19) 40179 9.35 40543 =(C13-C12)/365*$B$10*100 40908 9.35 41274 =(C15-C14)/365*$B$10*100 41639 =(C16- C15)/365*$B$10*100+100 42004 =IRR(B11:B16,0.01) Last IP 40179 Acc int =(C11-C18)/365*B10*100 Quote 102.15
  10. 10. Credit Rating Scales  Debt instruments rated 'BBB-' and above are classified as Investment Grade ratings.
  11. 11. Market Timings & Reporting Platforms  NSE (http://nseindia.com/products/content/debt/corp_bonds/cbm_reporting_homepage.htm)  BSE (http://www.bseindia.com/markets/debt/tradereport.aspx?expandable=0)  FIMMDA – FTrac Information (http://www.fimmda.org/modules/content/?p=1030) Market Timings & Holidays  Market Hours are 9.30 AM to 17.30 and reporting hours are 10.00 to 17:30.  Trades done till 17:30 but couldn’t be reported are required to be reported by 9:30 to 10 next day along with traded done post 17:30  Either the buyer or the seller can report the trade, but the reporting party has to enter both sides of the deal.  The party can use an id of your choice while reporting trades preferably NDS or CCIL ID. A confirmation email will be sent to both the email ids entered by the party. (http://www.nseindia.com/products/content/debt/corp_bonds/mrkt_timing_holidays.htm)
  12. 12. International Securities Identification Number (ISIN)  International securities identification number (ISIN) is a 12 character long code, first two characters indicates Country Code as per ISO3166 (For India it is IN).  Third letter indicates type of security which can be E, A, F, B or 9 (E – Company, A/0 – Central Government Security, B- State Government Security, F- Mutual Fund Unit and 9 represents Equity shares having different rights than those represented by INE number.)  In the remaining 9 digits last digit is check suffix suing Double Add Double method to check the validity of the International securities identification number (ISIN)  INE002A01018 – ISIN of Reliance Industry IN – India; E- Company Type; 002A-Company Serial No of Reliance; 01-Equity; 01-Issue Number; 8-Check Suffix
  13. 13. Corporate Bonds Market - Limitations (1/2)  Economic structure is a determinant of financial structure. Since India is a predominantly services based economy, the financial structure automatically prefers equity market liberalization over debt market liberalization.  the inconsistent, disorganized and overlapping institutional and regulatory framework has been one of the primary reasons impeding the development of strong corporate debt markets in India.  In India, a high level of public debt (Government Bonds) crowds out corporate borrowing by reducing the appetite of financial institutions. This increases the cost of borrowing for corporates making bond markets an unviable source of funding  absence of an adequately sized corporate debt market leads to an oversized banking system in any economy. It also results in a large portion of the lending market being excessively regulated, &without being subjected to free market forces, this becomes the perfect breeding ground for crony capitalism, sloppy lending by banks and careless investments by corporates.  The average maturity in the US bond market has lengthened in the recent past and has been upwards of 12 years since 2007 whereas average age of the bonds issued by Indian corporations is only 5 to 7 years
  14. 14. Corporate Bonds Market - Limitations (2/2)  RBI observes that listed corporate debt forms only 5.4 per cent of GDP significantly low compared to other emerging economies - Malaysia(43.1), Korea (77.5) & China (13).  the supply side issues hampering the development of corporate debt markets in India and lists the lack of diversity in instruments & issuers. The large issuers in the corporate debt market segment are “quasi-government” i.e. banks, public sector oil companies or government sponsored financial institutions..  On the equity side, management and controlling shareholders were largely in favour of equity reforms and consequently allowed for more room for negotiation and agreement. On the debt side, changes were necessary to bankruptcy laws, labour laws and judicial enforcement. At the time of liberalization the base of political power in India was support of labour unions and therefore any changes to labour or bankruptcy laws (allowing quick dismissal of labour) was not feasible.  Foreign borrowings have also shown a healthy growth, indicating preference for cheaper foreign funds over costlier Indian debt markets. However, the recent depreciation in rupee exchange rate against major currencies has tremendously increased the foreign obligations of corporate and stressed corporate balance sheets.
  15. 15. Thank You

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