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Intro To Debt Market
- 1. Introduction To Debt Market 28 June 2004 MindTree Consulting – Proprietary & Confidential
- 2. Objectives s What are Debt Instruments & their Features s Indian Debt Market s Types of Products s Trading Mechanism Page 2 MindTree Consulting – Proprietary & Confidential
- 3. Debt Instruments & Features s Contract between lender and the borroower ² Bonds ² Debentures s Features ² Maturity ² Coupon ² Principal Page 3 MindTree Consulting – Proprietary & Confidential
- 4. Modifying s Coupon ² Zero Coupon Bond ² Treasury Strips ² Floating Rate Bond ² Others s Term to Maturity ² Callable Bonds ² Puttable Bonds ² Convertible Bonds s Principal Repayment ² Amortising Bonds ² Bonds with sinking fund Provisions Page 4 MindTree Consulting – Proprietary & Confidential
- 5. Indian Debt Market s Market Segments ² Government Securities ² PSU Bonds ² Corporate Securities s Participants ² Government, RBI, PDs, PSUs, FI s, Corporates, Banks, Mutual funds, FII s, Provident Funds, Trusts. s Secondary Market ² NSE- WDM only formal trading platform (NEAT) Page 5 MindTree Consulting – Proprietary & Confidential
- 6. Indian Debt Market s Participants & Products in Debt Market Issuer Instrument Maturity Investors Central Dated Securities 2-20 Years RBI,Banks,Insurance Co., PFs, Government MFs, PDs, Central T-Bills 91/364 days RBI,Banks,Insurance Co., PFs, Government MFs, PDs,Individuals State Dated Securities 5-10 Years Banks,Insurance Co.,PFs. Government PSUs Bonds 5-10 Years Banks,Insurance Co., PFs, MFs, PDs,Individuals, Corporates Corporates Debentures 1-12 Years Banks, Mutual Funds, Corporates,Individuals Corporates, Commercial 3 months to Banks, Mutual Funds, FI s, PDs paper 1 Year Corporates,Individuals Banks Certificates of 3 months to Banks, Corporates Deposit 1 Year Page 6 MindTree Consulting – Proprietary & Confidential
- 7. Central Government Securities: Bonds s Long Term Borrowing s Developments ² Auction Based Pricing ² Information Dissemination ² DVP ² NDS/CCIL/RTGS s Trends in Volumes,Tenor,Yields Page 7 MindTree Consulting – Proprietary & Confidential
- 8. Central Government Securities: Bonds s Primary Issuance Process – Auction based ² Enable Higher Auction Volumes ² Broadening participation ² Ensuring efficiency s Types of Auctions ² Discriminatory / Uniform Price Auction ² Yield / Price Based Auction s Particiapnts ² Banks, PFs, Insurance Co., PDs, MFs. s Costituent SGL Account Page 8 MindTree Consulting – Proprietary & Confidential
- 9. Central Government Securities: Bonds s Primary Dealers ² Introduced in 1995 and at present 19 ² Act as underwriters and market makers ² To Strengthen Infrastructure ² To divest resposibilities of RBI ² To facilitate Open Market Operations ² Eligibility s Satellite Dealers ² Second Tier in Trading and Distribution ² Provide a retail outlet Page 9 MindTree Consulting – Proprietary & Confidential
- 10. Central Government Securities: Bonds s Secondary Market ² Deemed to be listed ² Telephonic Market ² NSE – WDM ² SGL holders to report to PDO s Settlement ² Delivery Vs Payment ² Negotiated Dealing System ² PDO debits/credits SGL and Current Account ² Brokers Page 10 MindTree Consulting – Proprietary & Confidential
- 11. T - Bills s Short Term borrowing s Issued at discount s 91 / 364 Days T – Bills s Aboiltion of Ad Hoc T-Bills s Issuance Process through Auction ² Banks and PDs ² Non Competitive Bids ² Calendar ² 91 days Weekly 250 Cr. Wednesday Thursday ² 364 days Fortnightly 750 Cr. Wednesday Thursday s Usually held till maturity s 5.5% of total secondary market Page 11 MindTree Consulting – Proprietary & Confidential
- 12. T-Bills s Cut off Yields ² Yield given Price= ((100-Price)*365/(Price*No.of days to maturity) ² Price given Yield= 100/1+(yield%*(No.of days to maturity/365)) ² For Example: A 182 day T-Bill auctioned on January 18 at a price of 95.510 would have an implicit yield of 9.4280% computed as follows: ((100-95.510)*365)/(95.510*182) Page 12 MindTree Consulting – Proprietary & Confidential
- 13. State Government Bonds s Represent market borrowimg to finance GFD s Currenrly at 13% of GFD s Averages about 12000 Cr. s 84000 Cr. Outstanding s Managed by RBI, States upto 35% s Coupon fixed at 25 bps above Central Government securities s PDs allowed to particiapte s SBI owns the largest chunk s Low risk weight of 20% s State Government Guaranteed Bonds Page 13 MindTree Consulting – Proprietary & Confidential
- 14. Call Money Markets s Short Term funds ranging from overnight funds to 14 days s Banks and PDs allowed to borrow/lend s UTI, FI s, MF s, Corporates allowed to lend s Is around 32% of reserve requirements s Call Rates ² Deposit mobilization of Banks, capital flows,CRR on supply side ² Tax outflows,Government borrowing,Credit Off Take Page 14 MindTree Consulting – Proprietary & Confidential
- 15. Corporate Debt: Bonds s Bonds issued by PSU, FI, and Corporates s PSU bonds can be taxable or taxfree s Issue Process ² Authority for the issue ² Appointment of Debenture Trustees ² Offer Document ² Creation of DRR Account ² Creation of charge ² Credit rating ² Listing Criteria on NSE WDM ² Form of Holding Page 15 MindTree Consulting – Proprietary & Confidential
- 16. Corporate Debt: Bonds s Issue management & Book building ² Managed by cosortium of lead managers,co- managers,underwriters and brokers. ² Virtual book building portal called debtonnet.com ² Investors indicate the amount at different coupon rates or the amount at cut-off coupon rate ² Arrival of Cut-off coupon rate ² Oversubscribed Page 16 MindTree Consulting – Proprietary & Confidential
- 17. Corporate Debt: Bonds s Terms of debenture Issue ² Face Value ² Price ² Credit rating ² Deemed date of allotment ² Applicable interest rate ² Interest on application money ² Interest payment ² Redemption ² Put/call option ² Lettr of Allotment and Debenture Certificate ² Security Page 17 MindTree Consulting – Proprietary & Confidential
- 18. Thank You Page 18 MindTree Consulting – Proprietary & Confidential