Indian Debt Market - Apost Liberal is at Ion Analysis

INDIAN DL81 MAkkL1
AÞCS1 LI8LkALISA1ICN ANAL¥SIS
DL81 MAkkL1
The capital market comprises of equity market and debt market. Debt market is a
market for the issuance, trading and settlement in debt securities of various types. It is
also known as the bond, credit, or fixed income market. Debt securities are one of the
most innovative and dynamic instruments evolved in the financial system ever since the
inception of money. It is based on the concept of interest and time-value of money. Fixed
Income securities personify the essence of innovation and transformation, which have
fueled the explosive growth of the financial markets over the past few centuries .Fixed
income securities can be issued by a wide range of organizations including the Central
and State Governments, public bodies, statutory corporations, banks and institutions
and corporate bodies.
Debt secur|t|es offer one of the most attract|ve |nvestment opportun|t|es w|th
regard to safety of |nvestmentsţ adequate ||qu|d|ty and f|ex|b|||ty |n structur|ng a portfo||oţ
eas|er mon|tor|ngţ |ong term re||ab|||ty and decent returnsŦ 1hey are an essent|a|
component of any portfo||o of f|nanc|a| and rea| assetsţ whether |n the form of pure
|nterestŴbear|ng bondsţ var|ed type of debt |nstruments or assetŴbacked mortgages and
secur|t|zed |nstrumentsŦ
DL81 MAkkL1 IN INDIA
Debt market has a |ong h|story |n Ind|aŦ 1he Government Secur|t|es market dates
back to 18S9 when the 8r|t|sh Government took over from the Last Ind|a CompanyŤ there
has been act|ve debt |ssu|ng by the government both before and after |ndependenceŦ
Corporate 8ondsţ ma|n|y debenturesţ were be|ng |ssued by compan|es of good stand|ng |n
the preŴwar and postŴwar yearsŦ 1here wasţ of courseţ a dec||ne |n corporate bond |ssues
|n the decades of s|xt|es and sevent|es fo||ow|ng the arr|va| of term |end|ng |nst|tut|ons
who supp||ed the bu|k of the med|um and |ong term fund|ng requ|rements of the pr|vate
sectorŦ 1he pub||c sector's |ong term fund|ng needs were met by the StateŦ



S1A1LMLN1 CI ÞkC8LLM
1hough cap|ta| market has a |ong h|story Ŧ|ts growth |s comparat|ve|y a recent
phenomenon |n the wor|dţ even |n deve|oped countr|esŦ W|th|n the cap|ta| market Ŧ1he
deve|opment of the Debt market |s st||| poor ŦSame trend |s seen |n the h|story of the
cap|ta| market |n Ind|a ŦInd|an cap|ta| market began to f|our|sh on|y |n the |ast quarter of
the 20
th
centuryŦ W|th|n the cap|ta| market of Ind|a one can see the deve|opment of equ|ty
market and the under deve|opment of the Debt marketŦ In Ind|a the cap|ta| market |s
often |dent|f|ed as the equ|ty marketŦ It shows the undeve|oped and |ns|gn|f|cant ro|e of
the Debt market Ŧ1h|s study |s an attempt to ana|yze the reasons for the undeve|oped
nature of the Debt market |n Ind|a |n the background of |ts h|story and featuresŦ
IMÞCk1ANCL CI 1nL S1UD¥
The debt market plays significant role in the development of any economy. In
India and in other countries the equity market has come down significantly from its
peak in recent time. Many companies are considering option of raising capital through
debt instead of equity, as investors are reluctant to put their money in equities at this
point of time. But the problem with many economies like India is, it does not have
developed debt market. Indian debt market is not as active as it is in other developed
countries. In India most of the part of the debt market is made up of government
securities and T-bills. Indian companies have hardly raised the capital through debt so
far and even if they did then it is very less compared to the debt raised by government.
There is need to find out what are the issues that can deter Indian companies to raise
the capital through debt market and what are the possible solutions to overcome these
problems.
C8ILC1IVLS
Io||ow|ng are the ma|n ob[ect|ve of the studyŤ
O To find out the growth of the Indian debt market in the post liberalization
period.
O Lva|uat|on of ma[or |ssues of debt marketŦ
O Lva|uat|on of ma[or reforms |n|t|ated |n the debt marketŦ
O Comparat|ve ana|ys|s of the debt and the equ|ty market of Ind|aŦ
O Comparat|ve ana|ys|s of the debt market of Ind|a and USAŦ


ML1nCDCLCG¥
O Indian debt market and Indian equity market can be compared with the help oI
comparative analysis. The developing Indian debt market and developed US debt
market can also be compared with the help oI a comparative analysis.
O Comparative analysis is the comparison oI the perIormance level oI an entity to the
perIormance level oI other similar entity in the same area or to other similar area.
O The research will use secondary data which can be collected Irom the various
websites and articles and books.
ComparaLlve analysls wlll be performed wlLh Lhe help of Lhe M|crosoft Lxce|
LIMI1A1ICNS
O s this study deals with the securitized debt, the most active non-securitized segment
oI money market is excluded Irom the study.
O s data on the various segment oI the debt market is not available beIore 1990s, this
study is restricted to Indian debt market Irom 1990s to 2008.

kCLL AND S1kUC1UkL CI INDIAN DL81 MAkkL1
1he f|xed |ncome secur|t|es market or popu|ar|y known as debt market |s the ear||est of a||
secur|t|es market |n the wor|dŦ I|nanc|a| market began w|th the f|xed |ncome secur|t|es
marketŦ 1oday |t |s the |argest of a|| the f|nanc|a| market |n the wor|dŦ
It has very prom|nent ro|e the eff|c|ent funct|on|ng of the wor|d f|nanc|a| system and
|n cata|yz|ng the econom|c growth of the nat|onŦ nowever |n most As|an countr|es when
compared to the debt market the equ|ty market expanded at a much faster speedŦ Now
debt markets are cons|dered an a|ternat|ve route for f|nanc|ng to bank|ng channe|sŦ It
p|ays very |mportant ro|e |n the deve|opment of economyŦ It p|ays the fo||ow|ng ro|esŦ
O Lff|c|ent Mob|||zat|on and a||ocat|on of I|nanc|a| and other resources |n the
economy
O I|nanc|ng the deve|opment act|v|t|es of the government
O 1ransm|tt|ng s|gna|s for the |mp|ementat|on of var|ous monetary and other
po||c|es of the centra| bank of the countryŦ


O Iac|||tat|ng the eff|c|ent ||qu|d|ty management |n tune w|th the overa|| short term
and |ong term ob[ect|ves of the econom|c p|ann|ng
O Cpportun|ty for |nvestors to d|vers|fy the|r |nvestment portfo||oŦ
O n|gher ||qu|d|ty and contro| over cred|tŦ
O 8etter corporate governanceŦ
O Improved transparency because of str|ngent d|sc|osure norms and aud|t|ng
requ|rementsŦ
O Less r|sk compared to the equ|ty marketsţ encourag|ng |owŴr|sk |nvestmentsŦ 1h|s
|eads to |nf|ow of funds |n the economyŦ
O Increased funds for |mp|ementat|on of government deve|opment p|ansŦ 1he
government can ra|se funds at |ower costs by |ssu|ng government secur|t|esŦ
O Imp|ementat|on of a monetary po||cyŦ
O keduced ro|e of banks and po||t|ca| |ntervent|on |n use of fundsţ as banks have to
fo||ow norms |a|d down by the centra| bankŦ
#GULATO#S OF TH DBT MA#T
The debt market in India is under the strict supervision and control of the #eserve
Bank Of India and Securities and xchange Board of India
1. #eserve Bank of India (#BI)
Government securities and issues by Banks, Institutions are regulated by the #BI.
#ole of the #BI is to regulate the issue of Bank Notes and keeping of reserves with a
view to securing monetary stability in India and generally to operate the currency and
credit system of the country to its advantage.
2. Securities and xchange Board of India (SBI)
The issue of non-government securities comprising basically the issues of Corporate
Debt is regulated by SBI.

ISSULS CI DL81 MAkkL1
A8SLNCL CI CCMMCN 1kADING MLCnANISUM
Desp|te |ncrease |n number of part|c|pantsţ the debt market |s yet to graduate from a
"negot|ated dea|" te|ephone marketŦ 1he markets wor|d over are sw|tch|ng from
te|ephone trad|ng to screenŴbased techno|ogy wh|ch br|ngs |n |ncreased transparencyţ
|ncreased compet|t|on and eff|c|ent pr|ce d|scoveryţ |mproves eff|c|ency of execut|on of
trade and reduces costs for the p|ayersŦ 1he market wou|d ga|n substant|a||y |n ||qu|d|ty
and eff|c|ency |f the trad|ng framework of equ|ty market |s rep||cated |n the debt market
a|soŦ 1hat |sţ four key pr|nc|p|es Ŵ anonym|tyţ pr|ce t|me pr|or|tyţ nat|onw|de market and
sett|ement guarantee Ŷ app|y to trad|ng of debt |nstrumentsŦ 1he p|ayers share a common
p|atform to buy or se|| secur|t|esŦ Absence of any requ|rement to go through a common
p|atform ||ke stock exchange |nduces some of the p|ayers to enter |nto nontransparent
dea|s through the te|ephon|c marketŦ If these part|c|pants are requ|red to go through a
screen based trad|ng on stock exchanges where an eff|c|ent and transparent pr|ce


d|scovery mechan|sm |s ava||ab|e w|th comp|ete aud|t tra|| of act|v|t|esţ a ||qu|d and
v|brant secondary market for debt w||| be a rea||tyŦ SL8I has taken the |n|t|at|ve |n th|s
regard by proh|b|t|ng 'negot|ated dea|s' |n respect of ||sted corporate debt secur|t|es and
prescr|b|ng that a|| such trades wou|d be executed on the bas|s of pr|ce and order
match|ng mechan|sm of stock exchanges as |n case of equ|t|esŦ S|m||ar prescr|pt|on |s
needed |n respect of a|| other debt InstrumentsŦ
ISSULS kLLA1LD 1C CLLAkING AND SL11LLMLN1
Nat|onŴw|de c|ear|ng and Sett|ementť k8I prov|des a 'Statutory Genera| Ledger (SGL)'
account fac|||ty to |arge banks and I|nanc|a| Inst|tut|ons to ho|d the|r |nvestments |n
Government Secur|t|es and treasury 8|||s |n 8ookŴentry formŦ As a|| |nvestors do not have
access to the SGL fac|||t|esţ they are a||owed to ho|d secur|t|es |n phys|ca| form or they
may open an account w|th a Const|tuent SGL account w|th any ent|ty author|zed by the
k8I for th|s purposeŦ 1he k8I operates these accounts through var|ous Þub||c Debt Cff|ces
(ÞDCs) |n each c|tyŦ As the ÞDCs |n var|ous |ocat|ons are not ||nkedţ |nvestors can on|y
execute transact|on w|th other |nvestors ho|d|ng accounts w|th the same ÞDCŦ Absence of
a nat|onŴw|de c|ear|ng and sett|ement fac|||ty for |nvestors has prevented the f|ow of
orders from a|| reg|ons |nto a s|ng|e order bookţ thereby reduc|ng ||qu|d|tyŦ 1he buyer ends
up pay|ng a ||qu|d|ty prem|um for each transact|onŦ It |s |mperat|ve that each |nvestor can
ho|d and sett|e transact|on on a nat|onŴw|de bas|s |rrespect|ve of the |ocat|on of |ts
accountŦ Nat|onŴw|de c|ear|ng and sett|ement |s the pr|mary requ|rement for creat|on of a
reta|| order f|owŦ
ISSULS CI S1AMÞ DU1¥ CN 1kANSILk CI DL81 INS1kUMLN1S
W|th a v|ew to modern|z|ng debt market and |ntroduc|ng paper|ess trad|ng |n th|s segment
a|soţ the I|nance M|n|ster |n h|s 8udget Speech dated 27
th
Iebruary 1999 announced
abo||t|on of stamp duty on transfer of debt |nstruments w|th|n the depos|tory modeŦ In
order to operat|ona||se th|s proposa|ţ the I|nance Actţ 1999 added the fo||ow|ng c|ause |n
Sect|on 8A of the Ind|an Stamp Actť
"(f) transfer of benef|c|a| ownersh|p of debenturesţ such debentures be|ng debentures of a
company formed and reg|stered under the Compan|es Actţ 19S6 or a body corporate
estab||shed by a Centra| Actţ dea|t w|th by a depos|tory sha|| not be ||ab|e to duty under
Art|c|e 27 of Schedu|e I of th|s ActŦ"
ISSULS CI IUNDING CI IN1LkMLDIAkILS
1rad|t|ona||y brokers are the ma|n |ntermed|ary |n the secur|t|es marketŦ 1hey do
not come forward to prov|de cont|nuous twoŴway pos|t|ons |n the market due to absence
of any fund|ng mechan|sm for themŦ 1he |aws perm|t a broker to obta|n work|ng cap|ta|
|oan of on|y ksŦ S0 |akh aga|nst the secur|t|esŦ ÞDs and SDsţ who are the new entrants |n
the market w|th s|m||ar funct|on of d|str|but|on and broad bas|ng the |nvestor base for
debt secur|t|esţ have recourse to the ca|| money market as we|| as repo market to meet
the|r temporary funds requ|rementŦ 8rokers shou|dţ thereforeţ be prov|ded f|nanc|a|
support by encourag|ng banks to set up ||nes of cred|t |n favor of them aga|nst the|r
ho|d|ng of government secur|t|es and other h|gh|y rated debt papersŦ


1h|s w||| not on|y f|nance the |nventory of the Government and other e||g|b|e debt paper
but the |nventory so bu||t up sha|| serve the purpose of co||atera| for the cred|t so ava||edŦ
A|ternat|ve|yţ these brokers shou|d a|so be a||owed to part|c|pate |n the kepo marketŦ
ISSULS kLLA1LD 1C ÞkIVA1L ÞLACLMLN1
1he conven|ence of structur|ng of the |ssues to match the needs of |ssuers w|th those of
|nvestors coup|ed w|th sav|ngs |n terms of t|me and cost has contr|buted to rap|d growth
of market for pr|vate p|acementŦ Government keport of the Informa| Group on Þr|mary
Market stresses the need for keep|ng th|s route a||ve s|nce |t he|ps to ra|se resources
qu|ck|y and |nexpens|ve|yŦ It |sţ howeverţ be||eved |n certa|n c|rc|es that pub||c |ssues are
be|ng passed off |n the garb of pr|vate p|acement to avo|d comp||ance w|th str|ngent entry
and d|sc|osure norms assoc|ated w|th pub||c |ssuesŦ 1h|s requ|res sub[ect|ng pr|vate
p|acement to appropr|ate regu|atory d|sc|p||neŦ It cou|d be spec|f|ed that pr|vate
p|acements resu|t|ng |n a||otments to more than a spec|f|ed number of peop|eţ say S0 or
100ţ wou|d be deemed as pub||c |ssues and be sub[ect to usua| d|sc|osure norms of SL8IŦ In
the a|ternat|veţ the part|c|pat|on |n pr|vate p|acement cou|d be restr|cted to on|y
know|edgeab|e |nvestors ||ke qua||f|ed |nst|tut|ona| |nvestors and h|gh networth
|nd|v|dua|sŦ 1hese cou|d a|so be traded among qua||f|ed |nst|tut|ona| |nvestors on C1CLIŦ
ISSULS kLLA1LD 1C ASSL1 8ASLD SLCUkI1I2A1ICN
Secur|t|zat|on of assets |s a structured process whereby des|gnated poo|s of |oans or other
rece|vab|es are packagedţ underwr|tten and so|d |n the form of f|nanc|a| |nstrumentsŦ A
typ|ca| secur|t|zat|on process |nvo|ves sa|e]transfer of the rece|vab|es from an
organ|zat|on (the owner of assets) to an |ndependent ent|ty (trustee) or a spec|a| purpose
veh|c|e (SÞV)ţ wh|chţ |n turnţ |ssues the f|nanc|a| |nstruments to |nvestorsŦ It offers an
effect|ve and re|at|ve|y qu|ck and |ess cost|y a|ternat|ve fund|ng sourceŦ Naras|mham
Comm|ttee keport (II) has observed that there |s scope to h|ve off NÞA portfo||o from II
books through secur|t|zat|onŦ Secur|t|zat|on wou|d enab|e IIs fac|ng resource constra|nts
to focus on the|r core competenc|es of fund|ng |nfrastructure products through gestat|on
stage and subsequent|y secur|t|z|ng themţ rather than fund|ng them t||| matur|tyŦ
ISSULS kLLA1LD 1C kL1AIL ÞAk1ICIÞA1ICN
Government secur|t|es are the safest |nvestment ava||ab|e to |nvestorsŦ 1hese offer
returns comparab|e to that on bank depos|tsŦ A number of measures have been |n|t|ated
to deve|op reta|| market for GŴsecsŦ 1hese |nc|ude estab||shment of pr|mary and sate|||te
dea|ersţ ||qu|d|ty support and other fac|||t|es to g||t fundsţ |ntroduct|on of const|tuent SGL
account fac|||tyţ a||ocat|on of SƷ of the not|f|ed amount |n auct|ons for the reta|| segmentţ
|aunch of NDS and CCILţ etcŦ Investment |n GŴsecs offers attract|ve benef|ts such as good
y|e|dsţ no 1DSţ easy ||qu|d|tyţ no defau|t r|skţ tax benef|ts under sect|on 80Lţ w|de range of
matur|t|es to su|t every ones need etcŦ Desp|te a|| theseţ the GŴsec market |s exc|us|ve
preserve of banksţ |nsurance compan|esţ prov|dent funds and trustsŦ 1he reta|| segment
wou|d get a boost |f there can be reta|| out|ets at conven|ent |ocat|on to fac|||tate
d|str|but|on and trad|ng of sma|| |ots of GŴsecsŦ 1he reach of the stock exchanges can be
advantageous|y used to reta|| GŴ secsŦ 1he |eve| of awareness about GŴsecs needs to be


|mproved to make the |nvestors aware about the r|skŴreturn prof||e of GŴsecs v|sŴàŴv|s
compet|ng products such as sma|| sav|ng |nstrumentsţ |nsurance schemesţ equ|t|es and
debentures etcŦ
1he househo|d |nvestment |n the government secur|t|es |s neg||g|b|eŦ 1h|s |s on
account of var|ous factorsŦ I|rstţ there |s an absence of awareness amongst the common
pub||c as to mer|ts of the |nvestment |n a cred|tŴr|skŴfree sovere|gn paperŦ Secondţ there
are compet|ng |nstrumentsţ such asţ sma|| sav|ngs |nstrumentsţ |nsurance schemesţ equ|ty
and debenturesţ wh|ch e|ther offer h|gher effect|ve returns or other benef|tsţ though the
r|sk percept|ons of some of these |nstruments do not appear to bother the sma|| |nvestorŦ
1h|rdţ the cumbersome sett|ement procedures and the |ack of reasonab|e ex|t route are
not comfort|ng the sma|| |nvestorŦ Iourthţ |nst|tut|ona| mechan|sm |n terms of agency
serv|ces |s absentŦ
ISSULS kLLA1LD 1C UNkLALI2LD ÞC1LN1IAL
1he government and the corporate sector have unconsc|ous|y kept the common
|nvestor away from f|xed |ncome marketab|e |nstrumentsŦ It |s |n the |nterest of both
Government and the corporate sector to ent|ce the common |nvestors |nto the|r f|xed
|ncome marketab|e |nstrumentsŦ Government wou|d be ab|e to br|ng down |ts borrow|ng
costs |f |t ra|ses funds d|rect|y from the common |nvestorŦ 1he ex|st|ng tax sops g|ven to
bank depos|ts may be extended to |nvestments |n government secur|t|esŦ 1he |eve| of
mandatory SLk may be gradua||y brought down so as to make the f|nanc|a| system more
marketŴor|entedŦ A network of underwr|tersţ brokers and subŴbrokers to d|str|bute
government secur|t|es needs to be deve|opedŦ 1he supp|y of good corporate bonds |s
scarce espec|a||y for the common |nvestorŦ Ind|an corporate ent|t|es have not yet shown
enough |nterest to tap the reta|| markets through |ssue of bondsŦ 1hey have been
depend|ng on convent|ona| sources ||keţ banks and f|nanc|a| |nst|tut|ons and the pr|vate
p|acement marketŦ 1he y|e|ds they offer to these sources wou|d be equa||y attract|ve for
common |nvestorsŦ Cnce the |nvestment act|v|ty p|cks |n the economyţ the costs of
borrow|ng from these trad|t|ona| sources w||| go upŦ 1hey shou|d try to tap the ma|n
source of supp|y v|zŦţ the househo|d sector and benef|ts from the |ow cost d|s|nter
med|ated fundsŦ Corporate ent|t|es w|th very good cred|t rat|ng w||| be ab|e to br|ng down
the|r cost of borrow|ngs |f they tap the market d|rect|yŦ W|th the recent amendment |n the
Income 1ax Actţ appropr|at|ve stamp duty on transfer of ownersh|p of debt |nstruments
has been abo||shedŦ W|th the d|sappearance of phys|ca| secur|t|esţ hand||ng costs |n
depos|tory mode has s|gn|f|cant|y reduced for the secondary market transact|onsŦ 1he
process of ownersh|p transfer |s a|so much safer and cheaperŦ It does not requ|re great
dea| of |nnovat|on to exp|o|t the secondary market |nfrastructure for the d|str|but|on of
any depos|toryŴbased secur|ty |nstrumentŦ 1he NSLŦs secondary market |nfrastructureţ
wh|ch has now spread to more than 360 c|t|esţ can be effect|ve|y used for d|str|but|on of
corporate debt paperŦ



ISSULS kLAL1LD 1C kLGULA1Ck¥ CLAkI1¥
1he po||cy makers have demonstrated the|r ser|ousness to deve|op the debt marketŦ
1hree ma[or steps taken |n th|s d|rect|on |n the recent pastţ |ŦeŦţ exempt|on of stamp duty
on transfer of debt secur|t|esţ mandat|ng screen based trad|ng of debt secur|t|esţ and
|n|t|at|ve to set up a c|ear|ng corporat|on for sett|ement of transact|ons |n government
secur|t|esţ have ra|sed hopes among market part|c|pantsŦ It wou|d take about a year for
fu|| rea||zat|on of the benef|ts from these measuresŦ noweverţ the debt market |s
current|y regu|ated by a number of regu|atory author|t|esţ name|y k8Iţ SL8Iţ Department
of Lconom|c Affa|rs and Department of company affa|rsŦ It |s des|rab|e that there |s on|y
one regu|atory author|ty |n the |nterest of effect|ve regu|at|on and deve|opment of the
marketŦ
#FO#MS IN TH DBT MA#T
As an |ntegra| part of a comprehens|ve program of f|nanc|a| sector reformţ Ind|a's
government secur|t|es market (GSM) has undergone a huge transformat|on s|nce 1991]92Ŧ
1he ma|n ob[ect|ve of th|s act|ve debt management po||cy has been to moderate ||qu|d|ty
growthţ conta|n |nf|at|onary pressureţ and conduct debt management |n a costŴeffect|ve
mannerŦ Cons|der|ng Ind|a's macro management and m|cro market structureţ the
deve|opments s|nce 1991]92 can be d|v|ded |nto two sub phasesŦ Dur|ng the f|rst sub
phase (1991Ŷ96)ţ reforms were eng|neered to fac|||tate "marketŴborrow|ngţ" w|th pr|ce
d|scovery through auct|onsŤ restr|ct automat|c monet|zat|on by f|x|ng a cap on the dur|ngŴ
theŴyear and endŴyear amountŤ deve|op appropr|ate |nstrumentsŤ
keforms |n Government 8ond Market
Þr|or to 1992ţ money was co||ected and |ent accord|ng to Þ|anŦ Lacunae |n
|nst|tut|ona| |nfrastructure and |neff|c|ent market pract|ces character|zed the government
secur|t|es marketŦ In fact the so|e ob[ect|ve pursued was to keep the cost of government
borrow|ng as |ow as poss|b|eŦ If p|ann|ng went awryţ the government sent word to |ts
bankerŦ 1he centra| bank made a few phone ca||s to the heads of banks and bonds were
|ssued and the money arrangedŦ No quest|ons askedţ no exp|anat|ons g|venŦ 1he GCI bond
market d|d not use trad|ng on an exchangeŦ It featured b||atera| negot|at|on between
dea|ersŦ 1he market thus |acked pr|ceŴt|me pr|or|ty and the b||atera| transact|ons |mposed
counterparty cred|t r|sk on part|c|pantsŦ 1h|s narrowed down the market |nto a "c|ub"
w|th homogeneous cred|t r|skŦ 1h|s was the state of the government debt market |n Ind|a
ten years agoŦ 1he debt market began tak|ng shapeŦ 1he |dea of the f|nanc|a| reform
movement was to have more and more d|fferent markets and not necessar||y have who|e
f|nanc|a| |ntermed|at|on |eft to the banksŦ
1he reform process attempted at do|ng away w|th regu|at|ons |n favor of contro|s
based on market forces |ŦeŦ an era where the |nterest rates are governed more by the
market forces of demand and supp|y and |ess by centra||zed superv|s|onŦ S|ow|yţ but
stead||yţ the market grewţ add|ng fresh p|ayers and nove| |nstrumentsŦ Severa| measures
have added greater transparency and have brought the |ssuances c|oser to the market
|eve|sŦ


1he ma[or reforms that took p|ace |n the 1990's wereť
O Introduction of the auction system for sale of dated government securities in
1une1992. This signaled the end of the era of administered interest rates.
O The #BI moved to computerize the SGL and implement a form of a delivery
versus payment` (DvP) system. The DvP enabled mitigating of settlement risk in
securities and ensured the smoothness of settlement by synchronizing the
payment and delivery of securities.
O Innovative products in form of Zero Coupon Bonds and Capital Indexed Bonds
(x. Inflation Linked) were issued to attract a wider gamut of investors.
However, the pace of innovation suffered due to non-sophistication of the
markets and lack of persistence with some of the new bonds like Inflation
Indexed bonds after the initial lukewarm response.
O The system of Primary Dealers was established in March 1995. These primary
dealers have since then acquired a large chunk of share in the GOI bond market
and have played the role of market makers.
O The #BI setup ~trade for trade¨ regime, a strong regulatory system which
required that every trade must be settled with funds and bonds. All forms of
netting were prohibited.
O holesale Debt Market (DM) segment was set up at NS, A limited degree of
transparency came about through the DM at NS, where roughly half the
trading volume of India`s GOI bond market is reported.
O The ays And Means agreement put an end to issuance of ad hoc treasury bills,
the government`s favorite instrument of funding its profligacy.
O Interest Income in G-Secs was exempted from the purview of TDS.
O FIIs with 100º Debt Schemes were allowed to invest in GOI Securities and T-
Bills while other FIIs were allowed 30º investment in these instruments.
O Dematerialized forms of securities in G-Secs were done through the SGL and
Constituents SGL accounts
keforms |n Corporate 8ond Market
O In the last decade, market related borrowings by the corporate sector have
remained depressed as a plethora of Financial Institutions were available for
disbursal of credit. These Institutions managed to mobilize a significant amount
of domestic savings and route them for corporate consumption.

Also the reforms abolished the office of the Controller of Capital Issues (CCI), which
meant that companies were free to price their equity issues as per the market appetite.
This led to a slew of primary issue of equity and the relative attractiveness of issue of
debt yielded way to equities. In fact, even debt issues were made with attached
sweeteners like convertible portion of the fixed income instrument. In addition, several
relaxations in regulations post 1992 have encouraged Indian corporate to raise debt


from overseas capital markets leading to further shunning of the domestic debt market
by creditworthy issuers. Therefore, the corporate debt market in India has continued to
be dominated by the PSU`s.
O In the recent past, the corporate debt market has seen high growth of innovative
asset-backed securities. The servicing of debt and related obligations for such
instruments is backed by some sort of financial assets and/or credit support from
a third party. Over the years greater innovation has been witnessed in the
corporate bond issuances, like floating rate instruments, zero coupon bonds,
convertible bonds, callable (put-able) bonds and step-redemption bonds. For
example, step bonds issued by ICICI in 1998, paid progressively higher rates of
interest as the maturity approached while the IDBI`s step bond was issued with a
feature to pay out the redemption amount in installments after an initial holding
period. The deep discount bond issued by IDBI in the same year had two put and
call options before maturity.
O hat these innovative issues have done is that they have provided a gamut of
securities that caters to wider segment of investors in terms of maintaining a
desirable risk-return balance. Over the last five years, corporate issuers have
shown a distinct preference for private placements over public issues. This has
further cramped the liquidity in the market. hile private placement has grown
6.23 times to #s. 62461.80 cores in 2000-2001 since 1995-96, the corresponding
increase in public issues of debt has been merely 40.95 percent from the 1995-96
levels.
Ind|a Debt market Vs Ind|an Lqu|ty market
In many countr|esţ debt market |s |arger than equ|ty marketsŦ In factţ |n matured
econom|es debt market |s three t|mes the s|ze of the equ|ty marketŦ Ind|an debt market
has grown stead||y |n |ast 1SŴ20 years but st||| Ind|an debt market's market cap|ta||zat|on
|s not even the ha|f of the equ|ty market's market cap|ta||zat|on (2009Ŵ10)Ŧ










1ab|e 1
Market cap|ta||zat|on of debt and equ|ty market (Ind|a)
NSL
¥ear
Market Cap of
Debt (ksŦCr)
Market CapŦ
Cf Lqu|ty
(ksŦCr)
1994Ŵ199S 1S8181 3633S0
199SŴ1996 207783 4014S9
1996Ŵ1997 292772 419367
1997Ŵ1998 343191 481S03
1998Ŵ1999 411470 49117S
1999Ŵ2000 494033 1020426
2000Ŵ2001 S8083S 6S7847
2001Ŵ2002 7S6794 636861
2002Ŵ2003 864481 S37133
2003Ŵ2004 121S864 1120976
2004Ŵ200S 1461734 1S8SS8S
200SŴ2006 1S67S74 2813201
2006Ŵ2007 1784801 33673S0
2007Ŵ2008 2123346 48S8122
2008 Ŵ2009 284831S 2896194
2009 Ŷ 2010 316S929 6009173
(Sourceť Nat|ona| stock exchange)
k8I and SL8I have taken many reforms |n |ast decade to make the debt market more
attract|ve for |nvestorsŦ 8ut st||| there are many regu|atory hurd|es wh|ch prevent debt
market to grow and become more act|veŦ




INDIAN DL81 MAkkL1 AND US DL81 MAkkL1
US debt market |s wor|d's |argest and most act|ve debt marketŦ 8y compar|ng Ind|an debt
market w|th US debt market we can conc|ude where we are stand|ng |n compar|son to
deve|oped debt marketŦ
1ab|e 2
Cutstand|ng Ind|an bond market debt
5 8||||ons
¥ear GovŦ
Corporate]
Non GovŦ
1ota|
1urnover
of Gov |n
Secondary
Market
1urnover
of
Corp]Non
GovŦ
Secondary
Market
1ota|
1urnover
Growth
|n
1urnover
(Ʒ)
199SŴ96 10Ŧ43 2Ŧ89 13Ŧ32 28Ŧ34 0Ŧ20 28ŦS4
1996Ŵ97 9ŦS1 SŦ6S 1SŦ17 27Ŧ40 0Ŧ27 27Ŧ67 Ŵ3Ŧ06
1997Ŵ98 1SŦ02 7Ŧ34 22Ŧ3S 41Ŧ39 0Ŧ81 42Ŧ19 S2ŦS1
1998Ŵ99 23Ŧ64 10Ŧ29 33Ŧ93 S0Ŧ64 2Ŧ32 S2Ŧ97 2SŦS3
1999Ŵ00 2SŦ26 13Ŧ24 38ŦS0 120Ŧ18 2Ŧ34 122ŦS2 131Ŧ32
2000Ŵ01 28Ŧ63 12Ŧ61 41Ŧ24 1SSŦS9 3Ŧ24 1S8Ŧ83 29Ŧ63
2001Ŵ02 33Ŧ99 11Ŧ49 4SŦ48 3S0Ŧ77 4Ŧ40 3SSŦ16 123Ŧ62
2002Ŵ03 40ŦS6 11Ŧ84 S2Ŧ39 43SŦ87 8Ŧ03 443Ŧ90 24Ŧ98
2003Ŵ04 44Ŧ16 11Ŧ76 SSŦ92 S97Ŧ10 9Ŧ42 606ŦS2 36Ŧ64
2004Ŵ0S 32Ŧ4S 13Ŧ21 4SŦ66 6S8Ŧ63 8ŦS6 667Ŧ19 10Ŧ00
200SŴ06 40ŦS1 18Ŧ24 S8Ŧ7S S7SŦ08 SŦ63 S80Ŧ72 Ŵ12Ŧ96
2006Ŵ07 44Ŧ62 20ŦS8 6SŦ20 798Ŧ60 3Ŧ14 801Ŧ7S 38Ŧ06
(Sourceť Nat|ona| Stock exchange)


O Government securities and Treasury bills dominates the debt market.
Corporate/Non government debt securities make very less portion of debt
market. One of the reasons why corporate are not issuing debt securities is
regulatory requirements and less active secondary market.
O Turnover in the secondary market is also big concern. It has grown over a period
of time but still it is not enough to term the Indian debt market as active.
1ab|e Ŵ3 58||||ons
Cutstand|ng US bond market debt
¥ear
Mun|c|pa| 1reasury
MortgageŴ
based
corporate
debt
Iedera|
secur|t|es
Asset
backed
1ota|
1991 1272Ŧ2 2471Ŧ6 1636Ŧ9 14S4Ŧ7 442Ŧ8 129Ŧ9 7408Ŧ1
1992 1302Ŧ8 27S4Ŧ1 1937Ŧ0 1SS7Ŧ0 484Ŧ0 163Ŧ7 8198Ŧ6
1993 1377ŦS 2989ŦS 2144Ŧ7 1674Ŧ7 S70Ŧ7 199Ŧ9 89S7Ŧ0
1994 1341Ŧ7 3126Ŧ0 22S1Ŧ7 17SSŦ6 738Ŧ9 2S7Ŧ3 9471Ŧ2
199S 1293ŦS 3307Ŧ2 23S2Ŧ1 1937ŦS 844Ŧ6 316Ŧ3 100S1Ŧ2
1996 1296Ŧ0 34S9Ŧ7 2486Ŧ1 2126ŦS 92SŦ8 404Ŧ4 10698ŦS
1997 1318Ŧ7 34S6Ŧ8 2680Ŧ2 23S9Ŧ0 1022Ŧ6 S3SŦ8 11373Ŧ1
1998 1402Ŧ9 33SSŦS 29SSŦ2 2708Ŧ0 1300Ŧ6 731ŦS 124S3Ŧ7
1999 14S7Ŧ2 3281Ŧ0 3334Ŧ2 3046ŦS 1620Ŧ0 900Ŧ8 13639Ŧ7
2000 1480Ŧ7 2966Ŧ9 3S6SŦ8 33S8Ŧ4 18S4Ŧ6 1071Ŧ8 14298Ŧ2
2001 1603ŦS 2967ŦS 4127Ŧ6 3836Ŧ4 2149Ŧ6 1281Ŧ1 1S96SŦ7
2002 1762Ŧ9 3204Ŧ9 4686Ŧ4 4099Ŧ6 2292Ŧ8 1S43Ŧ3 17S89Ŧ9
2003 1900ŦS 3S74Ŧ9 S238Ŧ6 44S9Ŧ4 2636Ŧ7 1693Ŧ7 19S03Ŧ8
2004 2031Ŧ0 3943Ŧ6 S4SSŦ8 478SŦ1 274SŦ1 1827Ŧ8 20788Ŧ4


200S 222SŦ8 416SŦ8 S91SŦ6 49S9Ŧ8 2613Ŧ8 19SSŦ2 21836Ŧ0
2006 2367Ŧ9 4322Ŧ9 6492Ŧ4 S394Ŧ2 2660Ŧ3 2130Ŧ4 23368Ŧ1

2007 2618Ŧ9 S081ŦS 9142Ŧ4 S946Ŧ8 2933Ŧ3 2472Ŧ4 2819SŦ6

2008 2676Ŧ2 6082ŦS 9101Ŧ9 6201Ŧ6 320SŦ2 2671Ŧ8 29939Ŧ2

2009 2801ŦS 7601ŦS 9187ŦS 6849Ŧ9 9727Ŧ9 2429Ŧ0 31607
(SourceťŴsecur|t|es |ndustry and I|nanc|a| market Assoc|at|on)
O If we compare Indian debt market with US debt market, then India`s total debt
outstanding is very less compared to US. This shows that Indian companies and
corporate do not prefer to raise money through debt. The annual average
trading volume in the secondary debt market in India is less than the daily
average trading volume in the secondary debt market of the US.
#COMMNDATION
From the above study I suggest the following recommendations to make Indian debt
market more efficient and active.
O keduce the d|rect ro|e of government |n the determ|nat|on of |nterest rates by
estab||sh|ng an |ndependent pub||c debt off|ce funct|onŤ
O keduce the d|rect ro|e of government as owner of f|nanc|a| |nst|tut|ons to perm|t
the deve|opment of a greater d|vers|ty of v|ews |n |nvestment dec|s|onsŤ
O kemove restr|ct|ons on |nvestment dec|s|on mak|ng by |nst|tut|ona| |nvestors (such
as pens|on funds and ||fe |nsurers) and max|m|ze outsourc|ng of |nvestment
dec|s|ons and treasury funct|ons to profess|ona| fund managersŤ
O Inst|tute changes to support a system of proper|y funded and |ndependent|y
managed pens|on schemesŤ
O S|mp||fy pub||c |ssuance proceduresţ standard|ze and regu|ar|ze pr|vate
p|acemement documentat|on to |mprove access to the market by reta|| |nvestorsť
O kemove |mped|ments to the |nteract|on of the |nst|tut|ona| and reta|| market by
ensur|ng that banks can access stock exchanges on beha|f of the|r customersŤ
O Improve postŴtrade transparency on secondary debt markets to perm|t eff|c|ent
pr|ce d|scovery and thus encourage w|der part|c|pat|on |n the marketŤ
O Invo|ve the market more forma||y |n dec|s|ons on des|gn of f|nanc|a| |nfrastructure
pro[ectsŤ



I|nd|ng
Debt secur|t|es offer one of the most attract|ve |nvestment opportun|t|es w|th
regards to safety of |nvestmentţ adequate ||qu|d|ty and f|ex|b|||ty |n structur|ng a portfo||o
ţeas|er mon|tor|ng ţ |ong term re||ab|||ty and decent returnŦ
Debt secur|t|es has very prom|nent ro|e |n the eff|c|ent funct|on|ng of the wor|d
f|nanc|a| system and |n cata|yz|ng the econom|c growth of the nat|onŦ
When compare to the equ|ty market and debt market ţ equ|ty market has grown
faster than debt market and |t |s more vo|at||e than debt marketŦ
When compare to the US debt market and Ind|an debt market ţwe can say that
US debt market |s |arger than Ind|an debt marketŦ
#F#NCS
1. Ajay Shah and Susan Thomas (28
th
August, 2001), ~The evolution of securities
market in India in the 1990s¨.
2. Dr. Y.V.#eddy, Governor, #BI (18
th
October, 2007), ~Developing Debt Markets in
India: #eview and Prospects¨, Speech at ashington, USA.
3. Pronab Sen, Nikhil Bahel and Shikhar #anjan (1uly 2003), ~Developing the Indian
debt Capital market: Small Investors Perspectives¨, working paper.
4. C. #. L. Narasimhan (10
th
December, 2007), ~The time has come for corporate bond
market¨, The Hindu.
5. Andy Mukherjee (31
st
October, 2007), ~Viewpoint: eak bond market hampers
India¨, International-Herald Tribune.
6. Nikhil alavalkar (31
st
December, 2006), ~Debt Instruments: hat 2007 holds¨,
The Financial xpress.
7. Deepak Mittal (2002), ~The Development of Bond Market in India¨, Dhan`-
quarterly magazine, Finance and Investment club, IIM-C.
8. SIFMA: #esearch report` (Feb, 2008) published by Securities Industries and
Financial market Association.
9. Indian security market: A review-1999` published by National stock exchange of
India Ltd.
10.Indian security market: A review-2000` published by National stock exchange of
India Ltd.
11.Indian security market: A review-2001` published by National stock exchange of
India Ltd.
12.Indian security market: A review-2002` published by National stock exchange of
India Ltd.
13.Indian security market: A review-2003` published by National stock exchange of
India Ltd.


14.Indian security market: A review-2004` published by National stock exchange of
India Ltd.
15.Indian security market: A review-2005` published by National stock exchange of
India Ltd.
16.Indian security market: A review-2006` published by National stock exchange of
India Ltd.
17.Indian security market: A review-2007` published by National stock exchange of
India Ltd.
18.FIMMDA-NS Debt market (Basic) Module ork Book Published by NS.
19.www.nseindi.com
20.www.bseindia.com
21.www.rbi.org.in and www.sebi.gov.in

22.Indian security market: A review-2008` published by National stock exchange of
India Ltd.
23.Indian security market: A review-2009` published by National stock exchange of
India Ltd.
24.Indian security market: A review-2010` published by National stock exchange of
India Ltd.