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Agenda
= Introduction to Corporate Bonds
= Reasons of stunted growth of Corporate Bond
market in India
= Current scenario of Indian Corporate Bond
market
Introduction to Corporate Bonds
= A |    is a debt security issued by a public or private
corporation.
= It is issued to raise the capital required to fund business
activities like building new plant, purchasing new equipments
etc..
= It represents a promise to pay bondholders a fixed sum of
money (called the bond͛s 

 , or  or   ) at a
future maturity date, along with periodic payments of interest
(called  ).
= Coupons are generally paid Semi-annually.
= Does not give ownership rights of the company to bondholders
like in equity shares.
= "
 - Rate of return on the investment in bonds
= |"
 9 Annual return on the amount paid for the
bond irrespective of the maturity.
eg. Face value of the Bond is Rs. 1000 and Coupon 6%
Ú If, Purchased at par, then
Yield = Coupon = 6%
Ú If, Purchased at low value, suppose Rs.900 then
Yield= (6% of 1000)/900 = 6.67 % > Coupon
Ú If, Purchased at high value, suppose Rs.1200 then
Yield= (6% of 1000)/1200 = 5 % < Coupon
= "
  
 j     
Includes all interest plus any capital gain (if you purchase the
bond below par) or minus any capital loss (if you purchase the
bond above par).
= "
   - A graph that shows the yields at different
maturities͙.you have bonds of various maturities 9 1 year, 2
year, 10 year etc͙.if we plot the yields of each bond with the
respective yield, we get a yield curve

ô  ô
     
= ô  mhe spread indicates the risk appetite of investors in the bond
markets.
= Corporate Bond Spread is the difference between the yield of a corporate
bond and a government bond.
= For an investor who is investing INR, GoI (Government of India) bonds are
considered risk-free bonds. All corporate bonds carry a risk and thus have
yields higher than GoI bonds.
= When the financial markets are confident and risk-appetite is high, the
difference in yields (spread) narrows. When there is uncertainty and risk-
appetite is low, the spread widens. In October 2008, there was so much panic
in the market, yields of corporate bonds were rising (bond prices were falling)
and yields of GoI bonds were falling (bond prices were rising), hence spread
was more.
In 2005, this spread was as low as 30-40 bps due to positive sentiments of
market.
= mhe credit spread between 10-year AAA-rated credit and 10-year GoI bond
went up from 200 basis points to almost 400 in October 2008 and has come
back to 200 at the end of April 2009.
(Source: Bloomberg)
ô       
    ͙ Reason 1
1951 inception of planning era Ú Birth of DFI
(Development Financial Institutions) Ú Motive of
DFI is to provide long term funds to industries Ú
DFI supported by Budgetary policies and RBI for
funds Ú Corporates got easy access to long term
loans Ú hence Corporates didn͛t go for public
debt
Reason ͙ 2
Recent times Ú withdrawal of budgetary support to
DFI Ú DFI started to convert into Commercial
banks (to access public deposit mechanism +
lending in short and long term) Ú Commercial
Banks prefer loans than investing in bonds
because later needs Mark-to-market
requirements and provisions for valuation loss Ú
Less investment in corporate bonds
Reason ͙ 3
= Strict regulatory requirements
 Max debt investors limit Ú 50 for Private placement route
through QIB
 Workaround adopted by Corporates:
= Stage 1- Privately place debt issue to less than 50
investors
= Stage 2- mhese investors sell issue to larger number of
investors in the guise of secondary market
Reason ͙ 4
= Strict regulations of SEBI and RBI make it cumbersome
for the corporates to issue debt papers due to too many
mandatory disclosures
= Issuing bonds specially to institutions is easy for
corporates since only credit rating needs to be disclosed
by the approved credit rating agencies
= Institutional buyers are more informed than retail
investors to make investment decision
= Hence majority retail investors stay away from corporate
bonds and so as corporates from retail investors
Reason ͙ 5
= Cash credit system by Banks
 Banks granting credit/borrowing limits to corporates
and burdening themselves with cash management
problems of the borrowers Ú No need of cash
management by corporates Ú Corporates became
complacent about borrowing through debt and
then managing that cash Ú Low activity as far as
public debt route is concerned
Reason ͙6
= SEBI directive issued in 2004 Ú All secondary market
trading need to be registered on automated screens of
stock exchanges Ú mhis was incorporated to bring in
transparency Ú Not applicable to SPOm trades which are
between 2 investors and are settled in 2 days Ú Major
investors of bond market i.e. institutions don͛t prefer
to go on stock exchange screen, resort to bilateral SPOm
trade Ú Brokers depict this as Direct sale instead of
issuing Contract notes, thus not liable to even report
these trades to stock exchange Ú Expected
transparency not observed Ú poor price discovery Ú
Low sentiments of public towards trading in secondary
bond market
Reason ͙ 7
= Easy to manage few number of investors like banks,
QIB than large number of public holding bonds
= Option of equity money e.g. IPO, FPO etc.
= Inefficient development of primary bond market Ú poor
development of secondary bond market
= Few banks/Institutions in secondary market Ú tend to
hold debt paper rather than trading Ú poor liquidity in
secondary bond market Ú low number of retail
investors
Reason ͙8
= No structured Clearing and Settlement system
 Seller has to first transfer the bond before getting price in
hand
= mDS on interest income of bonds (mDS is abolished from G-sec
market)
= Cap on FII investment in corporate debt is $500 million
= Corporate bonds are not considered for REPO transactions
= Stamp duty
 High for retail investors as compared to RBI, Co-op banks
etc.
 Variable across states
Current scenario
= Cap on FII revised from $500 mn to $15 bn
= Corporate bonds of credit rating AA and above permitted for REPO transactions
= mhe market, anticipating a new benchmark bond, has started to offload the
current ten-year bond, the 6.35% 2020. mhe note is no longer the ten-year on-
the-run bond and the right levels of the ten-year bond will only be known in
April when the first of the new ten-year benchmark bond issuances begin.
= mhe market offloading of the 6.35% 2020 bond has taken the yield up by 14
basis points (bps) week on week to 8% levels. Given the lack of alternatives for
the 6.35% 2020 bond, the market is shifting to the 7.02% 2016 bond as a
substitute.
= mhe spread between the 6.35% 2020 bond and the 7.02% 2016 bond has
widened from 17 bps to 30 bps over the last one month.
= P  

  

  
   
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References
= !)* +&+ ! )+,-. 
$+ $    & + +/ +
December 23, 2005
= *  + $  0  1,++
* & +2,3+ ,
 Feb 28, 2010 Kenya
= 4+52+ 
mhank you !

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