These bonds acknowledge the government debt obligation towards the holder . The government bonds can carry a fixed or floating coupon rate, which is paid at a periodicity on the Face value of the bond. Most of the government bonds are fixed coupon. The Public Debt office (PDO) of the Reserve Bank of India acts as the registry/ depository of Government Bonds and deals with issue, interest payment and repayment of principal at maturity. Different type of Government Bonds: (a) Fixed Rate Bonds: For these type of Bonds, the coupon rate is fixed for the entire life of
Bond at a particular percentage of Face Value. (b) Floating Rate Bonds: For these type of Bonds, Coupon rate is not fixed. The coupon rate is variable and is reset at a pre- announced interval. Floating rate Bonds were first issued in September 1995 in India. (c) Zero Coupon Bonds: These types of Bonds are Bonds with no coupon payments. These Bonds are issued at a discount to the Face value. These Bonds were issued by Government of India in nineties and after that it has not issued these types of Bonds. (d) Capital Indexed Bonds: To protect the holders from the inflation, in this type of
Bonds the principal is linked to an accepted Index of inflation. In December 1997, a Capital Index Bonds, with the principal hedged against inflation with maturity of 5 years was issued. Salient features of Government Bonds: (A) No risk of default as the bonds carry sovereign guarantee. (B) As the investors can sell the Bonds in Secondary market the Bonds have sufficient Liquidity. (C) No Tax deducted at source. (D) The Bonds qualify as Statutory Liquidity Ratio investment unless otherwise stated. (E) To borrow funds in the Repo market these bonds can be used as collateral.
The Government Bond market in India has two Segments namely, Primary Market And Secondary Market. (A) Primary Market: The market consists of sellers and buyers. For Primary market the sellers are the issuers of the bonds i. e. Central and State Governments. Buyers in this market generally are Insurance companies, Commercial Banks, Primary dealers and Financial Institutions and retail investors Subject to the guidelines of RBI. (B) Secondary Market: The secondary market consists of Financial Dealers, Retail investors, Corporate Houses, and RBI.
RBI conducts Auctions to issue Govt. Bonds. NDS-Auction platform is the electronic platform on which the auctions are conducted. The members of electronic platform are Insurance Companies, Provident Funds, Primary Dealers, Commercial banks and, Scheduled Urban cooperative banks, who maintain current account and securities account with RBI. The Electronic platform is used by all members of PDO-NDS to place their bids in the auction. For non NDS members, to participate in auction the route lies through Scheduled Commercial Bank or Primary Dealers.
For this purpose, the non NDS members have to maintain Gilt accounts with the Institution through which it is idding in the auction process. A guilt account is dematerialized account maintained by a scheduled bank or a primary dealer for those investors who have gone through them to bid in the auction. An indicative Half yearly auction calendar containing all relevant information about the bonds is issued by RBI in consultation with Govt. of India.. About one week prior to actual date of auction RBI release through Print and Electronic media all the relevant details.
Auction conducted by RBI can either be Yield based or Price based. (i) Yield based auctions are conducted for new bonds issue. In this type of auction the coupon rate gets fixed through a market based Price discovery process. In this process, investors bid in yield terms up to two decimal places. The cut off yield is arrived at the yield corresponding to the notified amount, when the bids are arranged in ascending order. (ii) Price based auctions are conducted when Govt. of India re issues bonds issued earlier. In this auction, bidders quote in term of price of face value.
After this the bids are arranged in descending order and those who have bid at or above the cut off price are declared successful idder. The successful bidder can be allocated bonds on Uniform Price Base and Multiple Price Base. Based on this, auction can be classified as Uniform Price base and Multiple Price base. In the case of Multiple Price base, all the successful bidders pay for the allocated quantity of bonds at the auction cut off price irrespective of their quoted price. In case of multiple Price base the successful bidders pay for the allocated quantity at their quoted rates.
The bidding in an auction can be (a) Competitive bidding, (b) Noncompetitive bidding. In competitive bidding, investors id at a price/yield as per his/her perspective of the market dynamics and is allocated the bonds if the price/yield is within the cut off price. In noncompetitive bidding, an opportunity is provided to retail investors to participate in auction. In this process, the investors apply for a certain number of bonds without any mention to price/yield, after this, bidders are allocated bonds at the weighted average price/yield of the auction.
The bonds are traded in the secondary market by the means as follows,(a) Negotiated Dealing Systems. (b) Over the counter. (c) Negotiated Dealing system-order matching. d) Stock Exchange for retail investors. Commercial Banks, Primary dealers and Insurance companies are the dominant players in Government Bonds market. There are other participants such as Co-operative banks, provident and pension funds. Corporate houses are also trading in Govt. Bonds in their endevour to manage their overall portfolio risk. The role of the market maker is played by the Primary Dealers.
Clearing Corporation of India Limited is the central counterparty for all transactions in the Govt. bonds i. e. during settlement CClL is the trades which are undertaken on OTC market and NDS-OM platform. After CClL receives all the trade details/information, it calculates the participant wise obligation and then it passes the details to RBI where the settlement happens by simultaneous transfer of funds and bonds through Delivery versus Payment (DVP) system. (B) Corporate Bond Market: Bonds issued by Financial Institutions, Public Sector Units and Corporate houses constitute Corporate Bonds . ndia, when compared to other developed countries and other Asian countries, does not have a well-developed Corporate Bond market in terms of liquidity and depth. The share of corporate bonds n Indian debt market is very low in comparison to Government bonds. It is in last twenty years some reforms favoring the corporate bonds have taken place in the Indian market. Abolition of ceiling on the interest rate, which was earlier stipulated by Controller of Capital issues on corporate bonds in the year 1992. NSE and BSE started trading in debt instruments through their WDM segment in the year 1994 and 2001 respectively.
In the year 2007 SEBI made regulator and use of electronic payment facility for coupon and redemption started. Reporting platforms set up by NSE and BSE to capture trading data of corporate bonds. Listed bonds were exempted from Tax deduction at source in 2008. Year 2010 saw mandatory clearing and settlement of all trades through centralized clearing house, and SEBI issued directions to exchanges to present issuer related information on their websites in a uniform format and, to issuer to use interest rate convention of Actual/Actual.
In June 2011 SEBI instructed exchanges to do away with Shut Period for interest payments or for part redemption. SEBI amended the Regulations of Mutual Funds that permits Mutual Funds to set up Infrastructure Debt funds under Mutual Funds frame work in August 2011. In September 2011, Third party valuation by Credit agencies and its disclosure to public was made mandatory by SEBI for corporate bonds. Anatomy of Indian Corporate Market: ISSUERS (i) The largest and most active corporate bond issuers in Indian market are the Public Sector Undertakings. ii) The second largest player in issuer category are the non-banking finance companies. INVESTORS in this market are primarily insurance companies, banks, mutual funds and, provident funds. Fll are also buying corporate bonds after opening up of the limit by SEBI. A snap shot of Trading in Corporate bonds in last six years YEAR NUMBER OF TRADES AMOUNT(IN CRORES) 2007-08 19079 95889. 706 2008-09 22683 148166. 180 2009-10 38230 401 198. 040 2010-11 605274. 240 2011-12 51 533 593783. 000 2012-13 66383 738631 . 60 Source: www. sebi. gov. in The issue can be public or private placement. In private placement the issue is offered to a select group of buyers. The table below compares the public issues with private placements in last 3 years. YEAR TYPE NUMBER OF ISSUES PUBLIC 10 9451. 17 PRIVATE PLC 1404 218785. 41 20 35610. 7 1953 261282. 65 16982. 05 489 361462. 00 From the table above it is obvious that in private placement there has been increase in the mobilization of funds. For the quarter ending June 2013, Rs 1. 1 lakhs crores was raised by the companies through private placement of corporate bonds, but for significantly on the RBI''s liquidity tightening measures announced in July. The corporate bond market in India is under developed and the main issues concerning its development are as follows: (a) Private Placement in numerous numbers leading to fragmentation and to deterrent in liquidity. Private placement route for raising inance through corporate bonds is generally used by small and medium corporate houses due to ease of issuance, lack of interest from retail, cost considerations and greater institutional demand.
Over 95% of issuances in India are through private placement and this leads to multiple issues with fragmentation and low liquidity. (b) Inadequate liquidity due to poor turnover of corporate bonds in the secondary market because of buy and hold strategy of institutional buyers coupled with lack of proper market infrastructure. (c) Due to absence of interest rate/credit derivatives hich can efficiently transfer the risks on account of interest rate movements and default probabilities have led to the inability of corporate bond market to pick up in India. d) Lack of greater retail participation. (e) In Indian corporate bond market, 25 years is the tenure of the longest maturity bond, which does not meet the requirement of long term investors who require higher tenure bonds. In comparison Government bonds are available in longer tenure to meet the requirements of long term investor. There had been a number of reforms in the Indian corporate bond market since1992, but still the market is nderdeveloped and its size as compared to the global market and other Asian countries is very meager.
The Corporate bond market will evolve as we proceed in our quest for economic development and with help of reforms and better transparency in this market, the borrowing needs of corporate houses will be met by this market that will eventually lessen the dependence of corporate houses on banks for financing and credit risks gets spread out in the economy. References: a. www. sebi. gov. in b. www. rbi. org. in c. IOSR-JBM, ISSN: 2278-478, ISSUE 4(SEPT OCT 2012), pp;46-50
No comments:
Post a Comment