Escolar Documentos
Profissional Documentos
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INDEX
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2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
Executive Summary
Introduction
Financial Market & Its Classification
Financial Instruments & Its Classification
Definition & Types Of Debt Instruments
Importance Of Debt Instruments
Types Of Debt Instruments
Comparison Between Debt & Ownership Instruments
RBI/SEBI Guidelines On Debt Instruments
Case Study
Conclusion
Bibliography
Babliography
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EXECUTIVE SUMMARY
Understanding and measuring liquidity of government bond markets is
important to various market participants. Primarily, these markets serve to
governments for financing purposes. Market participants use government
bonds as collateral, as benchmarks for pricing other financial instruments
and as hedging or investment instruments. Central banks extract from
these markets information on future interest rates and use government
bonds as a monetary policy instrument. Liquidity directly affects the
usability of government bonds for these purposes.
Until recently, most research articles focused on stock or foreign exchange
markets and only few were dedicated to government bond markets.
Researchers and regulators started to focus on the liquidity of government
bond markets after the financial market turmoil in 1998, which had an
impact even on such liquid markets like the U. S. Treasury market.
Through the efforts of this project, we understood in depth the various
instruments used by individuals as well as by organizations for raising and
using debt. Earlier we were under the impression that we have limited
instruments and limited scope to the debt markets but after this study, we
are aware of the various opportunities in the debt instrument market
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INTRODUCTION
The debt market is a bigger source of borrowed funds than the banking
system. The market for debt is larger than the market for equities (i.e., is
larger than the stock market). The debt market is commonly divided into the
so-called money market (short-term debt, maturity of one year or less) and
the so-called capital market (long-term debt). Both of these terms are
misnomers. All productive assets are capital (including equities). The
terminology may be rationalized by the convention that capitalized
expenses are amortized over periods in excess of one year. "Money
market" instruments are debt and although they can be used as a store of
value they can only be regarded as a medium of exchange in the sense
that they are readily sold at a price which is usually predictable within a
short time frame. Moreover, it is hard to base a conceptual distinction
between money & non-money based on a one-year maturity dividing line.
Most debt instruments are not traded through exchanges, but are traded
over-the-counter (OTC) in a telephone/electronic network market where
dealers or brokers frequently act as direct intermediaries. Money-market
instruments usually have such large denominations that they are not
accessible to small investors except through mutual funds.
The market for debt can be viewed as a market for money in the sense that
sellers of debt (lenders) have a supply of money which is demanded by
would-be buyers (borrowers). In this model, interest rates are the "price" of
money. An increase in demand to borrow money due to increased
economic opportunity increases interest rates (everything else being
equal). The market for debt is influenced by term-to-maturity, creditworthiness of borrowers, security for loan and many other factors. By their
control of money supply, government central banks try to manipulate
interest rates to stimulate their economies without causing inflation.
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The term "market" is sometimes used for what are more strictly exchanges,
organizations that facilitate the trade in financial securities, e.g., a stock
exchange or commodity exchange. This may be a physical location (like
the NYSE) or an electronic system (like NASDAQ). Much trading of stocks
takes place on an exchange; still, corporate actions (merger, spinoff) are
outside an exchange, while any two companies or people, for whatever
reason, may agree to sell stock from the one to the other without using an
exchange.
Trading of currencies and bonds is largely on a bilateral basis, although
some bonds trade on a stock exchange, and people are building electronic
systems for these as well, similar to stock exchanges.
Financial markets can be domestic or they can be international.
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Financial
Intermediaries
Financial
Markets
Interbank
Banks
Stock Exchange
Individuals
Insurance Companies Money Market
Companie
Pension Funds
Bond Market
s
Mutual Funds
Foreign
Exchange
Borrowers
Individuals
Companies
Central
Government
Municipalities
Public
Corporations
Lenders
Individuals
Many individuals are not aware that they are lenders, but almost everybody
does lend money in many ways. A person lends money when he or she:
puts money in a savings account at a bank;
KISHINCHAND CHELLARAM COLLEGE
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expands rather than being paid off. One strategy used by governments to
reduce the value of the debt is to influence inflation.
Municipalities and local authorities may borrow in their own name as well
as receiving funding from national governments. In the UK, this would
cover an authority like Hampshire County Council.
Public Corporations typically include nationalised industries. These may
include the postal services, railway companies and utility companies.
Many borrowers have difficulty raising money locally. They need to borrow
internationally with the aid of Foreign exchange markets.
Derivative products
During the 1980s and 1990s, a major growth sector in financial markets is
the trade in so called derivative products, or derivatives for short.
In the financial markets, stock prices, bond prices, currency rates, interest
rates and dividends go up and down, creating risk. Derivative products are
financial products which are used to control risk or paradoxically exploit
risk. It is also called financial economics.
Currency markets
Seemingly, the most obvious buyers and sellers of currency are importers
and exporters of goods. While this may have been true in the distant past,
when international trade created the demand for currency markets,
importers and exporters now represent only 1/32 of foreign exchange
dealing, according to the Bank for International Settlements.
The picture of foreign currency transactions today shows:
Banks/Institutions
Speculators
Government spending (for example, military bases abroad)
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Importers/Exporters
Tourists
Analysis of financial markets
Much effort has gone into the study of financial markets and how prices
vary with time. Charles Dow, one of the founders of Dow Jones & Company
and The Wall Street Journal, enunciated a set of ideas on the subject which
are now called Dow Theory. This is the basis of the so-called technical
analysis method of attempting to predict future changes. One of the tenets
of "technical analysis" is that market trends give an indication of the future,
at least in the short term. The claims of the technical analysts are disputed
by many academics, who claim that the evidence points rather to the
random walk hypothesis, which states that the next change is not
correlated to the last change.
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audited balance sheet, is not less than Rs. 4 crore (b) the working
capital (fund-based) limit of the company from the banking system is
not less than Rs.4 crore and (c) the borrowal account of the company
is classified as a Standard Asset by the financing bank/s. The
minimum maturity period of CP is 7 days. The minimum credit rating
shall be P-2 of CRISIL or such equivalent rating by other agencies.
6) Treasury Bills-Treasury Bills are short term (up to one year)
borrowing instruments of the union government. It is an IOU of the
Government. It is a promise by the Government to pay a stated sum
after expiry of the stated period from the date of issue (14/91/182/364
days i.e. less than one year). They are issued at a discount to the
face value, and on maturity the face value is paid to the holder. The
rate of discount and the corresponding issue price are determined at
each auction.
7) Certificate Of Deposit-Certificates of Deposit (CDs) is a negotiable
instrument and issued in de-materialized form or as a Usance Promissory
Note, for funds deposited at a bank or other eligible financial institution for a
specified time period. Guidelines for issue of CDs are presently governed by
various directives issued by the Reserve Bank of India, as amended from
time to time. CDs can be issued by (i) scheduled commercial banks
excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and
(ii) select all-India Financial Institutions that have been permitted by RBI to
raise short-term resources within the umbrella limit fixed by RBI. Banks
have the freedom to issue CDs depending on their requirements. An FI may
issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD
together with other instruments viz., term money, term deposits, commercial
papers and intercorporate deposits should not exceed 100 per cent of its net
owned funds, as per the latest audited balance sheet.
8) American Depository Receipt (ADR) -Certificates issued by a U.S.
depository bank, representing foreign shares held by the bank,
usually by a branch or correspondent in the country of issue. One
ADR may represent a portion of a foreign share, one share or a
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In most of the countries, the debt market is more popular than the equity
market. This is due to the sophisticated bond instruments that have returnreaping assets as their underlying. In the US, for instance, the corporate
bonds (like mortgage bonds) became popular in the 1980s. However, in
India, equity markets are more popular than the debt markets due to the
dominance of the government securities in the debt markets.
Moreover, the government is borrowing at a pre-announced coupon rate
targeting a captive group of investors, such as banks. This, coupled with
the automatic monetization of fiscal deficit, prevented the emergence of a
deep and vibrant government securities market.
The bond markets exhibit a much lower volatility than equities, and all
bonds are priced based on the same macroeconomic information. The
bond market liquidity is normally much higher than the stock market
liquidity in most of the countries. The performance of the market for debt is
directly related to the interest rate movement as it is reflected in the
yields of government bonds, corporate debentures, MIBOR-related
commercial papers,and non-convertible debentures.
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The debt market is a market where fixed income securities issued by the
Central and state governments, municipal corporations, government
bodies, and commercial entities like financial institutions, banks, public
sector units, and public limited companies. Therefore, it is also called fixed
income market.
The key role of the debt markets in the Indian Economy stems from the
following reasons:
Efficient mobilization and allocation of resources in the economy
Financing the development activities of the Government
Transmitting signals for implementation of the monetary policy
Facilitating liquidity management in tune with overall short term and
long term objectives.
Since the Government Securities are issued to meet the short term and
long term financial needs of the government, they are not only used as
instruments for raising debt, but have emerged as key instruments for
internal debt management, monetary management and short term liquidity
management.
The returns earned on the government securities are normally taken as the
benchmark rates of returns and are referred to as the risk free return in
financial theory. The Risk Free rate obtained from the G-sec rates are often
used to price the other non-govt. securities in the financial markets.
Advantages of debt instruments:
Reduction in the borrowing cost of the Government and enable
mobilization of resources at a reasonable cost.
Provide greater funding avenues to public-sector and private sector
projects and reduce the pressure on institutional financing.
Enhanced mobilization of resources by unlocking illiquid retail
investments like gold.
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Price Risk: refers to the possibility of not being able to receive the
expected price on any order due to a adverse movement in the
prices.
Significance
The Indian debt market is composed of government bonds and corporate
bonds. However, the Central government bonds are predominant and they
form most liquid component of the bond market. In 2003, the National
Stock Exchange (NSE) introduced Interest Rate Derivatives.
The trading platforms for government securities are the Negotiated Dealing
System and the Wholesale Debt Market (WDM) segment of NSE and BSE.
In the negotiated market, the trades are normally decided by the seller and
the buyer, and reported to the exchange through the broker, whereas the
WDM trading system, known as NEAT (National Exchange for Automated
Trading), is a fully automated screen-based trading system, which enables
members across the country to trade simultaneously with enormous ease
and efficiency.
Price determination of debt instruments
The price of a bond in the markets is determined by the forces of demand
and supply, as is the case in any market. The price of a bond also depends
on the changes in:
Economic conditions
General money market conditions, including the state of money supply in
the economy
Interest rates prevalent in the market and the rates of new issues
Future Interest Rate Expectations
Credit quality of the issuer
Debt Instruments are categorized as:
Government of India dated Securities (G Secs) are 100-rupee face-value
units/ debt paper issued by the Government of India in lieu of their
borrowing from the market. They are referred to as SLR securities in the
Indian markets as they are eligible securities for the maintenance of the
SLR ratio by the banks.
Corporate debt market: The corporate debt market basically contains PSU
bonds and private sector bonds. The Indian primary Corporate Debt market
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.Debt market refers to the financial market where investors buy and sell
debt securities, mostly in the form of bonds. These markets are important
source of funds, especially in a developing economy like India. India debt
market is one of the largest in Asia. Like all other countries, debt market in
India is also considered a useful substitute to banking channels for finance.
The most distinguishing feature of the debt instruments of Indian debt
market is that the return is fixed. This means, returns are almost risk-free.
This fixed return on the bond is often termed as the 'coupon rate' or the
'interest rate'. Therefore, the buyer (of bond) is giving the seller a loan at a
fixed interest rate, which equals to the coupon rate.
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Corporate Bonds
These bonds come from PSUs and private corporations and are offered for
an extensive range of tenures up to 15 years. There are also some
perpetual bonds. Comparing to G-Secs, corporate bonds carry higher risks,
which depend upon the corporation, the industry where the corporation is
currently operating, the current market conditions, and the rating of the
corporation. However, these bonds also give higher returns than the GSecs
Advantages of Corporate Bonds:
They are provide a fixed stream of income so they are safer than
stocks.
Bond holders get paid by companies before stock holders. For
example, companies are required to make interest payments to
bondholders, but are not required to make dividend payments to
stock holders. Another example of this is that if the company went
bankrupt, the bond holders would be the ones to get the proceeds
from auctioning off the company's assets and the stock holders would
get nothing.
Another advantage of corporate bonds over government bonds is that
they provide higher interest. The reason for this is because interest
rates are made up of a few ingredients. First is the real interest rate
(the actual money you are receiving simply for loaning money), then
the inflation premium (bonds have to pay extra interest so that bond
holders don't have the value of their payments decline due to
inflation), then is the liquidity premium (this is extra interest bond
issuers have to pay if their bond is not easily bought and sold.
KISHINCHAND CHELLARAM COLLEGE Page 22
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Certificate of Deposit
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Commercial Papers
In the global money market, commercial paper is a unsecured promissory
note with a fixed maturity of 1 to 270 days. Commercial Paper is a moneymarket security issued (sold) by large banks and corporations to get money
to meet short term debt obligations (for example, payroll), and is only
backed by an issuing bank or corporation's promise to pay the face amount
on the maturity date specified on the note. Since it is not backed by
collateral, only firms with excellent credit ratings from a recognized rating
agency will be able to sell their commercial paper at a reasonable price.
Commercial paper is usually sold at a discount from face value, and carries
higher interest repayment dates than bonds. Typically, the longer the
maturity on a note, the higher the interest rate the issuing institution must
pay. Interest rates fluctuate with market conditions, but are typically lower
than banks' ratesThere are short term securities with maturity of 7 to 365
days. CPs are issued by corporate entities at a discount to face value.
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ownership of the business and can claim the right to vote on matters the
directors of the business decide. Investors do not have any ownership of
the business when they buy bonds; they receive only an obligation from the
business to repay the loan.
5. Risk
Traditionally, the debt instrument is more secure than the money
instrument. Stock dividends can be reduced or suspended when a
business suffers, but bond obligations must be paid as the contract
stipulates. This also means that stocks have a greater chance for growth
than bonds because their success depends on the success of the
company.
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Issue of FCDs having a conversion period more than 36 months will not
be permissible, unless conversion is made optional with put and call
option.
Compulsory credit rating will be required if conversion is made for FCDs
after 18 months.
Premium amount on conversion, the conversion period, in stages, if
any, shall be pre-determined and stated in the prospectus.
The interest rate for above debentures will be freely determinable by the
issuer.
Issue of debenture with maturity of 18 months or less are exempt from
the requirement of appointing Debenture Trustees or creating a
Debenture Redemption Reserve (DRR).
In other cases, the names of the debenture trustees must be stated in
the prospectus and DRR will be created in accordance with guidelines
laid down by SEBI.
The trust deed shall be executed within six months of the closure of the
issue.
Any conversion in part or whole of the debenture will be optional at the
hands of the debenture holder, if the conversion takes place at or after
18 months from the date of allotment, but before 36 months.
In case of NCDs/ PCDs credit rating is compulsory where maturity
exceeds 18 months.
Premium amount at the time of conversion for the PCD, redemption
amount, period of maturity, yield on redemption for the PCDs/NCDs shall
be indicated in the prospectus.
The discount on the non-convertible portion of the PCD in case they are
traded and procedure for their purchase on spot trading basis must be
disclosed in the prospectus.
In case, the non-convertible portions of PCD/NCD are to be rolled over,
a compulsory option should be given to those debenture holders who
want to withdraw and encash from the debenture programme.
Roll over shall be done only in cases where debenture holders have
sent their positive consent and not on the basis of the non-receipt of
their negative reply.
Before roll over of any NCDs or non-convertible portion of the PCDs,
fresh credit rating shall be obtained within a period of six months prior to
the due date of redemption and communicated to debenture holders
before roll over and fresh trust deed shall be made.
KISHINCHAND CHELLARAM COLLEGE Page 32
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RBI GUIDELINES
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4.3 The Corporate shall ensure at the time of issuance of NCDs that the
rating so obtained is current and has not fallen due for review.
5. Maturity
5.1 NCDs shall not be issued for maturities of less than 90 days from the
date of issue.
5.2 The exercise date of option (put/call), if any, attached to the NCDs shall
not fall within the period of 90 days from the date of issue. 3.
5.3 The tenor of the NCDs shall not exceed the validity period of the credit
rating of the instrument.
6. Denomination
NCDs may be issued in denominations with a minimum of Rs.5 lakh (face
value) and in multiples of Rs.1 lakh.
7. Limits and the Amount of Issue of NCDs
7.1 The aggregate amount of NCDs issued by a corporate shall be within
such limit as may be approved by the Board of Directors of the corporate or
the quantum indicated by the Credit Rating Agency for the rating granted,
whichever is lower.
7.2 The total amount of NCDs proposed to be issued shall be completed
within a period of two weeks from the date on which the corporate opens
the issue for subscription.
8. Procedure for Issuance
8.1 The corporate shall disclose to the prospective investors, its financial
position as per the standard INSTRUMENT practice.
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8.2 The auditors of the corporate shall certify to the investors that all the
eligibility conditions set forth in these directions for the issue of NCDs are
met by the corporate.
8.3 The requirements of all the provisions of the Companies Act, 1956 and
the Securities and Exchange Board of India (Issue and Listing of Debt
Securities) Regulations, 2008, or any other law, that may be applicable,
shall be complied with by the corporate.
8.4 The Debenture Certificate shall be issued within the period prescribed
in the Companies Act, 1956 or any other law as in force at the time of
issuance.
8.5 NCDs may be issued at face value carrying a coupon rate or at a
discount to face value as zero coupon instruments as determined by the
corporate.
9. Debenture Trustee
9.1 Every corporate issuing NCDs shall appoint a Debenture Trustee (DT)
for each issuance of the NCDs.
9.2 Any entity that is registered as a DT with the SEBI under SEBI
(Debenture Trustees) Regulations, 1993, shall be eligible to act as DT for
issue of the NCDs only subject to compliance with the requirement of these
Directions.
9.3 The DT shall submit to the Reserve Bank of India such information as
required by it from time to time.
10. Investment in NCD
10.1 NCDs may be issued to and held by individuals, banks, Primary
Dealers (PDs), other corporate bodies including insurance companies and
mutual funds registered or incorporated in India and unincorporated bodies,
KISHINCHAND CHELLARAM COLLEGE Page 36
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12.4 The DTs shall report, within three days from the date of completion of
the issue, the issuance details to the Chief General Manager, Financial
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13.1 Issuers of NCDs of maturity up to one year shall follow the Disclosure
Document brought out by the Fixed Income Money INSTRUMENT and
Derivatives Association of India (FIMMDA), in consultation with the Reserve
Bank of India as amended from time to time.
14. Violation of the directions will attract penalties, which would include
debarring of the entity from the NCD INSTRUMENTs
CASE STUDIES
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"We are growing very fast and will continue to grow in the truck financing
segment. We are currently growing around 20 per cent year-on-year and
will continue to keep the same momentum in FY 11 also," Sridhar said.
The company had raised Rs 1,000-crore through NCDs last year.
"We will continue to raise money to expand our business in future through
NCDs," he said.
The company currently has 7-lakh customers. Last year, it added 3.5-lakh
customers.
"We are adding at least 3-4-lakh customers every year. Our business
model is very unique in the industry," he said.
In FY 10, the company's profit jumped around 42 per cent at Rs 874-crore
as against Rs 612-crore last year
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CONCLUSION
For a developing economy like India, debt instruments are crucial sources
of capital funds. The debt instrument in India is amongst the largest in Asia.
It includes government securities, public sector undertakings, other
government bodies, financial institutions, banks, and companies.
An investor can invest in money market mutual funds for a period of as little
as one day.
Avenues are also available for investing for longer horizons according to
your risk
appetite.
In conclusion, the ability of a continuously evolving and self-propelling
enterprise is its ability to not only learn and adapt to changes and
opportunities, but also to make full use of them as and when possible.
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BIBLIOGRAPHY
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BABLIOGRAPHY
www.rbi.org
www.google.com
www.investopedia.com
www.businessstandard.com
www.netbank.com