Debt Market: Evolution of debt market in India

14/05/2020 0 By indiafreenotes

Primary market

Primary market is that market where the debt instruments are issued for the first time. Which can be issued as follows:

Public prospectus: invites public to buy

Private placement: Invites few selected individuals, as the cost of public issuing is quite a large

Rights issue: to the already exciting members, but they can refer to their beneficiaries in case of unwillingness to buy

However, the issuer has to inform the exchanges in case of issuing debts. To notify the investors, about associated risk changes

Secondary market

Secondary market is where the debt instruments can be traded. It can take place by the following two ways based on the characteristics of the investors and the structure of the market are :

Wholesale debt market segment of NSE & Over the counter of BSE : Where the investors are mostly Banks , Financial Institutions , RBI , Primary dealers , Insurance companies , Provident Funds , MFs , Corporates and FIIs .

Retail debt Market: involves participation by individual investors, small trusts and other legal entities in addition to the wholesale investor’s classes.

Types of debt Instruments

Government Securities

  • It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India.
  • These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable semi-annually.
  • For shorter term, there are Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days

Corporate Bonds

  • These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years.
  • Comparing to Government Securities, 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

Certificate of Deposit

  • Certificate of Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in Demat form
  • Banks can offer CDs which have maturity between 7 days and 1 year.
  • CDs from financial institutions have maturity between 1 and 3 years

Commercial Papers

  • There are short term securities with maturity of 7 to 365 days.

Structured Debt

  • Structured debt is some type of debt instrument that the lender has created and adapted to fit the needs and circumstances of the borrower.
  • A debt package of this type usually includes one or more incentives that encourage the debtor to do business with the lender, rather than seeking to develop a working relationship with other lenders.
  • While the overall structure of the debt is adapted to the needs of the borrower, the terms also benefit the lender in the long term.
  • The main goal of structured debt is to create a debt situation that provides the debtor with as many benefits as possible, while also keeping the overall debt load as low as possible
  • At the same time, the lender receives an equitable return for the structured debt arrangement
Types Issuers Instruments
Government Securities Central Government:
State Government:
1. Zero Coupon bonds
2. Coupon bearing bonds
3. Treasury bills
4. Floating rate bonds
1. Coupon bearing bond
Public sectors bonds Government agencies, statutory bodies, public sector undertakings 1. Debentures
2. Government guaranteed bonds
3. Commercial papers
4. PSU bonds
Private sector bonds Corporates: 
Financial Institutions:
1. Debentures
2. Commercial papers
3. Fixed floating rate
4. Zero coupon bonds
5. Inter-corporate deposits
1. Certificate of debentures
2. Debentures
3. Bonds
1. Certificate of deposits
2. Bonds

The Indian debt market has traditionally been a wholesale market with participation restricted to few institutional players mainly banks. The banks were the major participants in the government securities market due to statutory requirements. The turnover in the debt market
too was quite low a few hundred crores till the early 1990s. The debt market was fairly underdeveloped due to the administrated interest rate regime and the availability of investment avenues which gave a higher rate of return to investors.

In the early 1990s, the government needed a large amount of money for investment in development and infrastructure projects. The government realized the need of a vibrant, efficient and healthy debt market and undertook reform measures. The Reserve Bank put in substantial efforts to develop the government securities market but its two segments, the private corporate debt market and public sector undertaking bond market, have not yet fully developed in terms of volume and liquidity.

It is debt market which can provide returns commensurate to the risk, a variety of instruments to match the risk and liquidity preferences of investors, greater safety and lower volatility. Hence the debt market has a lot of potential for growth in the future. The debt market is critical to the development of a developing country like India which requires a large amount of capital for achieving industrial and infrastructure growth.

Regulation of Debt Market: The Reserve Bank of India regulates the government securities market and money market while the corporate debt market comes under the purview of the Securities Exchange and Board of India (SEBI).

In order to promote an orderly development of the market, the government issued a notification on March 2, 2000 delineating the areas of responsibility between the Reserve Bank and SEBI. The contracts for sale and purchase of government securities, gold related securities, Money market securities and securities derived from these securities and ready forward contracts in debt securities shall be regulated by the Reserve Bank. Such contracts, if executed on the stock exchanges shall, however, be regulated by SEBI in manner that is consistent with the guidelines issued by the Reserve Bank.

Link between Money Market and Debt Market:

The money market is market dealing in short term debt instruments (up to one year) while the debt market is a market for long term instruments (more than one year) The money market supports the long term debt market by increasing the liquidity of securities. A developed money market is a prerequisite of the development of a debt market.

Characteristics of Debt Market:

The characteristics of an efficient debt market are a competitive market structure, low transaction costs, a strong and safe market infrastructure and a high level of heterogeneity among market participants.