Introduction to Fixed Income Securities PDF

Introduction to Fixed Income Securities What is a bond and its features? Bond is a debt instrument issued by a company, the holder of which gets periodical interest either annually/semi- annually/quarterly/monthly and gets back principal along with interest accrued on redemptio...

Introduction to Fixed Income Securities What is a bond and its features? Bond is a debt instrument issued by a company, the holder of which gets periodical interest either annually/semi- annually/quarterly/monthly and gets back principal along with interest accrued on redemption date at the end of maturity period. Bonds provide the borrower with external funds to finance investments, or, in the case of government bonds, to finance expenditure. Salient features of bonds:- 1. Face Value is the amount on which the issuer pays interest, and generally has to be repaid at the end of the term. Some structured bonds can have a redemption amount different from the face value and can be linked to performance of particular assets such as a stock or commodity index, foreign exchange rate or a fund. This can result in an investor receiving less or more than his original investment at maturity. The normal face value of the bonds is Rs 1 lakh, likely to be reduced to 10,000. 2. Coupon or Interest rate, is the rate that the issuer pays to the holder of the bond. Usually, this rate is fixed throughout the life of the bond, in case of a fixed rate bond. This rate can also vary with a standard benchmark, such as T-Bill rate, Repo rate, MIBOR, MCLR etc. Generally, coupon is paid either annually or semi-annually, also on certain bonds paid either quarterly or monthly. 3. Maturity or redemption date, is the date in the future on which the investor's principal will be repaid. As long as all due payments have been made, the issuer has no further obligations to the bond holders after the maturity date. There have been some issuance like AT 1 with no maturity date (perpetual) but has a call option embedded.  Trends in Indian Corporate Debt Market For Indian companies, the bond market was the preferred route for fundraising in FY24. Total amount raised through privately placed corporate bonds touched a record high peak of 10.02 lakh crores in FY 2023-24. In a span of 5 years, amount raised through corporate bonds increased from 6.55 lakh crores in FY 2018-19 to 10.02 lakh crores for the first-time last year witnessing a CAGR of approx.~ 9%. Also, a significant increase of approx.~17% from FY 22-23 to FY 23-24 is setting up a platform for outstanding size of corporate bond market to more than double by fiscal 2030. As per CRISIL press release on corporate bond market, outstanding size of bond market may clock an increase from ~Rs 43 lakh crore as of last fiscal to Rs 100-120 lakh crore by fiscal 2030. Growth of Indian corporate bond market in last 10 years is set out in chart below: Corporate Bond Market Issuances (last 10 yrs) 1.200.000 1.002.432 1.000.000 800.000 600.000 477.082 400.000 200.000 - FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 Note: The data above has been taken from Prime database. As per SEBI data, Listed debt private placements for FY 23-24 is 7.37 lakh crores. Bond Market in India and US Indian Bond Market - ($ 2.3 trillion) US Bond Market - $ 50 trillion 1.3% 2% 0.02% 5% 21% 24% 47% Corporate Bonds Dated G-Secs SDLs T-Bills CPs CDs Muni Bonds 5 Source: SEBI,RBI,NSDL,SIFMA Corporate Bonds vs Equity Shares Particulars Equity Share Corporate Bonds Investor relation with the Part owner of the company Lender to the company company May enjoy voting rights and have special voting Do not enjoy voting rights rights also Investor’s earning on Returns in form of dividend and capital Interest paid on bonds and capital appreciation on investment appreciation bonds (owing to favorable interest rates) Risk on Investment Equity shares are considered to be the riskiest Less risky than equity shares but riskier than G-sec. form of investment. However, corporate bonds also have their own set of risks (explained in slide 9). How liquid is the If equity shares are listed, then it is easily If listed, then can be easily traded. However, corporate investment? tradeable. bonds are not as liquid as equity shares. If unlisted/illiquid shares, then difficult to liquidate If unlisted, investor will find it difficult to liquidate and might be costlier to sell. before maturity date. What happens if company Investor will get face value of the investment back Investor will get preference in repayment over goes into liquidation? only after all other stakeholders are paid off. equity/preference shareholders. However, only after statutory dues like taxes etc. are paid off. Cash Flow on bonds Investor 3 On purchase of bonds Over tenure of bond, Redemption amount= Investment amount= payment of Periodical Principal + Interest No of bonds * Price of interest= Face value of accrued bonds bonds * Coupon rate 2 On redemption of bonds 1 Issuer Mode of Investment in Bonds Private Placement Primary market Public issue Listed bonds Request for Quote (RFQ) Mode of investment in bonds Secondary market Over the counter (OTC) Unlisted bonds  OVERVIEW OF PUBLIC ISSUE PROCESS Kick Off Meeting Listing & Trading Due Diligence, Basis of allotment X + 4 Weeks Pre- Issue other regulatory X + 7 Weeks approvals and Post Issue Drafting Finalization of Technical Rejection Filing of DP/DSP with SE & SEBI Issue Closes Receipt of In principle Approval X + 5 Weeks Issue Opens from Stock Exchange Marketing Determination of ROC Filing of Management Pre-Marketing Price band P/SP/TP Road shows  Key Activities Lead Managers Due Diligence of the Issuer End to end coordination of the process till Listing of Securities Key Intermediaries Legal Counsel Assists in due diligence Provides legal guidance for the Issue Registrar Co-ordination with the Issuer and Bankers regarding collections, reconciliation, refunds etc Post issue co-ordination, collation & reconciliation of data Assist in process for Listing and Trading Debenture Trustee Responsible for maintenance of adequate security Takes care of interest of investors even after listing of securities Assist the Company and LM on formulation and execution of the Media and PR Strategy Advertising/ PR Agency Organizing the Road Shows Ensure adequate coverage of IPO & positive news flow Collection of funds raised in the IPO Bankers to the Issue Issue provisional and final certificates to aid in the post issue process Issue of refund cheques Bulk printing of the Prospectus Printers Printing of application forms Ensure timely dispatch & distribution of stationery Credit Rating Agency Provide credit rating for the Issue Private Placement - Parties Involved For Rating the Securities Credit Rating Agency Act as Trustee to ensure security of Filing of Security related documents interest of Bond Holders Registrar of Debenture Company Trustee Process the application and credit in Providing Platform for bidding and trading of securities NSE/BSE Issuer R&T Agent DEMAT account Collecting NSDL/CDSL For ISIN Creation Banker For DEMAT Credit Collect the funds on behalf of Issuer Arrangers Act as advisor Assist in mobilizing funds Primary/Secondary Market & Public Issue/Private Placement Particulars Primary Market Secondary Market A public issue of bonds is when bonds are Meaning Bonds offered by the company Trading (Buy/Sell) of the offered to public in general and any other directly through private bonds subsequently after investor at large through issue of prospectus. placement/public issue is listing is referred to as referred to as primary market secondary market A private placement of bonds is generally Purchase of Directly from the company From the subsequent holder made to certain number of persons which is bonds who wishes to sell generally institutional investors and are not offered to retail investors. Purchase Generally, at face value. But an Generally, at a price higher or Price issuer may also issue at a lower than face value, As per Cos. Act, 2013 an offer for private premium or a discount depending on prevailing placement shall not be made to more than 50 market conditions persons and not more than 200 persons in Mode of Private placement or Public NSE/BSE Request for quote aggregate in a FY, excluding QIBs and buying issue of bonds platform (RFQ) or Over the ESOPs counter trade (OTC) Basic Features and Key Terminologies 13  BASIC FEATURES of a BOND multinational organization Creditworthiness sovereign (national) Issuer government investment-grade bonds non-sovereign (local) non-investment-grade government bonds quasi-government entity company 14 BASIC FEATURES & TERMINOLOGIES Pricing Face Value / Principal Issue Price Market Price Redemption Value Interest Zero Coupon / Coupon bearing Bonds Coupon Rate (Fixed/Floating) Coupon Frequency Repayment types Single Repayment Amortization Embedded Options Plain Vanilla bonds Call / Put Conversion 15 Bond’s cash flows The most common payment structure by far is that of a plain vanilla bond, as 1,080 depicted below. Coupons + Redemption 80 80 80 80 80 80 80 80 80 Annual coupons 1,000 Purchase price 16 Key Participants Issuers Govt. & Govt. Bodies/Authorities Banks/FIs Corporates Investors Institutional Investors Banks, FIs., MFs, Insurance Companies, PFs, Pension Funds, FPIs, etc. Corporates Individual Investors Intermediaries Merchant Banks / Primary Dealers Stock Exchanges Debenture Trustees Credit Rating Agencies Brokers / Market makers 17 FIS Issuers In India Government Government Securities (G-Secs) Treasury bills (T-bills) Bonds issued by State Govt.s & Uts (SDLs) Government Authorities Bonds issued by Govt. Controlled Institutions and PSUs Bonds issued by Local Bodies and Municipalities (Municipal Bonds) Banks / Financial Institutions Bonds/NCDs CPs/CDs Corporates Bonds/Debentures (NCDs) Preference Shares (NCRPs) 18 19 Role of Regulators Reserve Bank India (RBI) manages the borrowing of the Central and State Governments including the Union Territories. The RBI acts as the regulator for the Money market and the G-Sec market. The RBI also governs instruments issued by Commercial Banks and other Institutions regulated by it. The Securities and Exchange Board of India (SEBI) is the regulator for the corporate bond market including instruments issued by Commercial Banks and PSUs, provided such issuances by the above regulated entities are of more than ONE year of maturity. The role of SEBI is paramount when the funds are raised through public issuance. Role of Monetary Policy in Debt Markets Key Challenge - illiquidity Concentrated Market (Only Institutional Investors) Buy & Hold Investors Fragmented Liquidity (Large number of ISINs) Investment Prudential Norms Recent Initiatives by SEBI Amendment in Municipal Bonds Regulations Introduction of Framework for Green Bonds Electronic Book Platform (EBP) Consolidation and Reissuance of Bonds Market Making Integrated Trade Repository Timely disclosure of delays/defaults Streamlining continuous disclosures Thank you 24 Types of Fixed Income Securities Markets India market composition Types of Fixed Income Securities Markets Money Market Government Securities Market Corporate Debt Market  Money Market Money market instruments are short-term financing instruments aiming to increase the financial liquidity of businesses. What are Money Market Instruments? The main characteristic of money market instruments is that they can be easily converted to cash, thereby preserving an investor's cash requirements. The money market and its instruments are usually traded over the counter and, therefore, cannot be done by standalone individual investors themselves. It has to be done through certified brokers or a money market mutual fund. Types of Money Market Instruments Certificate of Deposit Commercial Paper Treasury Bills Repurchase Agreements Banker's Acceptance What is Call Money Market? The call money market is the most liquid of all short-term money market segments, with a maturity period of one day. The tenure of call money loan ranges from one day to fourteen days after the disbursement of the amount is made by the lending institution. In the call money market, any amount can be lent or borrowed at a market-determined interest rate that is acceptable to both the borrower and the lender. Key Rates : https://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics Government Securities Market A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.  Treasury Bills (T-bills) Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of ₹100/- (face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed at the face value of ₹100/-. Cash Management Bills (CMBs) In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Dated G-Secs Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years.  How are the G-Secs issued? G-Secs are issued through auctions conducted by RBI. Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI. Commercial banks, scheduled UCBs, Primary Dealers, insurance companies and provident funds, who maintain funds account (current account) and securities accounts (Subsidiary General Ledger (SGL) account) with RBI, are members of this electronic platform. All members of E-Kuber can place their bids in the auction through this electronic platform. The results of the auction are published by RBI at stipulated time (For Treasury bills at 1:30 PM and for GoI dated securities at 2:00 PM or at half hourly intervals thereafter in case of delay). The RBI, in consultation with the Government of India, issues an indicative half-yearly auction calendar which contains information about the amount of borrowing, the range of the tenor of securities and the period during which auctions will be held. The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills of 91day, 182 day and 364 day tenors. NDS OM SECONDARY MARKET NDS OM is an anonymous screen-based order matching system for secondary market dealing in government securities. This is an order driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants. Anonymity ensures a level playing field for various categories of participants. NDS-OM is owned by RBI. Direct access to the NDS-OM system is currently available only to select financial institutions like Commercial Banks, Primary Dealers, well managed and financially sound UCBs and NBFCs, etc. Other participants can access this system through their Primary members i.e. with whom they maintain Gilt Accounts. The securities and funds are settled on a net basis i.e. Delivery versus Payment System-III (DvP- III). CCIL guarantees settlement of trades on the settlement date by becoming a central counter-party (CCP) to every trade through the process of novation, i.e., it becomes seller to the buyer and buyer to the seller. All outright secondary market transactions in G-Secs are settled on a T+1 basis. Corporate Debt Market Corporate bonds are debt instruments issued by companies to borrow capital for various projects or to manage their day-to-day expenses. When you buy a bond, you lend money to the company in exchange for a return on the loaned amount. There are various categories of corporate bonds in India and they’re classified based on a number of factors such as security, equity characteristics and interest payments among others. Difference between G-Secs and Corp Bond Market Liquidity: G-Sec market is more liquid. On a typical trading day, if there is Rs 40,000 crore of trade in G- Secs, trades in corporate bonds would be Rs 6,000 crore. Nature of participants: nature of participants are similar in that corporate bond market also is populated by institutional investors, but in the corporate bond market, there is a relatively higher preponderance of Mutual Funds and HNIs. OTC: corporate bond trades are OTC, executed verbally and formalized on the NSE / BSE settlement platform. Arguably, G-Sec trades are Exchange-driven, but it is not an Exchange like NSE or BSE. NDS OM is a platform hosted by CCIL and there is no Exchange-standardized contract traded at NDS OM. Non-wholesale participation in the market RBI Retail Direct: This platform is meant for retail. Companies / institutions are not allowed. Instruments available are G-Secs, SDLs and SGBs. Investment vehicles: Mutual Funds for retail to wholesale quantum. AIF / PMS with defined minimum quantum. Bond houses: There are brokers / NBFCs, popularly referred to as bond houses, who offer bonds to non-institutional investors. Online bond platforms: there are online platforms offered by broking houses, where one can purchase bonds from the available list. Exchanges: corporate bonds are mostly listed, at NSE/BSE. One can purchase through a broker. However, traded volumes are limited. Thank You Fixed Income Securities - Investment Risks Risks in FIS 1. Credit Risks 2. Interest Rate Risks 3. Illiquidity Risks 4. Exchange Rate Risks 5. Inflation Risks 6. Reinvestment Risks 7. Optionality Risks (Call and Prepayment Risks) 8. Volatility Risks 9. Event Risks (1) Interest rate risks Price & yield - Inverse relationship (2) Call risk / prepayment risk (3) Reinvestment Risk (4) Credit Risk Credit ratings Rating scales (5) Liquidity risks (6) Exchange risk ▪ Currency Risks in cases where bonds are being settled in currency other than my primary currency ▪ Both Issuer and Investor can be exposed to Exchange Risk ▪ E.g. An FPI investing in Rupee denominated bond issued by an Indian issuer; or an Indian company raising money off shore in Dollar denominated bonds ▪ Forex derivatives can be used to hedge above risks ▪ Masala Bonds vs. ECBs (7) Inflation Risk (8) Volatility Risk ▪Any change in expected volatility of interest rates would change the value of a bond with an imbedded option ▪A bond with an embedded option is typically priced as under: ▪Value of a callable bond = Value of similar plain vanilla bond - Value of the call option ▪Value of a putable bond = Value of similar plain vanilla bond + Value of the put option ▪Any change in expected volatility of interest rates would change the value of the embedded option in the bond, and thus affect the bond value as under: Movement in Expected Int. Rate Effect on Price of Bonds Volatility Callable Bond Putable Bond + - (9) Event Risk Thank you  INDIAN MONEY MARKET and G-Sec  Introduction to Money Market Money Market is a short-term market and handles instrument from 1 day to 1 year. It is mostly used by Government, Banks and other corporate entities to tide over short-term requirements of funds. The entities having excess and the entities with shortage of funds participate in this market. The RBI uses the money market for transmission of its monetary policy direction by changing various Reserve ratios, conducting Open Market Operations, increasing or decreasing of policy rates, etc. Participants in the Indian money market include: Public Sector Banks, Private Sector Banks, Foreign Banks, Co-operative Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, Non-Banking Financial Companies (NBFCs), Corporates, Provident / Pension Funds, Payment Banks, Small Finance Banks, etc. Types of Instruments in Money Market Money market is typically divided into two segments: (a) Borrowing and Lending segment with or without collaterals; (b) Asset Market involving purchase and sale of such instruments. Following products are part of the Indian money market:  Call Money: The call money market is an avenue for unsecured lending and borrowing of funds. This market is a purely interbank market in India restricted only to Scheduled Commercial Banks (SCBs) and the Primary Dealers (PDs). Notice Money: This is an extension of the interbank call market with uncollateralized lending and borrowing of funds for a period beyond overnight and up to 14 days. Term Money: This is an extension of the interbank call market for uncollateralized lending and borrowing of funds for a period between 15 days and 1 year. Market Repo: Repo, also known as a ready forward contract, refers to borrowing funds via sale of securities with an agreement to repurchase the same at a future date with the interest for the borrowings incorporated in the repurchase price.  Triparty Repo: "Triparty repo" is a type of repo contract with a third party intermediary between the borrower and lender known as the Triparty Agent (TPA). Treasury Bills (T-bills): In India, Treasury bills or T-bills are used for short term borrowing by the Government of India and are considered to be a part of the money market as they mature within a year from issue. These are basically zero coupon securities which are issued at a discount and are redeemed at par. Normally RBI conducts weekly auctions for three tenors of T-bills: 91, 182 and 364 days. Cash Management Bills (CMBs): Essentially very short term T-bills, Cash Management Bills (CMBs) are issued by the Government of India to fund the temporary mismatches in its cash flow. CMBs have maturities less than 91 days.  Commercial Paper (CP): A Commercial Paper (CP) is used by Indian corporates to raise short-term unsecured funds. CPs are also discounted instruments like T-bills and are issued for ₹5 lakh and multiples thereof for maturities between 7 days and one year. Certificate of Deposit (CD): Certificate of Deposits are issued by Banks raising wholesale deposits from depositors. These are tradable instruments as Banks taking such deposits also pay the required stamp duly. Corporate Bond Repo (CBR): Repo in corporate bonds was introduced by RBI in 2010 and the eligible securities for CBR include: a. Listed corporate bonds and debentures, (however, participants cannot borrow against the collateral of their own securities or those of related entities); b. CPs and CDs; and c. Units of Debt ETFs. Important Rates in the Indian Inter-Bank Call Market MIBOR Introduced on July 22, 2015, the Mumbai Interbank Outright Rate (MIBOR), based on overnight call money market transactions, is administered by the Financial Benchmarks India Pvt. Ltd (FBIL) with CCIL as the ‘Calculation Agent’. MIBOR is notified by RBI as a ‘significant benchmark’ as it is the most widely used rate in India for pricing and settlement of derivatives and other contracts. MIBOR is a volume weighted average rate based on actual trades executed on the NDS-CALL platform during the first hour of trading. The trades of co-operative Banks are excluded from MIBOR calculation.  Weighted Average Overnight Call Money Rate – WACR Following the recommendations made by its Working Group on Operating Procedure of Monetary Policy, RBI adopted the weighted average overnight call money rate (WACR) from May 11, 2011 as the operating target of its monetary policy which aims to contain the WACR near the LAF repo rate within the policy rates corridor. WACR is the weighted average rate for all trades executed during the entire day in the Call Market. Economic Utility of Repo Market Repo market is used by the traders for funding their positions and taking position in the market to execute their views on interest rate. Traders short sell a security, if they think the price of the security is likely to fall due to expected increase in interest rate for a particular segment and they borrow the said security in the Repo market to make deliveries. RBI allows short sale upto 90 days but the short selling entity has to borrow the security from the Repo market to make deliveries against the short sale. Thank You Government Debt Market Introduction to Government Debt Market The government securities (G-Sec) market is the most active segment of the Indian Fixed Income Securities market. Regular structural and infrastructural measures by the Government and Reserve Bank of India (RBI) have contributed to its substantial growth and expansion over the last two decades. Along with meeting the governments’ funding needs, G-Sec Debt Market provides the benchmark interest rates in the market for pricing of various financial products, schemes and is also an indirect channel for monetary policy transmission. Primary participants in the Indian G-Sec market are large institutional players like banks, Primary Dealers and Insurance companies. Historically, commercial banks invest in Government securities because of Statutory Liquidity Ratio (SLR) requirement. DATED GOVERNMENT SECURITIES : GOVERNMENT DEBT MARKET Background: The government securities(G-sec) market is the most active segment of the Indian Fixed Income Securities market The structural and infrastructure aspects of the borrowing program are handled by central government and RBI G-Sec Debt Market provides the benchmark interest rates in the market for pricing of various financial products Primary participants in the Indian G-Sec market are large institutional players like banks, Primary Dealers and Insurance companies The securities issued are coupon bearing(fixed/floating) and have a maturities ranging from one to fifty years. The central government notifies the annual borrowing (both gross and net) via G-sec issuances in its budget presentation Subsequently, RBI publishes auction calendar on a half yearly basis, providing details of tenure wise borrowing Auction mechanism: RBI decides the appropriate auction type based on the market conditions and informs the market about the same in advance in the respective auction notification. The various types of auctions currently being conducted by RBI are: Yield based mechanism: This is generally conducted for a new security.Investors place bids in yield terms. Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. This cut-off yield gets set as the security’s coupon rate. Bids higher than the cut-off yield are rejected. Price based mechanism: This is used for reissuances of existing securities. Bidding is in terms of price for the par value of the security. Bids are arranged in descending order of price offered and ones below the cut-off price are rejected. Auction participants: Investors can bid under two categories: Competitive bidding: This category is for accepting bids from institutional investors, where investors can bid at a specific price/yield and get allotment, if their quotes are within the cut-off price/yield. Non-Competitive bidding: This category is for small and retail investors, who do not have a Subsidiary General Ledger account with RBI. GOVERNMENT SECURITIES : KEY STATISTICS Ownership pattern as on 31st Dec23 Weighted avg interest rates (Y-o-Y) 9,00% Commercial Banks 8,45% 8,51% 8,50% 5,74% Co-Operative Banks 7,89% 8,00% 12,54% Non-Bank PDs 7,78% 1,92% 1,33% 37,55% Insurance Companies 7,32% 7,50% 0,55% 7,16% 6,97% Mutual Funds 7,00% 4,44% 6,85% Provident Funds 4,57% 6,50% Pension Funds 6,28% 3,03% 6,00% Financial Institutions 1,49% 5,80% 5,50% 26,16% Corporates 0,67% FPIs 5,00% 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Turnover(Face Value) (In Crs) (Y-o-Y) 30.764.503 22.616.214 19.489.151 19.105.704 18.302.398 16.881.524 16.317.353 15.923.357 15.290.421 12.661.400 FY14-15 FY15-16 FY16-17 FY17-18 FY18-19 FY19-20 FY20-21 FY21-22 FY22-23 FY23-24 Types of Instruments in Government Debt Market A Government Security (G-Sec) in Indian markets implies a tradable debt instrument issued either by the Central Government of India or the State Governments. The Central Government issues both Treasury bills (with maturities of less than one year) and bonds, while the State Governments issue only bonds also known as State Development Loans (SDLs). G-Secs are considered risk-free. At issuance time, each security is assigned a unique ISIN (International Security Identification Number). Over the years, a variety of debt instruments have been introduced by the government to match the diverse risk appetites and investment horizons of the market participants. INSTRUMENTS : GOVERNMENT DEBT MARKET Treasury Bills: Treasury bills or T-bills are short term money market instruments issued by the Government of India at a discount to its face value. These are zero coupon securities issued to be redeemed at par (Rs 100) at maturity. The RBI issues 91,182- and 364- days T-Bills on behalf of Government of India Floating Rate Bonds: FRBs pay interest at a variable coupon rate that is reset at pre-announced intervals. While majorly linked to the 6-month rate i.e. the 182 Day T-Bill rate. FRBs coupons at each semi-annual date are currently determined in various ways: (a) As the average of the implicit cut-off yields of the last three 182 Day T-Bill auctions; (b) Base rate equivalent to weighted average yield of last three 182 Day T-Bills auctions plus a fixed spread State Development Loans: Market borrowings of State Governments / Union Territories through semi-annual coupon paying dated securities are known as State Development Loans (SDLs). These are eligible for SLR and borrowing under the Liquidity Adjustment Facility (LAF) window. In Primary issuance, the Auction Calendar comes out every quarter. STRIPS: STRIPS(Separate Trading of Registered Interest and Principal of Securities) are essentially separate ZCBs created by breaking down the cash flows of a regular coupon paying G-Sec. These can all then be traded separately as independent securities in the secondary market. STRIPS can be created out of all existing fixed coupon SLR eligible G-Secs Sovereign Gold Bond: SGBs are unique instruments linked with gold price. Part of budgeted borrowing, these are issued in tranches and are denominated in units of one gram of gold and multiples thereof. They pay a fixed coupon per annum on the nominal value paid on semi-annual basis and are redeemed at simple average of closing price published by the India Bullion and Jewelers Association Limited of gold (999 purity) of previous 3 business days from the date of repayment Auction Mechanism of G-Sec CCIL NDS-OM : Secondary Market Trading Platform for G-sec and SDL’s  G-sec Valuation in India G-Sec valuation is done using the cubic spline methodology where the curve generation is based on transaction level data pulled from the NDS-OM platform, with the primary input being actual traded prices/yields of “Nodal” securities (a security which is more representative with higher market activity), in absence of which observable and tradable price/yield information from the market or finally in absence of all these, proxy points are used. A nodal point is basically a representative G-Sec for each calendar year tenor (e.g. 2020, 2021, etc.). Chosen at the beginning of each month, these are the most traded G-Sec for each calendar year tenor (minimum 50 trades and ₹500 crore) in the previous month. A new methodology for valuing SDLs on basis of actual/observed market prices and interpolation/extrapolation methods was notified by FBIL on March 26, 2019 and implemented from April 15, 2019. Benchmarks pertaining to the G-Sec market published by FBIL are: FBIL Prices/YTM for G-Secs, including FRBs and IIBs FBIL Prices/YTM for SDLs FBIL Prices/YTM for Special Securities/Uday/Discom bonds FBIL Prices/YTM for STRIPS and ZCYC FBIL Par Yield Curve G-Sec portfolios in India have to be valued as per these prices/yields. The detailedmethodology is published on the FBIL website. Thank You Regulatory aspects of G-Sec  Key Regulatory Guidelines for the Indian G-Sec Market The legal framework to the Indian G-Sec market is provided by RBI’s “The Government Securities Act, 2006” and “The Government Securities Regulations, 2007” with amendments to these notified by RBI from time to time. CCIL is a payment system authorized by RBI under the Payment and Settlement Systems Act, 2007. Prudential norms for various investors are notified by their respective regulators  Reserve Bank of India The Reserve Bank of India is the main regulator for the Money Market. Reserve Bank of India also controls and regulates the G-Secs Market. Apart from its role as a regulator, it has to simultaneously fulfill several other important objectives viz. managing the borrowing program of the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensuring a stable currency environment. RBI controls the issuance of new banking licenses to banks. It controls the manner in which various scheduled banks raise money from depositors. Further, it controls the deployment of money through its policies on CRR, SLR, priority sector lending, export refinancing, guidelines on investment assets etc. Another major area under the control of the RBI is the interest rate policy. Earlier, it used to strictly control interest rates through a directed system of interest rates. Each type of lending activity was supposed to be carried out at a pre-specified interest rate. Over the years RBI has moved slowly towards a regime of market determined controls.  Regulations governing Primary Dealers Primary Dealer System In 1995, the Reserve Bank of India (RBI) introduced the system of Primary Dealers (PDs) in the Government Securities (G-Sec) Market. The objectives of the PD system are to strengthen the infrastructure in G-Sec market, development of underwriting and market making capabilities for G-Sec outside the RBI, improve secondary market trading system and to make PDs an effective conduit for open market operations (OMO). As on June 30, 2014, there are seven standalone PDs and thirteen banks authorized to undertake PD business departmentally. Primary Market Activities PDs are expected to support the primary issues of dated securities of Central Government and State Government, T-Bills and CMBs through underwriting/bidding commitments. The related guidelines are as under: Underwriting of Dated G-Sec Dated securities of State Governments Bidding in Primary auctions of T-Bills/CMBs ‘When-Issued’ transactions in Central G-Sec Submission of client bids in the primary auctions Settlement of primary auctions  Secondary Market activities Market making in G-Sec Turnover ratio Secondary Market Transactions - Short-selling Separate Trading of Registered Interest and Principal of Securities (STRIPS) in G-Sec Sources of funds PDs are permitted to borrow funds from call/notice/term money market, repo (including CBLO) market, Inter-Corporate Deposits, FCNR (B) loans, Commercial Paper and Non-Convertible Debentures. They are also eligible for liquidity support from RBI. Application of Funds PDs are permitted to undertake a set of core and non-core activities. PDs which undertake only the core activities are required to maintain a minimum NOF of Rs.150 crore. PDs which also undertake non-core activities are required to maintain a minimum NOF of Rs.250 crore. The investment in G-Sec should have predominance over the non-core activities in terms of investment pattern. Standalone PDs are required to ensure predominance by maintaining at least 50 per cent of their total financial investments (both long term and short term) in G-Sec at any point of time. Investment in G-Sec will include the PD’s Own Stock, Stock with RBI under Liquidity Support / Intra-day Liquidity (IDL)/ LAF, Stock with market for repo borrowings and GSec pledged with the CCIL.  Norms for Ready Forward transactions PDs are permitted to participate in ready forward (Repo) market both as lenders and borrowers. Portfolio Management Services by PDs PDs may offer Portfolio Management Services (PMS) to their clients under the SEBI scheme of PMS, subject to the following conditions: i. Before undertaking PMS, the PD must have obtained the Certificate of Registration as Portfolio Manager from the SEBI and also a specific approval from the RBI. ii. PMS cannot be offered to any RBI regulated entity. However, advisory services can be provided to them with suitable disclaimers. iii. Where applicable, the clients regulated by any other authority should obtain clearance from the regulatory or any other authority before entering into any PMS arrangement with the PD. iv. PDs are required to comply with the SEBI (Portfolio Managers) Regulations, 1993 and any amendments issued thereto or instructions issued there under.  How to invest in GSec RETAIL INVESTORS REGISTERED WITH NSE TRADING MEMBER ALL RESIDENT INDIVIDUALS Option 1: Through NSE Trading Member Option 2: Through NSE goBID mobile app/web platform Through NSE goBID mobile app/web platform Eligible Investors All eligible investors as permitted by RBI All eligible investors as permitted by RBI Only resident individuals No additional KYC if already done through any of SEBI If existing active client of NSE trading member, no additional If existing active client of NSE trading member, no additional KYC registered intermediary KYC KYC Compliance New investor should complete KYC and register as client with NSE trading member New investor should complete KYC with any SEBI New investor should complete KYC with NSE trading member intermediary Demat Account Mandatory Mandatory Mandatory No additional registration required if already having active Investor Registration One time registration on NSE goBID platform One time registration on NSE goBID platform account with NSE trading member Investor can register directly without selecting trading Investor selects respective trading member at time of registration* member of NSE Registration subject to - Registration subject to - Respective trading member has provided valid investor records to Exchange Valid KYC details of investor available with SEBI New investor registration on NSE goBID Not applicable registered KRA including mobile number, email Successful validation of investor category, demat and bank account with address, investor category depositories Successful validation of demat and bank account with * Available only if trading member is registered (See Point 1 below) on NSE goBID depositories Accept e-undertaking on NSE goBID platform and Undertaking by investor Submit to trading member of NSE in format provided by NSE Accept e-undertaking on NSE goBID and Terms & Conditions Terms & Conditions Submit offline or online through mobile app / web platform Order placement Submit through NSE goBID mobile app / web platform Submit through NSE goBID mobile app / web platform to the trading member Bid Only single bid per security in an auction is permitted Only single bid per security in an auction is permitted Only single bid per security in an auction is permitted Bidding Details Click Here Click Here Click Here Payment and refund of funds through NSE Clearing Ltd. Mandatory to have online Payment and refund of funds through NSE Clearing banking facility Ltd. Mandatory to have online banking facility Payment and refund of funds Payment and refund of funds through trading member Funds accepted only from bank account linked to demat account (see point 2 Funds accepted only from bank account linked to below). demat account (see point 2 below). Credit of Securities Directly in demat account of investor Directly in demat account of investor Directly in demat account of investor Thank You INDIA CORPORATE BONDS MARKETS - Introduction - Trends & Regulatory Environment Need for Corporate Bond Market Can act as a source of stability, during periods of financial stress Reduce reliance on bank financing Reduce the risk of currency and funding mismatches A pre-requisite to provide for investment in superior quality infrastructure Acts as a stable source of finance when the equity market is volatile Helps in the diversification of risks in the system. Corporate Bond Vs Bank Financing Bond financing gives access to large number of lenders Bond financing involves spreading credit risk over a large group of diverse bondholders A well-developed bond market introduces a healthy competition with the banking sector in providing corporate financing. Bond financing lowers funding cost for high quality borrowers as intermediation costs are lower Global market size comparative Source: https://www.visualcapitalist.com/ranked-the-largest-bond-markets-in-the-world/  Trends in Indian Corporate Debt Market For Indian companies, the bond market was the preferred route for fundraising in FY24. Total amount raised through privately placed corporate bonds touched a record high peak of 10.02 lakh crores in FY 2023-24. In a span of 5 years, amount raised through corporate bonds increased from 6.55 lakh crores in FY 2018-19 to 10.02 lakh crores for the first-time last year witnessing a CAGR of approx.~ 9%. Also, a significant increase of approx.~17% from FY 22-23 to FY 23-24 is setting up a platform for outstanding size of corporate bond market to more than double by fiscal 2030. As per CRISIL press release on corporate bond market, outstanding size of bond market may clock an increase from ~Rs 43 lakh crore as of last fiscal to Rs 100-120 lakh crore by fiscal 2030. Growth of Indian corporate bond market in last 10 years is set out in chart below: Corporate Bond Market Issuances (last 10 yrs) 1.200.000 1.002.432 1.000.000 800.000 600.000 477.082 400.000 200.000 - FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 Note: The data above has been taken from Prime database. As per SEBI data, Listed debt private placements for FY 23-24 is 7.37 lakh crores. Bond Market in India and US Indian Bond Market - ($ 2.3 trillion) US Bond Market - $ 50 trillion 1.3% 2% 0.02% 5% 21% 24% 47% Corporate Bonds Dated G-Secs SDLs T-Bills CPs CDs Muni Bonds 6 Source: SEBI,RBI,NSDL,SIFMA India Corporate Bond Market Indian Debt Market Structure Debt Market Non Sovereign Sovereign Sub- Corporat CP’s/ Short term G-Sec T- Bills Sovereign e Bonds market instruments State Government Guaranteed Bonds, Municipal Bonds etc. Market Participants Regulatory Bodies Investors Investors RBI Banks Issuers SEBI Mutual Funds Trustees MCA Insurance Firms Merchant bankers IRDA Pension Funds Rating Agencies NHB Provident Funds  Recent Developments in Indian Bond Market Recent developments which will help boost Indian Corporate Bond Market aiding to liquidity and deepening of bond markets in India:- Increased flow of foreign investments into government securities under the fully accessible route (FAR) due to inclusion of G-Secs in JP Morgan Global Bond Index - Emerging Markets starting June 2024 and Bloomberg Emerging Market (EM) Local Currency Government Index starting Jan 2025 to be phased over 10 months helps in infusion of $24 bn and $3-4bn respectively. This fact was also reflected in reduced budgeted gross govt. borrowing figure of INR 14.13 lakh crores for FY 24-25 significantly lower than the last budgeted figure of INR 15.43 lakh crores. Indian Banks will gravitate towards investing in corporate bonds as new RBI regulations kicked in from 01 st Apr, 24 to include corporate bonds under HTM category based on objective of acquiring the security and the SPPI criteria (Solely payments of principal and interest). The securities classified under HTM category will not be required to be marked to market. Also, the earlier cap of 23% in HTM category has been removed in new regulations which will help in increased demand in Corporate bond markets by bank treasuries. Launch of 33,000 crores Corporate Debt Market Development Fund (backstop facility) which aims to provide liquidity to debt schemes during periods of market stress. As another initiative to deepen corporate bond markets, FM launched in Jul 2023 the LPCC with tri-party repo services & central counterparty services of AMC Repo Clearing Corporation Ltd which will help market makers to access cost effective funding for their inventory, holders of bonds to meet their short-term liquidity needs without having to liquidate their assets and an opportunity for entities with short term surpluses to deploy their funds in a safe and efficient manner. As per SEBI ILNCS regulations, The revised framework effective from 01st Apr, 24 for large corporates to raise not less than 25% of its qualified borrowings by way of issuance of debt securities to be met over a contiguous block of 3 years will help further deepen bond markets. Listed entities having outstanding listed NCDs shall be required to list their subsequent issuance of NCDs at the exchanges, thereby improving liquidity for bonds issued by regular issuers. Source: PIB, RBI & SEBI regulations  Issuances by credit rating in last 5 FYs Issuances by credit rating in last 5 FYs 3.000.000 2.713.946 % of issuances by credit rating in last 5 FYs 2.500.000 0,89 0,73 1,46 10,75 2.000.000 2,44 6,67 1.500.000 7,72 69,34 1.000.000 500.000 420.787 301.992 261.151 AAA AA+ AA AA- A+ A A- Below A- 95.303 57.030 34.847 28.670 - AAA AA+ AA AA- A+ A A- Below A- Source: Prime Database  AAA and AA+ rated issuances tenor-wise in last 5 FYs AAA rated issuances tenor-wise in last 5FYs AA+ rated issuances tenor-wise in last 5 FYs 0.19 3 YEARS & 3 YEARS & 11,17 BELOW BELOW 0,57 11,65 3 TO 6 YEARS 18,38 3 TO 6 YEARS 31% 6 TO 9 YEARS 6 TO 9 YEARS 9 TO 12 YEARS 9 TO 12 YEARS 31,24 12 TO 15 YEARS 12 TO 15 YEARS 43,04 1,26 29,28 ABOVE 15 1,00 ABOVE 15 YEARS YEARS PERPETUAL 17,46 PERPETUAL 2,14 2,19 Source: Prime Database  No of issuances in last 5 FY (Credit rating and Tenor-wise) 3 YEARS & ABOVE 15 PERPETUA Credit Rating BELOW 3 TO 6 YEARS 6 TO 9 YEARS 9 TO 12 YEARS 12 TO 15 YEARS YEARS L Total AAA 3,03,082 11,68,043 58,091 8,47,852 15,412 3,16,229 5,238 27,13,946 AA+ 55,521 88,436 6,619 52,716 3,034 3,810 91,856 3,01,992 AA 82,676 86,668 10,886 60,224 206 219 20,271 2,61,151 AA- 31,364 39,281 8,857 12,918 - 834 2,050 95,303 A+ 21,219 23,585 6,042 5,285 - - 900 57,030 A 16,579 8,758 2,909 682 - 2,636 3,283 34,847 A- 15,027 11,437 507 691 193 681 135 28,670 A1+ 548 - - - - - - 548 A1 - 400 - - - - - 400 A1- 90 - - - - - - 90 BBB+ 4,391 4,579 314 725 - - - 10,009 BBB 4,582 6,317 1,036 1,909 750 - - 14,594 BBB- 15,735 6,737 431 101 - - - 23,004 Source: Prime Database  Secondary Trades in Corporate Bonds (FY 15 till Feb FY 24) Trades in Corporate Bonds 1.600.000 1.400.000 AMOUNT (IN RS. CRORES) 1.200.000 1.000.000 800.000 600.000 400.000 200.000 - FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 Source: SEBI Statistics on Corporate Bonds  No of issuances in last 5 FY (By issuer type) Amount ISSUER TYPE No of issuers % No. of issues % (in Rs. Crs.) % ALL-INDIA FINANCIAL INSTITUTIONS & BANKS/SUBSIDIARIES - PRIVATE SECTOR 21 0.85 342 2.54 544494.4 13.92 ALL-INDIA FINANCIAL INSTITUTIONS & BANKS/SUBSIDIARIES - PUBLIC SECTOR 33 1.34 534 3.96 1275018.63 32.59 STATE FINANCIAL INSTITUTIONS 2 0.08 10 0.07 3459.7 0.09 PUBLIC SECTOR UNDERTAKINGS 26 1.05 173 1.28 396547.13 10.13 STATE LEVEL UNDERTAKINGS 10 0.41 25 0.19 23849.16 0.61 PRIVATE SECTOR - NBFCs / FINANCIAL SERVICES 552 22.38 8796 65.3 923999.28 23.62 PRIVATE SECTOR - MANUFACTURING / SERVICES 1823 73.9 3591 26.66 745300.67 19.05 TOTAL 2467 13471 3912668.97 Source: Prime Database Thank You Mechanism and Regulation of Bond Market Guidelines for primary issuances through EBP platform SEBI ILNCS Regulations Eligible Timelines for issuance and listing of Private placement of NCDs shall be Face Value- made through EBP platform if: participants- securities 1 Lakhs QIB/Non-QIB Category Timeline Issuer in existence for (authorized by issuer) In principle approval Prior to T-2/T-5 < 3yrs, irrespective of issue size Single Issue (inclusive of Bidding announcement On or before T-2/T-5 green shoe) ≥ 50Crs. Day of Bidding/ Issue Date T Issuer in existence for ISIN Allocation On or before T+1 ≥ 3yrs Shelf Issue (with Pay-in/ Settlement On or before T+1/T+2 multiple tranches), Listing On or before T+3 cumulatively ≥ 50Crs. Issuance of PDI, PNCPS (non-equity regulatory instruments), forming a part of Bank/NBFC Subsequent issue where capital, irrespective of aggregate of all issue size previous issues in a F.Y. ≥ 50Crs Source: SEBI ILNCS Regulations, 2021 (amended) OVERVIEW OF PUBLIC ISSUE PROCESS Kick Off Meeting Listing & Trading Due Diligence, Basis of allotment X + 4 Weeks Pre- Issue other regulatory X + 7 Weeks approvals and Post Issue Drafting Finalization of Technical Rejection Filing of DP/DSP with SE & SEBI Issue Closes Receipt of In principle Approval X + 5 Weeks Issue Opens from Stock Exchange Marketing Determination of ROC Filing of Management Road Pre-Marketing Price band P/SP/TP shows Key Intermediaries Key Activities Due Diligence of the Issuer Lead Managers End to end coordination of the process till Listing of Securities Assists in due diligence Legal Counsel Provides legal guidance for the Issue Co-ordination with the Issuer and Bankers regarding collections, reconciliation, refunds etc Registrar Post issue co-ordination, collation & reconciliation of data Assist in process for Listing and Trading Debenture Trustee Responsible for maintenance of adequate security Takes care of interest of investors even after listing of securities Assist the Company and LM on formulation and execution of the Media and PR Strategy Advertising/ PR Agency Organizing the Road Shows Ensure adequate coverage of IPO & positive news flow Collection of funds raised in the IPO Bankers to the Issue Issue provisional and final certificates to aid in the post issue process Issue of refund cheques Bulk printing of the Prospectus Printers Printing of application forms Ensure timely dispatch & distribution of stationery Credit Rating Agency Provide credit rating for the Issue Private Placement - Parties Involved For Rating the Securities Credit Rating Agency Act as Trustee to ensure security of Filing of Security related documents interest of Bond Holders Registrar of Debenture Company Trustee Process the application and credit in Providing Platform for bidding and trading of securities NSE/BSE Issuer R&T Agent DEMAT account Collecting NSDL/CDSL For ISIN Creation Banker For DEMAT Credit Collect the funds on behalf of Issuer Arrangers Act as advisor Assist in mobilizing funds Investors Insurance Companies Mutual Funds Pension Funds Provident funds Banks FPIs  Nature of Corporate Bond market Trades in Government Securities take place over NDS OM platform hosted by CCIL. It is an anonymous, quote-driven order matching system. Some trades take place on NSE as well, but to a very small extent. There is a fair degree of liquidity in G-Secs. The investors are large institutions like Banks, Insurance Companies, Provident Funds, Trusts, Corporate Treasuries, Mutual Funds, and the like. Trades in corporate bonds take place on the voice market. Liquidity in the corporate bond market is relatively lower than the G-Secs market. For a trade, market participants either talk to each other or to an intermediary. Settlement happens mostly on the trade reporting and settlement system of NSE (CBRICS) and BSE (ICDM). Some trades take place on NSE WDM as well, but to a negligible extent. Approx. 98% / 99% of the trades take place on the telephone-driven market. REGULATORY ENVIRONMENT - Corporate Bond Market Key Regulations SEBI Companies Act,2013 ICDR Regulations,2018 ILDS Regulations,2021 Private Placement/Public issue Listing Obligations & Disclosure Debenture provisions Requirements,2015 Deposit provisions Debenture Trustee Regulations,1993 Bonds/NCDs RBI FEMA NCD Directions NBFC Private placement guidelines ECB Regulations HFC issuance of NCD guidelines SEBI (ILDS) Regulations ❖SEBI prescribed the regulatory framework for issue and listing of corporate bonds through SEBI (Issue and Listing of Debt Securities) Regulations, 2008. ❖ILDS prescribed a disclosure based regime for issuers and contained checks and balances for protection of investors. ❖ILDS applicable to public issue of debt securities and private placement of debt securities proposed to be listed on stock exchange.  ILDS – Investor Protection ❖Issuer shall obtain credit rating from at least one credit rating agency and disclose in offer document. ❖Any change in rating shall be promptly disclosed to investors through stock exchanges. ❖Offer document shall contain all material disclosures which are necessary for the subscribers of the debt securities to make an informed investment decision. ❖Summary term sheet shall be provided which shall include information (where relevant) pertaining to the Secured / Unsecured Non Convertible debt securities. ❖Every application form issued by the issuer is accompanied by a copy of the abridged prospectus which shall not contain matters which are extraneous to the contents of the prospectus. ILDS – Investor Protection ❖ Issuer shall appoint one or more debenture trustees in accordance with the provisions of Companies Act, and SEBI (Debenture Trustees) Regulations, 1993. ❖ Obligations of Debenture Trustee: The debenture trustee shall be vested with the requisite powers for protecting the interest including a right to appoint a nominee director on the Board of Issuer. The debenture trustee shall ensure disclosure of all material events on an ongoing basis. The debenture trustees shall supervise creation of security for the debt securities and DRR. ❖ Debenture trustee shall disclose the information to the investors and the general public by issuing a press release in any of the following events: Thank you