Professional Documents
Culture Documents
Capstone 182051012
Capstone 182051012
Income In India
Submitted by:
Name of Faculty Guide: Prof. Krupesh Thakkar Name of the Student: Mayank Kushwaha
Designation: Professor3 Roll No.: 182051012
Program: Financial Market
Batch: 2018-20
This is to certify that the Project Work titled Comparison and Analysis of Fixed Income in India is a
bonafide work carried out by Mr Mayank Kushwaha Roll No. 182051012, a student of PGDM program
2018 – 2020 of the Institute for Technology & Management, Kharghar, Navi Mumbai under my
guidance and direction.
Designation : HOD
REFERENCES
Chapter - 1
1.Introduction
"With a meagre 35 per cent and 17 per cent debt market penetration in government securities
(G-secs) and corporate bonds, India is trailing developed economies like the US, where it is
83 per cent and 123 per cent respectively," the release said quoting the study.
Indian debt market also suffers from a skew towards sovereign paper, with G-secs (including
treasury bills and state-development loans) accounting for three-fourths of the pie, while bank
loans form predominant medium of corporate funding.
The study said there is "a marked lack of participation, of both individual and institutional
investors.
While individual investors limit themselves to the most accessible bank fixed deposits,
institutional investors, such as insurance and pension funds are restricted by regulatory
constraints, especially in terms of preference to G-secs over bonds.
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.
(https://thecalminvestor.com/india-market-cap-growth-2018)
1.6 Regulatory Bodies
As debt market trade both government and corporate debt instruments, we have following
two regulators
1. Reserve Bank of India (RBI): The Reserve Bank of India (RBI) is governed by the
Reserve Bank of India Act, 1934. The RBI is responsible for implementing monetary and
credit policies, issuing currency notes, being banker to the government, regulator of the
banking system, manager of foreign exchange, and regulator of payment & settlement
systems while continuously working towards the development of Indian financial markets.
The RBI regulates financial markets and systems through different legislations. It regulates
the foreign exchange markets through the Foreign Exchange Management Act, 1999.It
regulates and also facilitates the government bonds and other securities on behalf of
governments.
2. Securities & Exchange Board of India (SEBI): The Securities and Exchange Board of
India (SEBI) is the regulatory authority established under the SEBI Act 1992 and is the
principal regulator for Stock Exchanges in India. SEBI’s primary functions include protecting
investor interests, promoting and regulating the Indian securities markets. All financial
intermediaries permitted by their respective regulators to participate in the Indian securities
markets are governed by SEBI regulations, whether domestic or foreign. Foreign Portfolio
Investors are required to register with DDPs in order to participate in the Indian securities
market. It regulates corporate bonds, both PSU (Public sector undertaking) and private sector
.
3. National Stock Exchange (NSE) : In the role of a securities market participant, NSE is
required to set out and implement rules and regulations to govern the securities market. These
rules and regulations extend to member registration, securities listing, transaction monitoring,
compliance by members to SEBI / RBI regulations, investor protection etc. NSE has a set of
Rules and Regulations specifically applicable to each of its trading segments. NSE as an entity
regulated by SEBI undergoes regular inspections by them to ensure compliance
1.7 Product
1.8 Participants
The market participants in the debt market are:
1. Central Governments, raising money through bond issuances, to fund budgetary deficits
and other short and long term funding requirements.
2. Reserve Bank of India, as investment banker to the government, raises funds for the
government through bond and t -bill issues, and also participates in the market through open-
market operations, in the course of conduct of monetary policy. The RBI regulates the bank
rates and repo rates and uses these rates as tools of its monetary policy. Changes in these
benchmark rates directly impact debt markets and all participants in the market.
3. Primary dealers, who are market intermediaries appointed by the Reserve Bank of India
who underwrite and make market in government securities, and have access to the call
markets and repo markets for funds.
4. State Governments, municipalities and local bodies, which issue securities in the debt
markets to fund their developmental projects, as well as to finance their budgetary deficits.
5. Public sector units are large issuers of debt securities, for raising funds to meet the long
term and working capital needs. These corporations are also investors in bonds issued in the
debt markets.
6. Corporate treasuries issue short and long term paper to meet the financial requirements of
the corporate sector. They are also investors in debt securities issued in the market.
7. Public sector financial institutions regularly access debt markets with bonds for funding
their financing requirements and working capital needs. They also invest in bonds issued by
other entities in the debt markets.
8. Banks are the largest investors in the debt markets, particularly the treasury bond and bill
markets. They have a statutory requirement to hold a certain percentage of their deposits
(currently the mandatory requirement is 25% of deposits) in approved securities (all
government bonds qualify) to satisfy the statutory liquidity requirements. Banks are very
large participants in the call money and overnight markets. They are arrangers of commercial
paper issues of corporates. They are also active in the inter-bank term markets and repo
markets for their short term funding requirements. Banks also issue CDs and bonds in the
debt markets.
9. Mutual funds have emerged as another important player in the debt markets, owing
primarily to the growing number of bond funds that have mobilised significant amounts from
the investors. Most mutual funds also have specialised bond funds such as gilt funds and
liquid funds. Mutual funds are not permitted to borrow funds, except for very short-term
liquidity requirements. Therefore, they participate in the debt markets pre-dominantly as
investors, and trade on their portfolios quite regularly.
10. Foreign Institutional Investors are permitted to invest in Dated Government Securities
and Treasury Bills within certain specified limits.
11. Provident funds are large investors in the bond markets, as the prudential regulations
governing the deployment of the funds they mobilise, mandate investments pre-dominantly in
treasury and PSU bonds. They are, however, not very active traders in their portfolio, as they
are not permitted to sell their holdings, unless they have a funding requirement that cannot be
met through regular accruals and contributions.
12. Charitable Institutions, Trusts and Societies are also large investors in the debt markets.
They are, however, governed by their rules and byelaws with respect to the kind of bonds
they can buy and the manner in which they can trade on their debt portfolios.
Capital market has a crucial significance to capital formation. For a speedy economic
development adequate capital formation is necessary. The significance of capital market in
economic development is explained below:
In developing countries like India the importance of capital market is self -evident. In this
market, various types of securities helps to mobilize savings from various sectors of population.
The twin features of reasonable return and liquidity in stock exchange are definite incentives
to the people to invest in securities. This accelerates the capital formation in the country.
2. Raising Long - Term Capital :
The existence of a stock exchange enables companies to raise permanent capital. The investors
cannot commit their funds for a permanent period but companies require funds permanently.
The stock exchange resolves this dash of interests by offering an opportunity to investors to
buy or sell their securities, while permanent capital with the company remains unaffected.
The stock exchange is a central market through which resources are transferred to the industrial
sector of the economy. The existence of such an institution encourages people to invest in
productive channels. Thus it stimulates industrial growth and economic development of the
country by mobilizing funds for investment in the corporate securities.
The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes investment in securities more liquid as
compared to other assets.
5. Technical Assistance :
The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.
The prevailing market price of a security and relative yield are the guiding factors for the people
to channelize their funds in a particular company. This ensures effective utilization of funds in
the public interest.
The financial institutions functioning in the capital market provide a variety of services such
as grant of long term and mediumterm loans to entrepreneurs, provision of underwriting
facilities, assistance in promotion of companies, participation in equity capital, giving expert
advice etc.
Capital markets makes possible to generate foreign capital. Indian firms are able to generate
capital funds from overseas markets by way of bonds and other securities. Government has
liberalized Foreign Direct Investment (FDI) in the country. This not only brings in foreign
capital but also foreign technology which is important for economic development of the
country.
With the help of secondary market investors can sell off their holdings and convert them into
liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when
they are in need of funds
1.10 Future:
Capital Markets will look very different in 2020 than they do today. Based on feedback from
clients, many have gloomily predicted a shrinking capital markets landscape, over-regulation
and the fall of traditionally powerful financial centers such as London and New York.
However, we have a different vision for 2020 – one of a New Equilibrium. This New
Equilibrium consists of: government intervention receding (as memories of the financial and
sovereign debt crises fade), traditional financial axis of power further solidifying their
positions at the top, and the world seeking stability and predictability in the context of riskier
and more uncertain geopolitical situations. In addition, much of the landscape where financial
institutions operate will change significantly. This change will come from economic and
government policies, from innovation, operational restructuring, technology, from smarter
and more demanding clients, companies harnessing powerful data, and from continued
growth of the shadow banking system.
Chapter -2
LITERATURE REVIEW
2.1 INTRODUCTION
INDIAN DEBT MARKETS: A PROFILE
Indian debt markets, in the early nineties, were characterised by controls on pricing of assets,
segmentation of markets and barriers to entry, low levels of liquidity, limited number of
players, near lack of transparency, and high transactions cost. Financial reforms have
significantly changed the Indian debt markets for the better. Most debt instruments are now
priced freely on the markets; trading mechanisms have been altered to provide for higher
levels of transparency, higher liquidity, and lower transactions costs; new participants have
entered the markets, broad basing the types of players in the markets; methods of security
issuance, and innovation in the structure of instruments have taken place; and there has been
a significant improvement in the dissemination of market information.
MARKET SEGMENTS
There are three main segments in the debt markets in India, viz., Government Securities,
Public Sector Units (PSU) bonds, and corporate securities. The market for Government
Securities comprises the Centre, State and State-sponsored securities. In the recent past, local
bodies such as municipalities have also begun to tap the debt markets for funds. The PSU
bonds are generally treated as surrogates of sovereign paper, sometimes due to explicit
guarantee and often due to the comfort of public ownership. Some of the PSU bonds are tax
free, while most bonds including government securities are not tax-free. The RBI also issues
tax-free bonds, called the 6.5% RBI relief bonds, which is a popular category of tax-free
bonds in the market. Corporate bond markets comprise of commercial paper and bonds.
These bonds typically are structured to suit the requirements of investors and the issuing
corporate, and include a variety of tailor-made features with respect to interest payments and
redemption. The less dominant fourth segment comprises of short term paper issued by
banks, mostly in the form of certificates of deposit.
The market for government securities is the oldest and most dominant in terms of market
capitalisation, outstanding securities, trading volume and number of participants. It not only
provides resources to the government for meeting its short term and long term needs, but also
sets benchmark for pricing corporate paper of varying maturities and is used by RBI as an
instrument of monetary policy. The instruments in this segment are fixed coupon bonds,
commonly referred to as dated securities, treasury bills, floating rate bonds, zero coupon
bonds and inflation index bonds. Both Central and State government securities comprise this
segment of the debt market.
• Corporate Bond- Corporate Bonds are issued by public sector undertakings and
private corporations for a wide range of tenors normally upto 15 years although some
corporates have also issued perpetual bonds. Compared to government bonds, corporate
bonds generally have a higher risk of default. This risk depends, of course, upon the
particular corporation issuing the bond, the current market conditions, the industry in
which it is operating and the rating of the company. Corporate bond holders are
compensated for this risk by receiving a higher yield than government bonds.
• Certificate of deposit- CDs are negotiable money market instruments issued in demat
form or as a Usance Promissory Notes. CDs issued by banks should have a maturity
of not less than seven days and not more than one year. Financial Institutions are
allowed to issue CDs for a period between 1 year and up to 3 years. CDs normally
give a higher return than Bank term deposit. CDs are rated by approved rating
agencies(e.g. CARE, ICRA, CRISIL, FITCH) which considerably enhances their
tradability in secondary market. CDs are issued in denominations of Rs.1 Lac and in
the multiples of Rs. 1 Lac thereafter
• Commercial Paper- A CP is a short term security (7 days to 365 days) issued by a
corporate entity (other than a bank), at a discount to the face value. One can invest in
CPs starting from a minimum of 5 lacs (face value) and multiples thereof. CPs are
rated by approved rating agencies (e.g. CARE, ICRA, CRISIL, FITCH). CPs
normally give a higher return than fixed deposits & CDs. We deal in investment grade
CPs only. CPs can be traded in the secondary market, depending upon demand. An
element of credit risk is attached to CPs.
• T-Bills- A Treasury Bill (T-Bill) is a short-term debt obligation backed by
the Treasury Department of the U.S. government with a maturity of less than one
year, sold in denominations of $1,000 up to a maximum purchase of $5 million on
non-competitive bids. T-bills have various maturities and are issued at a discount
from par.
2.3 Review
1) Author -Subir Gokarn (1996) in his research paper “Indian Capital Market Reforms,
1992-96 An Assessment” has used a conceptual framework that draws on the theory of
regulation on the one hand and the new political economy on the other to make an
assessment of the wide-ranging reforms that have been initiated in the Indian stock
market over the past four years. Based on the framework the various reforms are
classified into categories reflecting their regulatory effectiveness and/or their impact on
sources of market failure. The researcher arrives at a generally positive assessment of
the reforms but points out three areas of concern: the lack of a fixed term appointment
for the regulators; the persistence of non-competitive conditions in the market; and the
excessive entry of new scripts into the market, Although in recent days, some steps
have been taken to address this problem as well.
2) Author - Anand Pandey (2003) in his thesis entitled “Efficiency of Indian Stock
Market” made an analysis of three popular stock indices to test the efficiency level and
random walk nature of Indian equity market. The study presented the evidence for
inefficient form of Indian market. Autocorrelation analysis and runs test concluded that
the series of stock indices in India are biased random time series.
3) Author - Kumar Bharath & Sampath Sangu (2012) through their research paper
entitled “Corporate Governance and Capital Markets: A Theoretical Framework” has
outline a conceptual framework of the relationship between relationship between
corporate governance and two important determinants of capital market development
namely, a firm’s access to finance, and its financial performance. The framework
assumes that a firm’s corporate governance is simultaneously determined by a group of
related governance components and other firm characteristics. In this study an attempt
is made to know how organisations are fair in corporate governance and capital market.
It was explained that firm-level corporate governance quality can enhance both the
firm’s ability to gain access to finance and its financial performance, which eventually
lead to capital market development.
4) Author - AnsariMohd Shamim(2012) entitled “Indian Capital Market Review: Issues,
Dimensions and Performance Analysis” in which the researcher has ascertained that the
purpose of an efficient capital market is to mobilize funds from those who have it and
route each them to those who can utilize it in the best possible way.
The researcher has also analyzed that India’s financial market is multi-facet but not
balanced. Further it has been stated that the Indian capital market in the recent year has
undergone a lot of innovation in term regulation and mode of operation. The researcher
while concluding has stated that India needs innovative financial instrument in its
domestic capital market. Financial Innovation must aim value addition in existing
technologies, risk management practices, credit system, process, and products. As per
the analysis of the researcher there is positive correlation between finance and
economic growth. Thus, economic development is relatively impossible without quality
innovation in financial market. The researcher has also added that the creation of a deep
and robust debt capital mechanism is the key to financing infrastructure companies by
allowing them to raise long term debt. At last the researcher has concluded with this
fact that emerging economies like India have an advantage of learning from the
mistakes of others.
5) Author – Roy (2000) The Indian capital market, for equity and corporate debt, also
dates back to colonial period with the establishment of the first stock market in India in
Bombay in 1857. During the colonial period, many Indian firms adopted debentures as
a source of financing.
6) Author - Ahuja Juhi (2012) in her research paper entitled “Indian Capital Market: An
Overview with Its Growth” has examined that there has been a paradigm shift in Indian
capital market. The application of many reforms & developments in Indian capital
market has made the Indian capital market comparable with the international capital
markets. Now, the market features a developed regulatory mechanism and a modern
market infrastructure with growing market capitalization, market liquidity, and
mobilization of resources. The emergence of Private Corporate Debt market is also a
good innovation replacing the banking mode of corporate finance. However, the market
has witnessed its worst time with the recent global financial crisis that originated from
the US sub-prime mortgage market and spread over to the entire world as a contagion.
The Capital Market in India delivered a sluggish performance.
7) Author - Shaik Abdul Majeeb Pasha (2013) duringhis research paper “An
Evolutionary Critical approach on Indian Capital Market Developments”. In this paper
the researcher has examined various kinds of changes that have taken place in Indian
Capital Market before and after globalisation, liberalization and privatization (GLP) era
and wants to evaluate critically capital market system as well as Securities and
Exchange Board of India (SEBI) role in India. In fact, it is observed that,
on almost all the operational and systematic risk management parameters, settlement
system, disclosures, accounting standards, the Indian Capital Market is at par with the
global standards with little bit loopholes. While concluding it has been briefly noticed
that a perception is steadily growing about the Indian Capital Market, as a dynamic
market.
2.4 Conclusion
The assessment and review of literature about the financial sector reforms in India reveals
that the reforms have been pursued vigorously and the results of the reform shave brought
about improved efficiency and transparency in the financial sector. There forms also brought
into inter-linkage of financial markets across the globe leading to new product development
and sophisticated risk management tools. The application of many reforms & developments
in Indian capital market has made the Indian capital market comparable with the international
capital markets.
Chapter -3
3. RESEARCH DESIGN
3.1 Design
Research design is defined as a framework of methods and techniques chosen by a researcher
to combine various components of research in a reasonably logical manner so that the research
problem is efficiently handled. It provides insights about “how” to conduct research using a
particular methodology. Every researcher has a list of research questions which need to be
assessed – this can be done with research design.
The sketch of how research should be conducted can be prepared using research design. Hence,
the market research study will be carried out on the basis of research design.
The type of research problem an organization is facing will determine the research design and
not vice-versa. Variables, designated tools to gather information, how will the tools be used to
collect and analyze data and other factors are decided in research design on the basis of a
research technique is decided.
An impactful research design usually creates minimum bias in data and increases trust on the
collected and analyzed research information. Research design which produces the least margin
of error in experimental research can be touted as the best. The essential elements of research
design are:
Validity: There are multiple measuring tools available for research design but valid measuring
tools are those which help a researcher in gauging results according to the objective of research
and nothing else. The questionnaire developed from this research design will be then valid.
Generalization: The outcome of research design should be applicable to a population and not
just a restricted sample. Generalization is one of the key characteristics of research design.
A researcher must have a clear understanding of the various types of research design to select
which type of research design to implement for a study. Research design can be broadly
classified into quantitative and qualitative research design.
3.2 Objective
On the basis of vast review of literature, this study will highlight the actual recession
scenario. As the above studies says that India did very well during recession, it was not
originated from here and not affected as dreadfully as happened in the west. Basically its
roots were outside India, which does not impose a huge negative overall affect on India. The
main objective of the study is to analyze the changing pattern of Indian debt market. The
objectives of the study is to study performance of Govt. and Non-govt. securities.
• To gain insight into the Indian capital market
• To analyse the effect of economic reforms on Indian Capital Market.
• . To provide suggestive measures for future prospectus.
. 3.3 Methodology
Secondary Research: I shall be doing secondary research through the study of:
• Standard Matrix
• Porter’s generic strategies
• BCG Matrix
• SWOT Analysis.
• Review of Literature.
Chapter -4
Global Debt Market
Global debt hit a record high of over $250 trillion in the first half of this year, led by a surge
in borrowings in the U.S. and China. The IIF said the overall number hit $250.9 trillion at the
end of this period and will exceed $255 trillion by the end of 2019.China and the U.S.
accounted for over 60% of the increase. Similarly, EM debt also hit a new record of $71.4
trillion (220% of GDP). With few signs of slowdown in the pace of debt accumulation, we
estimate that global debt will surpass $255 trillion this year.
Source: IIF
Rising debt across the world has been a big concern for investors and has also been flagged
as the next breaking point by a number of economists. Record-low interest rates make it
extremely easy for corporates and sovereigns to borrow more money.
“However, with diminishing scope for further monetary easing in many parts of the world,
countries with high levels of government debt (Italy, Lebanon) — as well as those where
government debt is growing rapidly (Argentina, Brazil, South Africa, and Greece) — may
find it harder to turn to fiscal stimulus.
The International Monetary Fund (IMF) last month escalated its warnings about high levels
of risky corporate debt, which have been exacerbated by persistent low interest rates from
central banks. The IMF warned that almost 40%, or around $19 trillion, of the corporate debt
in major economies such as the U.S., China, Japan, Germany, Britain, France, Italy and Spain
was at risk of default in the event of another global economic downturn.“The big increase in
global debt over the past decade — over $70 trillion — has been driven mainly by
governments and the non-financial corporate sector (each up by some $27 trillion). For
mature markets, the rise has mainly been in general government debt (up $17 trillion to over
$52 trillion). However, for emerging markets the bulk of the rise has been in non-financial
corporate debt (up $20 trillion to over $30 trillion).”
Sectoral Indebtedness
Source: IIF
Global Debt by Sector
Non-Financial
Household Government Financial Sector
Corporates
Q2 Q2
% of GDP Q2 2018 Q2 2019 Q2 2018 Q2 2019 Q2 2018 Q2 2019
2018 2019
Global 59.9 59.4 92 91.8 87.7 86.1 80.4 81.2
Types of G-sec
Corporate Bonds
Corporate entities issue these and promise an annual or a semi-annual fixed return. The return
gets calculated on the face value of the bond, and the rates are dependent on the
creditworthiness of the issuing company.
Municipal Bonds
Issued by the state or municipalities, these bonds are meant to finance projects or meet other
financial obligations. Many of such bonds are exempt from federal income taxes or local and
state taxes.
Backed by the U.S. Government, these instruments are considered to be the safest in the
world. With varying duration, these instruments are backed by the debt paying capacity of the
Government. The interest rates on these instruments are pretty low, considering the extent of
risk associated.
In this case, various individual debts are pooled together but sold as single debt security.
Commercial paper
Corporations to finance their short-term obligations, issue these instruments. They are sold at
a discount, and then it matures to its face value. They are more popular among mutual funds
than retail investors.
Chepter-5
INDIAN DEBT MARKET
Overview of market reforms Market liberalization began in earnest in 1991. The then Finance
Minister Manmohan Singh launched a program of economic reforms which prompted steady
flows into capital markets. Bucking the global trend in the wake of the financial crisis, market
growth was further boosted in 2009-2010 by several international surveys that had ranked
India as one of the most attractive locations for businesses and investors. Since then, the
domestic debt market size has grown at an average rate of more than 34% per year. Together
with equities, this represents an annualized average growth rate of more than 24%
What does this mean today for international investors who may be looking for opportunities
to invest in a rising economy? Choices for international investors to invest in India’s fixed
income market remain limited but are increasing as restrictions fall.
Chart 2 shows the major Indian Rupee (INR) bond markets and their
relative sizes, which foreign investors may consider
Since its inception at the end of December 2011, the size of the FTSE SBI Government Bond
Index has more than doubled, before levelling off through much of 2017 and 2018.
Aggregate limits on foreign ownership of Indian government bonds have been stringent with
foreign investors being allowed to own a maximum of 6% of outstanding government debt.
However, the Reserve Bank of India has been progressively relaxing restrictions.10 Prior to
May 1, 2018, it was forbidden for foreign investors to purchase government securities with a
remaining maturity of less than three years.11 That restriction has now been lifted and the
entire government bill market (previously off-limits) is now accessible. The new rules
stipulate that:
• at most, 20% of a portfolio can be invested in government securities with a maturity of less
than one year;
• no single security can account for more than 30% of a portfolio’s value;
• the 5% withholding tax on coupon payments from government securities has been reduced
to zero until at least March 2019
Source: Refinitiv
Non-corporate credit markets
Bonds issued by states, territories, municipalities, agencies and supranational offer an
alternative to investing in pure sovereign issues, with fewer accessibility hurdles than the
corporate bond market.
The total size of this market is about INR 34 trillion (c. USD 479 billion) comprising some
3,700 securities. 3,300 bonds of these bonds, totaling some INR 30 trillion, are issues with
more than a year to maturity. Of these, the median issue size is INR 6.6 billion (c. USD 94
million). As of January 2019, only five issues have an amount outstanding of INR 100 billion
or more (c. USD 1.4 billion).27 Consequently, given the small size of the securities, it is
unlikely that foreign investors will regard non-corporate credits as a significantly richer and
more practical source of alpha-generation opportunities than corporate bonds. Lastly, Masala
bonds are denominated in Indian rupees but issued outside of the domestic Indian market.
Since their launch in 2013, they have grown in popularity, so much so that the SEBI
temporarily suspended their issuance by domestic issuers in 2017 as foreign holdings of INR
debt had exceeded 92% of their threshold of INR 2.4 trillion.28 This restriction has now been
lifted in further efforts to strengthen the currency.
Source: Investing.com
Source: Investing.com
Chapter 5: Credit Rating Agencies
The 1990s saw the emergence of a number of rating agencies in the Indian market. These
agencies appraise the performance of issuers of debt instruments like bonds or fixed deposits.
The rating of an instrument depends on parameters like business risk, market position,
operating efficiency, adequacy of cash flows, financial risk, financial flexibility, and
management and industry environment. The objective and utility of this exercise is two-fold.
From the point of view of the issuer, by assigning a particular grade to an instrument, the
rating agencies enable the issuer to get the best price. Since all financial markets are based on
the principle of risk/reward, the less risky the profile of the issuer of a debt security, the lower
the price at which it can be issued. Thus, for the issuer, a favourable rating can reduce the
cost of borrowed capital.
From the viewpoint of the investor, the grade assigned by the rating agencies depends on the
capacity of the issuer to service the debt. It is based on the past performance as well as an
analysis of the expected cash flows of a company, when viewed on the industry parameters
and performance of the company. Hence, the investor can judge for himself whether he wants
to place his savings in a "safe" instrument and get a lower return or he wants to take a risk
and get a higher return. The 1990s saw an increase in activity in the primary debt market.
Under the SEBI guidelines all issuers of debt have to get the instruments rated. They also
have to prominently display the ratings in all that marketing literature and advertisements.
The rating agencies have thus become an important part of the institutional framework of the
Indian securities market.
Default and rating agencies During 2018, the INR has fallen dramatically as a result of a
stronger US dollar and fears of the knock-on effect of higher oil prices on the economy. India
imports 80% of its oil, and domestic taxes are high at almost 100% on petrol and 60-70% on
diesel. In the year to the start of October, the rupee fell by almost 14% against the dollar,
while India’s Real Effective Exchange Rate, as published by the RBI, fell by 8.7% in the year
to the end of September.
There was further turbulence in financial markets in September 2018 triggered by the default
of the Infrastructure Lending & Financial Services group (IL&FS), one of India’s largest
infrastructure financing and operation conglomerates. And all the above occurred against a
backdrop of generally nervous emerging markets due to fears of contagion from upheavals in
Turkey and Argentina. The collapse of IL&FS has not reflected well on some of India’s
domestic credit rating agencies. There are currently six agencies registered with the
country’s financial regulator SEBI (the Securities and Exchange Board of India). These are
CRISIL, ICRA, CARE, India Ratings and Research, Brickwork Ratings and SMERA.
CRISIL is majority-owned by Standard & Poor’s, ICRA by Moody’s, while India Ratings is
a wholly- owned subsidiary of Fitch Group. CARE and Brickwork are independent agencies,
as is SMERA, which focuses exclusively on rating micro, small and medium-sized
enterprises. Despite a sharply increased debt burden IL&FS was rated as AAA by CARE,
ICRA and India Ratings at least until August 2018.
Concerns over the state of the country’s banks and the extent of their nonperforming loans
led India’s Finance Minister to announce in his 2018 February Union Budget Speech that
greater use should be made of the domestic bond market by firms seeking capital. As a result,
SEBI has asked listed companies with outstanding borrowings of over INR 1 billion and a
domestic rating of AA or above to raise a minimum of 25% of their borrowing needs after
April 2019 via the corporate bond market. According to the rating agency CRISIL, this could
amount to INR 400 - 500 billion (about USD 5.5 - 7 billion) of additional corporate bond
issuance over the next five years. Even prior to this announcement there was a burgeoning
trend of firms preferring to raise capital through bond issuance rather than bank loans.
Issuance has grown from just INR 15 million in 2001 to almost INR 21 billion in the first
nine months of 2018.
The long-term sovereign rating of India is Baa2/BBB-/BBB- according to Moody’s, Standard
& Poor’s and Fitch respectively. The rating has been remarkably stable in recent years.
Moody’s upgrade of India from Baa3 to Baa2 in November 2017 was the first change from
any of the three agencies since 2007. Given this “ceiling” it is not surprising that there are
10very few primarily Indian corporations which have a higher rating. Of the 27 firms rated by
Standard & Poor’s, only Tata Consultancy Services, Infosys, Wipro and Reliance Industries
have ratings above that of India. Apart from Reliance, none of these has yet raised capital
through the domestic bond market.
In a sign that non-corporate entities may also be looking towards raising more funds through
debt markets, Kerala has become the first of India’s twenty-nine states to be publicly rated,
being assigned a BB rating by Standard & Poor’s in September 2018
Chapter 6: Recommendation and Conclusion
• The study has helped in understanding the importance of efficiency and effectiveness
of debt market in india.
• The study has also helped us in understanding the importance of various parameters
required to determine the overall risk in debt market products.
• The study enlightened us with the role and importance of credit rating agency.
• The study has helped in understanding the importance of efficiency and
effectiveness of corporate debt
• This study has helped us understand the relation between global debt market and
Indian debt market.
• There is a relationship between the global debt market and Indian debt market.
• There is a significant role of credit rating agency management in the issuance of
debt product.
6.4Limitations
• The study is limited to the fundamentals. No statistical tool is used to arrive at the
results.
Conclusion
Corporate Bonds act as a good source to raise long term funds with lower borrowing cost as
compared to many Bank Loans. In India, Corporate Bonds market is at a growing stage and
measures are being taken by the regulatory bodies to boost the growth of Corporate Bonds
market in India. Necessary Amendment in the rules and regulations are being taken by
various legal bodies. To increase the retail investors in Corporate Bonds, necessary awareness
has to be taken by the market respectively.
References
1. www.investopedia.com
2. https://thecalminvestor.com/india-market-cap-growth-2018
3. https://ssmengg.edu.in
4. https://ugcportal.com/
5. https://en.wikipedia.org
6. www.ibef.org
7. www.pwc.com
8. Investing.com