Title of the Project: Comparison and Analysis of Fixed

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

Institute for Technology and Management

Plot No. 25 / 26, Institutional Area,
Sector – 4, Kharghar, Navi Mumbai
 CERTIFICATE FROM THE FACULTY GUIDE

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.

Signature of Guide : __________________________

Name of Guide : Prof.Krupesh Thakkar

Designation : HOD

Date: 29/01/2019 Place: Kharghar,Navi Mumbai

CONTENTS
Chapter 1. INTRODUCTION
1.1 Introduction of the Sector
1.2 Over-View of the Sector
1.3 Need for the study
1.4 Objective of the study
1.5 Industry Trends
1.6 Regulatory Bodies
1.7 Product
1.8 Participants
1.9 Role and Importance of Capital Market In India
1.10 Future
Chapter 2. LITERATURE REVIEW
2.1 Introduction
2.2 Debt Instrument
2.3 Review
2.4 Conclusion
Chapter 3. RESEARCH METHODOLOGY
3.1 Design
3.2 Objective
3.3 Methodology
3.4 Data Analysis
Chapter 4. Global Debt Market
Chapter 5. Indian Debt Market
Chapter 6. Credit Rating Agencies
Chapter 7. Recommendation and Conclusion

REFERENCES
 Chapter - 1
1.Introduction

1.1 Identification of Sector

Capital Market Sector (Indian Fixed Income Debt Market)

1.2 Overview of the Sector

"Capital Markets" refers to activities that gather funds from some entities and make them
available to other entities needing funds. The core function of such a market is to improve the
efficiency of transactions so that each individual entity doesn't need to do search and analysis,
create legal agreements, and complete funds transfer.
With a population of 1.35 billion, India is expected to overtake China to become the world’s
most populous country by the end of the next decade. Two thirds of the population are of
working age. Although GDP per capita (at around US$ 2,000) is lower than in many
emerging economies, India has one of the fastest growing large economies and GDP is on
course to rise by 7.3% in 2018-19.2 The country has recently been recognized by the World
Bank as one of the most improved in which to do business. The International Monetary Fund
cites as an important factor in India’s continued growth its increasing attractiveness to foreign
investors, which is being achieved through reductions in bureaucracy and tariffs, higher
standards of governance and greater financial sector 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%
The government securities market India’s central bank, the Reserve Bank of India (RBI), is
responsible for issuing almost half of the outstanding INR-denominated debt. Short-term
discount bills account for INR 5.7 trillion (c. USD 80 billion) of this, while longer-term,
fixed-rate government bonds, at INR 56.6 trillion (c. USD 804 billion), constitute by far the
largest market sector.
Reforms in Capital Market of India
The major reforms undertaken in capital market of India includes:-
1. Establishment of SEBI
The Securities and Exchange Board of India (SEBI) was setup in 1988 and was legalized in
1992. The primary function of SEBI is to regulate the activities of the merchant banks, to
control the operations of mutual funds, to work as a promoter of the stock exchange activities
and to act as are regulatory authority of new issue activities of companies. The SEBI was set
up with the fundamental objective, "to protect the interest of investors in securities market
and for matters connected therewith or incidental thereto."
2. Establishment of Creditors Rating Agencies
Three creditors rating agencies viz The Credit Rating Information Services of India Limited
(CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited
(ICRA-1991) and Credit Analysis and Research Limited (CARE) were set up in order to
assess the financial health of different financial institutions and agencies related to the stock
market activities. It is a guide for the investors also in evaluating the risk of their investments.
3. Increasing of Merchant Banking Activities
Many Indian and foreign commercial banks have set up their merchant banking divisions in
the last few years. These divisions provide financial services such as underwriting facilities,
issue organizing, consultancy services, etc. It has proved as a helping hand to factors related
to the capital market.
4. Candid Performance of Indian Economy
In the last few years, Indian economy is growing at a good speed. It has attracted a huge
inflow of Foreign Institutional Investments (FII). The massive entry of FIIs in the Indian
capital market has given good appreciation for the Indian investors in recent times. Similarly
many new companies are emerging on the horizon of the Indian capital market to raise capital
for their expansions.
5. Rising Electronic Transactions
Due to technological development in the last few years, the physical transaction with more
paperwork is reduced. Now paperless transactions are increasing at a rapid rate. It saves
money, time and energy of investors. Thus it has made investing safer and hassle free
encouraging more people to join the capital market.
6. Growing Mutual Fund Industry
The growing of mutual funds in India has certainly helped the capital market to grow. Public
sector banks, foreign banks, financial institutions and joint mutual funds between the Indian
and foreign firms have launched many new funds. A big diversification in terms of schemes,
maturity, etc. has taken place in mutual funds in India. It has given a wide choice for the
common investors to enter the capital market.
7. Growing Stock Exchanges
The numbers of various Stock Exchanges in India are increasing. Initially the BSE was the
main Exchange, but now after the setting up of the NSE and the OTCEI, stock exchanges
have spread across the country. Recently a new Inter-connected Stock Exchange of India has
joined theexisting stock exchanges.
8. Investor's Protection
Under the purview of the SEBI the Central Government of India has set up the Investors
Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors.
Ittries to protect the interest of the small investors from frauds and malpractices in the capital
market.
9. Growth of Derivative Transactions
Since June 2000, the NSE has introduced the derivatives trading in the equities. In
November2001 it also introduced the future and options transactions. These innovative
products have given variety for the investment leading to the expansion of the capital market.
10. Insurance Sector Reforms
Indian insurance sector has also witnessed massive reforms in last few years. The Insurance
Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the
private insurance firms in India. As many insurance companies invest their money in the
capital market, it has expanded.

1.3 Need for the study

"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.

1.4 Objective of the study

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 study the growth and development of Indian fixed income debt market.
• To examine the consistency and growth rate of selected financial parameters of
Ratings, maturity profile, ownership profile the particular debt instruments.
• To analyse return and comparison with different asset class
• To evaluate the financial status and viability of particular debt instruments.

1.5 Industry Trends

Debt market refers to the financial market where investors buy and sell debt securities, mostly
in the form of bonds. These markets are important source of funds, especially in a developing
economy like India. India debt market is one of the largest in Asia. Like all other countries,
debt market in India is also considered a useful substitute to banking channels for finance.

The most distinguishing feature of the debt instruments of Indian debt market is that the
return is fixed. This means, returns are almost risk-free. This fixed return on the bond is often
termed as the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is giving the
seller a loan at a fixed interest rate, which equals to the coupon rate.

(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

Types Issuers Instruments

Government Securities Central Government: 1. Zero coupon bonds
2. Coupon bearing
bonds
State Government: 3. T-Bill
1. Coupon bearing
bonds
 Public sectors bonds Government agencies, 1. Debentures
statutory bodies, public 2. Government
sector undertakings guaranteed bonds
3. Commercial papers
Private sector bonds Corporates: 1. Debentures
2. Commercial paper
3. Fixed floating rate
4. Zero coupon bonds
5. Inter-corporate
deposits
Bank: 1. Certificate of
debentures
2. Debentures
Financial Institutions: 3. Bonds
1. Certificate of
deposits
2. Bonds

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.

1.9 Role and Importance of Capital Market In India:

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:

1. Mobilization Of Savings And Acceleration Of Capital Formation :

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.

3. Promotion Of Industrial Growth :

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.

4. Ready And Continuous Market :

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 :

An important shortage faced by entrepreneurs in developing countries is technical assistance.

By offering advisory services relating to preparation of feasibility reports, identifying growth
potential and training entrepreneurs in project management, the financial intermediaries in
capital market play an important role.

6. Reliable Guide To Performance:

The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.

7. Proper Channelization Of Funds:

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.

8. Provision Of Variety Of Services:

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.

9. Development Of Backward Areas:

Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long term funds are also provided for development projects
in backward and rural areas.

10. Foreign Capital:

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.

11. Easy Liquidity:

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.

SECONDARY MARKET FOR DEBT INSTRUMENTS

The NSE- WDM segment provides the formal trading platform for trading of a wide range of
debt securities. Initially, government securities, treasury bills and bonds issued by public
sector undertakings (PSUs) were made available for trading. This range has been widened to
include non-traditional instruments like, floating rate bonds, zero coupon bonds, index bonds,
commercial papers, certificates of deposit, corporate debentures, state government loans, SLR
and non-SLR bonds issued by financial institutions, units of mutual funds and securitized
debt. The WDM trading system, known as NEAT (National Exchange for Automated
Trading), is a fully automated screen based trading system that enables members across the
country to trade simultaneously with enormous ease and efficiency. The trading system is an
order driven system, which matches best buy and sell orders on a price/time priority.

2.2 Debt Instrument

There are various types of debt instruments available that one can find in Indian 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 design of a research topic is used to explain the type of research

(experimental, survey, correlational, semi-experimental, review) and also its sub-type
(experimental design, research problem, descriptive case-study). There are three main sections
of research design: Data collection, measurement, and analysis.

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:

1. Accurate purpose statement of research design

2. Techniques to be implemented for collecting details for research
3. Method applied for analyzing collected details
4. Type of research methodology
5. Probable objections for research
6. Settings for research study
7. Timeline
8. Measurement of analysis

Research Design Characteristics

There are four key characteristics of research design:

Neutrality: The results projected in research design should be free from bias and neutral.
Understand opinions about the final evaluated scores and conclusion from multiple individuals
and consider those who agree with the derived results.

Reliability: If a research is conducted on a regular basis, the researcher involved expects

similar results to be calculated every time. Research design should indicate how the
research questionscan be formed to ensure the standard of obtained results and this can happen
only when the research design is reliable.

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.

Types 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.

Qualitative Research Design: Qualitative research is implemented in cases where a

relationship between collected data and observation is established on the basis of mathematical
calculations. Theories related to a naturally existing phenomenon can be proved or disproved
using mathematical calculations. Researchers rely on qualitative research design where they
are expected to conclude “why” a particular theory exists along with “what” respondents have
to say about it.

Quantitative Research Design: Quantitative research is implemented in cases where it is

important for a researcher to have statistical conclusions to collect actionable insights. Numbers
provide a better perspective to make important business decisions. Quantitative research design
is important for the growth of any organization because any conclusion drawn on the basis of
numbers and analysis will only prove to be effective for the business

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:

• Already published articles

• Journals
• Websites

3.4 Data Analysis

Statistical tools and techniques help us to analyse the collected data. Collected data can be put
up in excel sheet and can be analysed using different methods.In case of secondary research,
the data collected from secondary research can be analysed using different parameters like:

• 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

$ Trillion Non-Financial Financial

Household Corporates Government Sector Total
Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2
2018 2019 2018 2019 2018 2019 2018 2019 2018 2019
Mature
33.8 34.4 42.4 43.2 50.8 52.1 49.8 49.8 176.8 179.5
Markets
Emerging
11.7 12.9 29.5 31 14.9 16.3 10.7 11.2 66.8 71.4
Markets
Global 45.6 47.2 71.9 74.2 65.6 68.4 60.5 61 243.6 250.9
Source – Institute International Finance Report

Percent of total bond universe

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

Mature 72 72.2 90.9 90.6 109.3 108.2 107.5 108.9

U.S. 74.2 74.9 73.8 73.1 100.5 100.1 77.3 78.7
Euro 57.8 57.5 107.8 108.4 100.8 99.5 122.4 124.3
Japan 55.5 55.2 100.8 98.3 227.9 224.1 151.9 149.4
UK 83.4 83.5 78.6 81.2 105 102.9 174.4 178.7
Emerging 39.5 37.8 93.7 93.9 51.5 49.2 35.1 34.9

EM Asia 49.7 47.3 122.2 122.2 52.7 50 42.5 42.3

China 53.8 50.7 155.3 156.2 52.3 48.2 42.5 41.7
Hong
73.9 71.5 224 231.5 47.1 66.4 132.2 157.8
Kong
India 11.4 11 44.6 44.3 67.5 67.4 4 4.4

Sources: IIF, National Sources

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.

S. Treasury Bills, Bonds, and Notes

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.

Packaged debt securities

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%

Source: National Securities Depository Ltd

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

Source: Refinitiv 2019

The government securities market

India’s central bank, the Reserve Bank of India (RBI), is responsible for issuing almost half
of the outstanding INR-denominated debt. Short-term discount bills account for INR 5.7
trillion (c. USD 80 billion) of this, while longer-term, fixed-rate government bonds, at INR
56.6 trillion (c. USD 804 billion), constitute by far the largest market sector. This part of the
market is tracked by the FTSE SBI Bond Index, which was launched in 2017 as a product of
a partnership formed by FTSE Russell and the State Bank of India. The 60% government-
owned SBI is India’s largest bank with over 18,000 branches throughout the country.9
Restricted to issues with a minimum outstanding face value of INR 50 billion (USD 711
million), the index comprises 70 bonds maturities between one year and a current high of 27
years, and a total value of INR 52.8 trillion (USD 750 billion) as of January 2019. However,
41 smaller fixed-rate bonds with a combined value of INR 6 trillion (USD 8 billion) and a
single inflation-linked bond are not included in the index.
 Source: FTSE Russell

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

The corporate bond market

The next largest section of the rupee-denominated debt market is the corporate bond market,
which has grown substantially in recent years This market is very different from that of
government-issued debt. The corporate bond market consists of over 12,000 bonds, of which
some 9,300 have a maturity above one year and an average amount outstanding of INR 3.7
billion (USD 53 million). In comparison, the FTSE SBI Government Bond Index contains 70
bonds, with an average amount outstanding of just over INR 720 billion (USD 10.3 billion)
per bond. The median issue amount of the corporate bond market is about INR 500 million
(USD 7.1 million). It is dominated by issuers from the financial services industry, which
accounts for close to 75% of the market by value. Moreover, the majority – all but around
400 of the 9,300 – are privately placed.14 Consequently, the prospect of a broad foray into
the Indian corporate bond market has been somewhat unappealing for a foreign investor
given the current make-up and concentration of the corporate bond market. In addition, the
RBI has placed restrictions on foreign holdings of corporate bonds, although as with the
government market, these have relaxed over time. Regulations enacted at the beginning of
May 2018 stated that:
• bonds must have a minimum maturity of one year at purchase;
• bonds held below one-year maturity must make up less than 20% of the corporate bond
portfolio;
• no single security should make up more than 20% of the portfolio;
• investors are not allowed to hold more than 50% of any issue.15 However, these lower
barriers were removed completely by the RBI in September 2018 in a bid to counteract the
effects of several negative factors impacting the Indian economy.

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.

Debt issuance by Indian States

State Outstanding No. of issues Ave size

Maharastra 2587004970 137 18883248

Tamil Nadu 2494557980 173 14419410
West Bengal 2372087250 158 15013210
Uttar Pradesh 2178823200 143 15236526
Andhra Pradesh 1963095080 168 11685090
Gujurat 1709782200 140 12212730
Karnataka 1388687600 173 8027096
Rajasthan 1468662700 86 17077473
Kerala 1274911600 126 10118346
Haryana 1090076552 116 9397212
Punjab 1034860100 178 5813821
Madhya Pradesh 970310900 71 13666351
Telangana 874809500 73 11983692
Bihar 746454200 56 13329539
Jharkhand 346441300 57 6077918
Uttarakhand 315348600 72 4379842
Jammu & Kashmir 339662100 80 4245644
Chhattisgarh 289154000 45 6425644
Assam 289038200 40 7225955
 Orrisa 305699900 36 8491664
Himanchal pradesh 235091000 62 3791790
Goa 124010000 77 1610519
Nagaland 80547300 56 1438345
Pondicherry 64049400 39 1642292
Tripura 57808300 34 1700244
Meghalaya 53854300 62 868618
Manipur 43572200 39 1117236
Sikkim 40510100 29 1396900
Arunachal Pradesh 36346000 23 1580261
Mizoram 22882700 33 693415
Source: Refinitiv
Yield Analysis

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.

Number of Indian issuers by credit rating

Source: S&P Global Market Intelligence as at October 2018.

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

6.1 Brief description of recommendations:

This project assessed the Debt market in India by briefly describing its structure and
functioning, as well as employing to identify factors that influence the demand and supply of
debt product actually influence firms‟ demand and supply of debt product. This study
intended to explain the intensity of debt issues for Indian firms given the conditions of the
economy and also identified the capacity of the firms to raise cheaper funds or to lengthen the
maturity of their bond issues for given financials. Our findings have been in consonance with
previous finding in the literature. The credit rating is the most significant factor to the
investors when they select debt product investment. It helps the investors assess the credit
risk of the bond and thus require an appropriate risk premium. The debt market is affected by
the movement in other security markets. To compete for the limited funds of the institutional
investors, debt markets must be able to provide investors certain facilities to promote higher
investments in bonds. The corporate bond market also faces challenges such as finance sector
skew, poor trading volumes and little appetite for debt rated in the ‘A’ category and below.
While the domestic debt market in India amounts to about 67 per cent of GDP, the size of
India’s corporate bond market is just 16 per cent of GDP

6.2Benefits of the project:

• 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.

6.3Learning from the project

• 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