Indian Debt Capital Market

November 2011

Disclaimer

The information contained herein is proprietary and the

property of Venator Search Partners and Piper Serica Advisors

Pvt. Ltd. The research on Indian Debt Capital Market is

conducted for Venator Search Partners. The information

contained herein is based on primary and secondary sources

and we do not vouch for its correctness. The recipient should

use its own judgment before using this information.

Structure of Indian Debt MarketRegulators

SEBI, RBI, DCA

Market Segment Issuers Instruments Investors

The Sovereign

Issuer

Central Govt.

State Govt.

GOI dated securities,

Treasury Bills,

State Govt. securities

Index bonds, zero

coupon bonds

RBI

DFIs

The Public

Sector

Govt. Agencies &

Stat. Bodies

Comm. Banks

/DFIs

Govt. Guaranteed

Bonds/ Debentures

Banks

Pension Funds

PSUsPSU Bonds,

Debentures, CP

CD, Debentures,

Bonds

FIIs

Corporates

The Private

Sector

Corporates

Pvt. Banks

Bonds, Debentures,

Commercial Paper

(CP), Floating

Rate Notes FCDs,

PCDs, ZCBs

Bonds, Debentures, CPs

and CDs

Individuals

Provident Funds

Insurance

Companies, Trusts

&Mutual Funds

Indian Debt Capital Market – International

Comparison

22%

34%

48% 49%54%

68%

76%

93%

108%

121%

140%

177%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Chile India UK China Singapore Brazil Germany Malaysia France Spain Italy USA

GD

P (

% )

India's DCM Market as % of GDP

Government Securities Market…

India’s Government Bond Market vs. International Bond Markets

Source: RBI

7%

30% 31% 32% 32%36%

39% 40%

47% 49%51%

80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Chile India Spain China UK Malaysia Singapore Germany USA Brazil France Italy

% o

f G

DP

Public Bond Market Capitalization as % of GDP

Indian Government Bond Markets is not much out of the line with

the rest of the world.

…Government Securities Market

Investor Base in Government Securities

Source: RBI

Commercial banks

38%

Insurance Companies

22%

RBI

12%

Bank - Primary Dealers

9%

Provident Funds

7%

Co-operative Banks

3%

Corporates

3%

FII's

1%

Mutual Funds

1%

Fiancial Institutions

0%

Non-Bank Primary

Dealers

0%Others

4%

Corporate Bond Market…

India’s Corporate Bond Market vs. International Bond Markets

4%

15% 16% 16% 16% 19%

36%

57% 58% 59%

89%

130%

0%

20%

40%

60%

80%

100%

120%

140%

GD

P (

%)

Private Bond Market Capitalization as % of GDP

Source: RBI

…Corporate Bond Market…

Share of Corporate Bonds in Total Debt

13 1312

1112

11

8 8 87

67

5 56

10

15

17

1 12 2

34

0

2

4

6

8

10

12

14

16

18

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

(%)

United States Japan China India

Post Crisis the share of Corporate Debt has been declining in the developed countries like

U.S. and Japan where the economies are being supported by additional government

borrowing. On the other hand, its share in the EMEs of China and India is gradually increasing

as more and more corporates approach the market and the market actually open up.

Source: RBI

…Corporate Bond Market…

Too few public issuances

- Private placement completely dominate the primary segment of the corporate

debt market

- High stamp duty (expensive public issuance process)

- Cumbersome TDS process

Resources raised in Debt Market (Rs. Cr)

YearPublic Issues

Private

PlacementTotal

2007-081603 118485 120088

2008-091500 173281 174781

2009-102500 212636 215136

2010-11 (upto Dec'10)2197 164210 166407

Source: SEBI

…Corporate Bond Market…

Trading dominated by the AAA rated securities, which are perceived to have the least probability of

default

Illiquidity

- No market maker

- Institutional investors typically to hold securities to maturity which results in

lack of exit options and result in NO LIQUIDITY

Share of Top 5 Ratings (%)

2008-09 2009-10 2010-11 2011-12 (upto June'11)

Rating Share Rating Share Rating Share Rating Share

AAA 78.15 AAA 72.06 AAA 63.69 AAA 76.16

AA+ 6.4 AA+ 6.09 AA+ 9.33 AA 4.35

AA 3.76 AAA(SO) 5.93 AA- 5.07 AA+ 3.96

A(so) 1.47 AA 2.72 AAA(so) 4.2 AA- 2.42

A-(so) 0.64 AAA(ind) Fitch 2.17 AA 2.37 AAA(so) 1.99

Unrated Securities 8.25 Unrated Securities 4.12 Unrated Securities 5.43 Unrated Securities 4.17

Source: FIMMDA, NSE, BSE

Key Growth Factors

Widen investor base

- Tap latent investors – growing pension sector

Innovative Product Structuring

IFRS Norms – Similar treatment to loans and bonds

Develop and enhance related derivatives product

- Credit Default Swap , Interest rate derivatives etc.

Reform in Stamp Duty & TDS process

- Standard Stamp duty rate across nation, and that the maximum payable should be capped

- Removal of cumbersome TDS on corporate bonds

…Corporate Bond Market…

…Corporate Bond Market… Less rigid Investment Mandate for Insurance Companies and

Pension Funds

- Controlled and phased relaxation for these institutions

Presence of retail investors in the market

- Essential for deepening of Bond market

Facilitating Liquidity in the market:

Active Market Making

Credible Credit Rating

Degree of Standardization with respect to bond covenants

Recent Developments

The 12th Plan aspires for a planned infrastructure expenditure of around $1 trillion - around

11% of GDP

- Government can only meet 50% funding requirement

- The 50% funding gap is expected to be met by developing Corporate Bond Market (Private

sector)

The Government is mulling tax incentives such as reduction in Securities Transaction Tax (STT)

and Stamp Duty, besides withdrawal of withholding tax, to help companies raise funds at

competitive rates.

Increased FII’s investment limit to invest in infra bonds

Government is set to take measures to improve liquidity to develop a vibrant Corporate bond

market to support growing Infra sector

IIFCL, IDFC & LIC have signed a MOU to undertake take-out financing of infrastructure projects

worth up to Rs. 300 billion

…Corporate Bond Market

Government Bond Market• Government has raised the investment limit for FIIs from US $5bn to US $10bn in government

securities

Corporate Bond Market

• Infrastructure Sector to play an catalyst for innovation and growth in Corporate Bond Market in India

• FIIs can invest $20bn in Indian Corporate Bond market (Non-Infra)

• Government has raised the investment limit for FIIs in long-term infra bonds from additional $5bn to

$25billion

• Government allowed Qualified Foreign Investors (QFIs) to subscribe to mutual fund debt schemes in

infrastructure sector, subject to a ceiling of $3 billion within the existing ceiling of $25 billion.

• $5 billion (lock in period 1 year) is carved out of the remaining $22 billion for FII investments in

Longterm infra bonds

• Remaining $17billion (3 years lock – in period) can be invested in long-term infra bonds which have an

initial maturity of five years or more at the time of issue and residual maturity of three years at the

time of first purchase by FIIs.

Key factors for FIIs to invest in India

Thank You