Indian Debt Markets

NEERAJ GUPTA

Indian Debt Market

The

Indian debt market is composed of

money markets, short term debt and long
term government bonds and corporate
bonds.
However, the Central government bonds are
predominant and they form most liquid component
of the bond market.
In 2003, the National Stock Exchange (NSE)
introduced Interest Rate Derivatives.

The

components of debt market

Money markets
Short term instruments

Long term Instruments

NEERAJ GUPTA

Role of Debt in Indian

Economy
Efficient

mobilization and
allocation of resources in the
economy
Financing the development
activities of the Government
Transmitting signals for
implementation of the monetary
policy
Facilitating liquidity management
in tune with overall short term
NEERAJ GUPTA

Why should one invest in

fixed income securities?
Fixed

Income securities offer a predictable

stream of payments by way of interest and
repayment of principal at the maturity of
the instrument. The debt securities are
issued by the eligible entities against the
moneys borrowed by them from the
investors in these instruments.
Therefore, most debt securities carry a
fixed charge on the assets of the entity and
generally enjoy a reasonable degree of
safety by way of the security of the fixed
and/or movable assets of the company
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 The

investors benefit by investing in fixed income securities

as they preserve and increase their invested capital and also
ensure the receipt of regular interest income.

The

investors can even neutralize the default risk on their

investments by investing in Govt. securities, which are
normally referred to as risk-free investments due to the
sovereign guarantee on these instruments.

The

prices of Debt securities display a lower average

volatility as compared to the prices of other financial
securities and ensure the greater safety of accompanying
investments.

Debt

securities enable wide-based and efficient portfolio

diversification and thus assist in portfolio risk-mitigation.
NEERAJ GUPTA

Debt Markets in India

In most of the countries, the debt market is more popular than the
equity market. This is due to the sophisticated bond instruments
that have return-reaping assets as their underlying.
In the US, the corporate bonds (like mortgage bonds) became popular in
the 1980s.
However, in India, equity markets are more popular than the debt
markets due to the dominance of the government securities in the debt
markets.
Moreover, the government used to borrow at a pre-announced coupon
rate targeting a captive group of investors, such as banks.
This, coupled with the automatic monetization of fiscal deficit which
existed, prevented the emergence of a deep and vibrant government
securities market.
This is surprising considering the fact that India has a strong debt preference
among households for their financial investment portfolio.

Since the early 90s, Indian firms have become flexible in choosing
the their capital structure optimally by virtue of significant
structural changes in the Indian Capital Market.
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Size Of Bond And Stock Markets World Over

NEERAJ GUPTA

The Structure of Indian Debt Market

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Participants and Instruments In Debt

Markets

NEERAJ GUPTA

Central Governments,raising money through bond issuances, to

fund budgetary deficits and other short and long term funding
requirements.

Reserve Bank of India,as investment banker to the

government, raises funds for the government through bond and tbill issues, and also participates in the market through open-market
operations.

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.

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.

Public Sector Unitsare large issuers

debt securities, for
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10

Public Sector Financial Institutionsregularly 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.

Banksare 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 24% of deposits) in
approved securities

Mutual Fundshave emerged as another important player in

the debt markets, owing primarily to the growing number of bond
funds that have mobilized significant amounts from the investors.

Foreign Institutional InvestorsFIIs can invest in

Government Securities upto US $ 30 billion and in Corporate Debt
up to US $ 25 billion.

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11

Provident

Fundsare 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.

Corporatetreasuries 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 debt market.

Charitable Institutions, Trusts and Societiesare 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.
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12

The

Debt Markets in India and all around the world

are dominated by Government securities, which
account for between 50 - 75% of the trading
volumes and the market capitalization in all markets.
Government securities (G-Secs) account for 70 75% of the outstanding value of issued securities
and 90-95% of the trading volumes in the Indian
Debt Markets. State Government securities &
Treasury Bills account for around 3-4 % of the daily
trading volumes.
The trading activity in the G-Sec. Market is also very
concentrated currently (in terms of liquidity of the
outstanding G-Secs.) with the top 10 liquid securities
accounting for around 70% of the daily volumes.
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13

Regulators in Debt Market

The

issue and trading of fixed

income securities by each of
these entities are regulated by
differentbodies in India. For eg:
Government securities and issues
by Banks, Institutions are
regulated by the RBI.
The issue of non-government
securities comprising basically
issues of Corporate Debt is
regulated by SEBI.
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Government Securities

Government securities(G-secs) are sovereign securities

which are issued by the Reserve Bank of India on behalf of
Government of India, to aid the Central Government's
market borrowing programme.

The term Government Securities includes:

Central Government Securities.
State Government Securities
Treasury bills
The Central Government borrows funds to finance its 'fiscal
deficit'.
The market borrowing of the Central Government is raised
through the issue of dated securities and 364 days treasury bills
either by auction or by floatation of loans.

In addition to the above, treasury bills of 91 days are issued

for managing the temporary cash mismatches of the
Government.
These do not form part of the borrowing programme of the
Central Government.
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15

Types of Government
Securities

Dated Securities are fixed maturity and fixed coupon

securities usually carrying semi-annual coupon.
These are called dated securities because these are
identified by their date of maturity and the coupon,
e.g. 11.03% GOI 2012 is a Central Government security
maturing in 2012, which carries a coupon of 11.03%
payable half yearly.

Zero Coupon bonds are bonds issued at discount to

face value and redeemed at par.
These were issued first on January 19, 1994 and were
followed by two subsequent issues in 1994-95 and 199596 respectively

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Types Of Govt Securities -Contd

Partly Paid Stock is stock where payment of principal

amount is made in installments over a given time frame.
It meets the needs of investors with regular flow of funds and the
need of Government when it does not need funds immediately.
The first issue of such stock of eight year maturity was made on
November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a
few more times thereafter.

Floating Rate Bonds are bonds with variable interest rate

with a fixed percentage over a benchmark rate.
There may be a cap and a floor rate attached thereby fixing a
maximum and minimum interest rate payable on it.
Floating rate bonds of four year maturity were first issued on
September 29, 1995, followed by another issue on December 5,
1995.
Recently RBI issued a floating rate bond, the coupon of which is
benchmarked against average yield on 364 Days Treasury Bills
for last six months..
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17

Types Of Govt Securities -Contd

Bonds with Call/Put Option:

First time in the history of Government Securities market RBI
issued a bond with call and put option this year (2002)
This bond is due for redemption in 2012 and carries a coupon of
6.72%.
However the bond has call and put option after five years i.e. in
year 2007.
It means that holder of bond can sell back (put option) bond to
Government in 2007 or
Government can buy back (call option) bond from holder in 2007.
This bond has been priced in line with 5 year bonds.

Capital indexed Bonds are bonds where interest rate is a

fixed percentage over the wholesale price index.
These provide investors with an effective hedge against inflation.
These bonds were floated on December 29, 1997 on tap basis.
They were of five year maturity with a coupon rate of 6 per cent
over the wholesale price index.
The principal redemption is linked to the Wholesale Price Index.
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Corporate Bonds

Corporate Bonds are issued by public sector undertakings

and private corporations

The tenor ranges upto 15 years.

Companies like Reliance 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, its rating, the current market conditions
and the sector in which the Company is operating.

Corporate bond holders are compensated for this risk by

receiving a higher yield than government bonds.
Bond with embedded call option that allows the issuer to redeem the
debt before its maturity date, some carry a put-option for the benefit of
the investors.
Convertible bonds, allow investors to convert the bond into equity.

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19

Indian Corporate Bond

Market
Corporate

bond market in India remains

minuscule at 3.2 per cent of gross domestic
product compared with about 108 per cent
for the equity market,
Report released by the Asian Development Bank
last

Indian

bond market is inactive due to

crowding out by the government, which borrows a

great deal to fund its growing fiscal deficit.
lack of buying interest,
poor transparency
Illiquidity
absence of pricing of spreads against the
benchmark yield curve
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Primary Market

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Secondary Market

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Security Wise Distribution

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Participant Wise

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25

Money Market
Call / Notice Money

It is an important segment of the Indian money market. In this

market, banks and primary dealers borrow and lend funds to each
other on unsecured basis.
If the period is more than 1 day and up to 14 days it is called
notice money.
Money lent for 15 days to 1 year is called term money.
No brokers. Settlement is done between the participants through
the current accounts maintained with the RBI.
In general, the call money rate, referred to as the overnight
MIBOR.

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26

Repo

Repurchase agreements are contracts for the sale and future

repurchase of a financial asset, most often sovereign securities.
On the termination date, the seller repurchases the asset at the
price agreed at inception of the repo.
The difference between the sale and repurchase prices represents
interest for the use of the funds.
A repo is essentially a short term interest bearing loan
against collateral.
A repo transaction for the borrower is a reverse repo
transaction for the lender.

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27

Collateralized Borrowing and Lending

Obligation (CBLO)

As an alternative to the call money market, CCIL has developed

CBLO, a money market instrument recognized by RBI.

An instrument issued at a discount and in electronic book entry

form, for initial maturities ranging from one day to one year.

CBLO rates are generally comparable to market repo rates, both

being secured transactions.

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28

Treasury Bills

Promissory notes of the central government and therefore qualify

as being free of credit risks.

Issued to meet short term funding requirements of the

government account with Reserve Bank.

Sale is by auction. Any individual, corporate, bank, primary dealer

or other entity is free to buy T-Bill.

Denominations of 91, 182 and 364 days.

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29

Commercial Paper (CP)

Promissory notes issued by the corporate sector for raising short

term funds.

Sold at a discount to face value.

Maturity can range between a minimum of 7 days and a maximum

of 1 year.

CPs are required to be rated and the minimum rating eligibility is

P2.

Every CP issue has an Issuing and Paying Agent (IPA), which has to
be a scheduled bank.

Stamp duty is currently payable on CP issues, depending on the

maturity and who the initial buyer is.
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Certificate of Deposit (CD)

Similar to CPs except that the issuer is a bank.

Minimum amount of a CD can be Rs. 1 lakh and maturity between

7 days and 1 year.

Financial Institutions can issue CDs only for maturities between 1

and 3 years.

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31

Types of Securities
Treasury

Bills: Treasury bills (T-bills) are money market

instruments, i.e., short-term debt instruments issued by the
Government of India, and are issued in three tenors91 days, 182
days, and 364 days. The T-bills are zero coupon securities and pay
no interest. They are issued at a discount and are redeemed at
face value on maturity.

Cash Management Bills: Cash management bills (CMBs)3 have

the generic characteristics of T-bills but are issued for a maturity
period less than 91 days. Like the T-bills, they are also issued at a
discount, and are redeemed at face value on maturity. The tenure,
notifi ed amount, and date of issue of the CMBs depend on the
temporary
cash
requirement
of
the
government.
The
announcement of their auction is made by the RBI through a Press
Release that would be issued one day prior to the date of auction.
The settlement of the auction is on a T+1 basis.

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32

Dated

Government Securities: Dated government

securities are long-term securities that carry a fi xed or fl
oating coupon (interest rate), which is paid on the face value,
payable at fi xed time periods (usually half-yearly). The tenor
of dated securities can be up to 30 years. State Development
Loans: State governments also raise loans from the market.

State

Development Loans (SDLs) are dated securities

issued through an auction similar to the auctions conducted
for the dated securities issued by the central government.
Interest is serviced at half-yearly intervals, and the principal is
repaid on the maturity date. Like the dated securities issued
by the central government, the SDLs issued by the state
governments qualify for SLR. They are also eligible as
collaterals for borrowing through market repo as well as
borrowing by eligible entities from the RBI under the Liquidity
Adjustment Facility (LAF).
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Types of Dated Government Securities

Fixed

Rate Bonds: These are bonds on which

the coupon rate is fi xed for the entire life of the
bond. Most government bonds are issued as fi
xed rate bonds.

Floating Rate Bonds: Floating rate bonds are

securities that do not have a fi xed coupon rate.
The coupon is re-set at pre-announced intervals
(say, every 6 months, or 1 year) by adding a
spread over a base rate.
In the case of most fl oating rate bonds issued by
the Government of India so far, the base rate is
the weighted average cut-off yield of the last
three 364-day Treasury Bill auctions preceding
the coupon re-set date, NEERAJ
andGUPTA
the spread is34


Zero

Coupon Bonds: Zero coupon bonds are bonds with no coupon

payments. Like T-Bills, they are issued at a discount to the face value.
The Government of India issued such securities in the 90s; it has not
issued zero coupon bonds after that.

Capital

Indexed Bonds: These are bonds, the principal of which is

linked to an accepted index of infl ation with a view to protecting the
holder from infl ation. Capital indexed bonds, with the principal
hedged against infl ation, were fi rst issued in December 1997. These
bonds matured in 2002. The government is currently working on a
fresh issuance of Infl ation Indexed Bonds wherein the payment of
both the coupon as well as the principal on the bonds would be linked
to an Infl ation Index (Wholesale Price Index). In the proposed
structure, the principal will be indexed and the coupon will be
calculated on the indexed principal. In order to provide the holders
protection against actual infl ation, the fi nal WPI will be used for
indexation.
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35

Bonds

with Call/Put Options:

Bonds can also be issued with
features of optionality, wherein
the issuer can have the option to
buy back (call option) or the
investor can have the option to
sell the bond (put option) to the
issuer during the currency of the
bond.
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Special

Securities:

In addition to T-Bills and dated securities issued by the

Government of India under the market borrowing program,
the government also issues special securities, from time to
time, to entities such as oil marketing companies, fertilizer
companies, the Food Corporation of India, and so on as
compensation to these companies in lieu of cash subsidies.
These securities are usually long-dated securities carrying
a coupon with a spread of about 2025 basis points over
the yield of the dated securities of comparable maturity.
These securities are, however, not eligible SLR securities,
but are eligible as collateral for market repo transactions.
The benefi ciary oil marketing companies may divest these
securities in the secondary market to banks, insurance
companies, primary dealers, etc., for raising cash.

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Separate Trading of Registered

Interest and Principal of Securities
(STRIPS)

Steps are being taken to introduce new types of instruments such

as the STRIPS (Separate Trading of Registered Interest and Principal
of Securities). Accordingly, guidelines for the stripping and the
reconstitution of government securities have been issued. The
STRIPS are instruments in which each cash fl ow of the fi xed
coupon security is converted into a separate tradable zero coupon
bond and traded.

These cash fl ows are traded separately as independent securities

in the secondary market. The STRIPS in government securities will
ensure the availability of sovereign zero coupon bonds, which will
facilitate the development of a market-determined zero coupon
yield curve (ZCYC).

The STRIPS will also provide institutional investors with an

additional instrument for their asset-liability management. Further,
as the STRIPS have zero reinvestment risk (being zero coupon
bonds), they can be attractive to retail/non-institutional investors.

The process of stripping/reconstituting government securities is

carried out at the RBI, the Public Debt Offi
ceGUPTA
(PDO) in the PDO-NDS38
NEERAJ

All dated government securities, other than

floating rate bonds, having coupon payment dates
on January 2 and July 2 (irrespective of the year of
maturity) are eligible for stripping/ reconstitution.

The

eligible government securities are held in the

Subsidiary General Ledger (SGL)/ Constituent
Subsidiary General Ledger (CSGL) accounts
maintained at the PDO, RBI, Mumbai. Physical
securities
are
not
eligible
for
stripping/reconstitution. The minimum amount of
securities that needs to be submitted for
stripping/reconstitution will be ` 1 crore (face
value) and multiples thereof.
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Issuance of Government Securities

Government

securities are issued through auctions

conducted by the RBI. The auctions are conducted on
an electronic platform called the NDSAuction platform.
Commercial banks, scheduled urban co-operative
banks, primary dealers, insurance companies, and
provident funds, who maintain a funds account (current
account) and securities account (SGL account) with the
RBI are members of this electronic platform.
All the members of the PDO-NDS can place their bids
in the auction through this electronic platform. All nonNDS members, including non-scheduled urban cooperative banks, can participate in the primary auction
through scheduled commercial banks or primary
dealers.

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40

 For

this purpose, the urban co-operative banks need to open a

securities account with a bank / primary dealer; such an account
is called a Gilt Account.
A Gilt Account is a dematerialized account maintained by a
scheduled commercial bank or primary dealer for its constituent
(e.g., a non-scheduled urban co-operative bank).
The RBI, in consultation with the Government of India, issues an
indicative half-yearly auction calendar, which contains
information about the amount of borrowing, the tenor of security,
and the likely period during which auctions will be held.
A Notifi cation and a Press Communique giving the exact details
of the securities, including the name, amount, type of issue, and
the procedure of auction are issued by the Government of India
about a week prior to the actual date of auction. The RBI places
the notifi cation and a Press Release on its website
(www.rbi.org.in), and also issues an advertisement in leading
English and Hindi newspapers.
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Auctions
Yield Based
Auction

Price Based
Auction

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42

Different types of auctions used for issue of

securities

Prior to the introduction of auctions as the method of

issuance, the interest rates were administratively fi
xed by the government. With the introduction of
auctions, the rate of interest (coupon rate) gets fi xed
through a market-based price discovery process. An
auction may be either yield-based or price-based.
Yield-Based Auction:
A yield-based auction is generally conducted when a
new government security is issued. Investors bid in
yield terms up to two decimal places (for example,
8.19 percent, 8.20 percent, and so on). The bids are
arranged in ascending order, and the cut-off yield is
arrived at the yield corresponding to the notifi ed
amount of the auction. The cut-off yield is taken as
the coupon rate for the security. Successful bidders
are those who have bid at or below the cut-off yield.
NEERAJ GUPTA
Bids that are higher than the cut-off
yield are rejected43

Price-Based Auction:
A price-based auction is conducted when the Government of
India re-issues securities issued earlier. The bidders quote in
terms of price per ` 100 of the face value of the security
(e.g., ` 102.00, ` 101.00, ` 100.00, ` 99.00, etc. per ` 100).
The bids are arranged in descending order, and the
successful bidders are those who have bid at or above the
cut-off price. Bids that are below the cut-off price are
rejected.
Multiple Price-Based: In a Uniform Price auction, all the
successful bidders are required to pay for the allotted
quantity of securities at the same rate, i.e., at the auction
cut-off rate, irrespective of the rate quoted by them. On the
other hand, in a Multiple Price auction, the successful bidders
are required to pay for the allotted quantity of securities at
the respective price/yield at which they have bid.

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Holding of Government
Securities
Holding

Physical Form

SGL A/C

Demat Form

GILT A/C

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Holding of Government Securities

The

Public Debt Office (PDO) of the Reserve Bank of India,

Mumbai acts as the registry and central depository for the
government securities. Government securities may be held by
investors either as physical stock or in dematerialized form.
From May 20, 2002, it is mandatory for all the RBI regulated
entities to hold and transact in government securities only in
dematerialized (SGL) form. Accordingly, the UCBs are required
to hold all government securities in demat form.
Physical form: Government securities may be held in the
form of stock certifi cates. A stock certifi cate is registered in
the books of the PDO. The ownership of stock certifi cates
cannot be transferred by way of endorsement and delivery.
They are transferred by executing a transfer form as the
ownership and transfer details are recorded in the books of the
PDO. The transfer of a stock certifi cate is fi nal and valid only
when the same is registered in the books of the PDO

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46

Demat

form:
Holding government securities in the
dematerialized or scripless form is the
safest and the most convenient
alternative, as it eliminates the
problems relating to custody, such as
the loss of securities. Besides, transfers
and servicing are electronic and hassle
free. The holders can maintain their
securities in dematerialized form in one
of two ways:
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47

SGL Account: The RBI offers a

Subsidiary General Ledger (SGL)
account facility to select entities,
who can maintain their securities
in SGL accounts maintained with
the PDO of the RBI.

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48

Gilt Account: As the eligibility to open and maintain an SGL account

with the RBI is restricted, an investor has the option of opening a Gilt
Account with a bank or a primary dealer that is eligible to open a
Constituents Subsidiary General Ledger Account (CSGL) with the RBI.
Under this arrangement, the bank or the primary dealer, as a
custodian of the Gilt Account holders, would maintain the holdings of
its constituents in a CSGL account (which is also known as an SGL II
account) with the RBI.
The servicing of the securities held in the Gilt Accounts is done
electronically, facilitating hassle free trading and maintenance of the
securities. The receipt of maturity proceeds and periodic interest is
also faster, as the proceeds are credited to the current account of the
custodian bank/PD with the RBI, and the custodian (CSGL account
holder) immediately passes on the credit to the Gilt Account Holders
(GAH).
Investors also have the option of holding government securities in a
dematerialized account with a depository (NSDL, CDSL, etc.). This
facilitates the trading of government securities on the stock exchanges

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Trading of Government
Securities
OTC

Trading

NDS

NDS-OM

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Trading in Government securities

There

is an active secondary
market in government securities.
The securities can be bought/sold
in the secondary market
(i) over the counter (OTC),
(ii) through the Negotiated
Dealing System (NDS), or
(iii) through the Negotiated
Dealing System-Order Matching
(NDS-OM).
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Over the Counter/Telephone Market

In this market, a participant who wants to buy or sell a
government security may contact a bank/ primary dealer/fi
nancial institution either directly or through a broker
registered with SEBI, and negotiate for a certain amount of
a particular security at a certain price.
Such negotiations are usually done over the telephone, and
a deal may be struck if both the parties agree on the
amount and rate. In the case of a buyer, such as an urban
co-operative bank wishing to buy a security, the banks
dealer (who is authorized by the bank to undertake
transactions in government securities) may get in touch
with other market participants over the telephone and
obtain quotes. All trades undertaken in the OTC market are
reported on the secondary market module of the Negotiated
Dealing System (NDS).
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Negotiated Dealing System

The Negotiated Dealing System (NDS) for electronic
dealing and reporting of transactions in government
securities was introduced in February 2002. It allows the
members to electronically submit bids or applications for
the primary issuance of government securities when
auctions are conducted.
The NDS also provides an interface to the Securities
Settlement System (SSS) of the PDO of the RBI, Mumbai,
thereby facilitating the settlement of transactions in
government securities (both outright and repos)
conducted in the secondary market. Membership to the
NDS is restricted to members holding SGL and/or current
accounts with the RBI, Mumbai.

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Negotiated Dealing System-Order Matching

In August 2005, the RBI introduced an anonymous screenbased order matching module on the NDS, called the
Negotiated Dealing System-Order Matching (NDS-OM). This
is an order-driven electronic system where the participants
can trade anonymously by placing their orders on the
system or accepting the orders already placed by other
participants. The NDS-OM is operated by the Clearing
Corporation of India Ltd. (CCIL) on behalf of the RBI. Direct
access to the NDS-OM system is currently available only to
select fi nancial institutions such as commercial banks,
primary dealers, insurance companies, and mutual funds.
Other participants can access this system through their
custodians, i.e., those with whom they maintain Gilt
Accounts. The custodians place the orders on behalf of their
customers, like the urban co-operative
banks. The
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54

Stock

Exchanges

Facilities

are also available for trading in government securities on the

stock exchanges (NSE, BSE), which cater to the needs of retail investors.
The NSEs Wholesale Debt Market (WDM) segment offers a fully automated
screen-based trading platform through the National Exchange for
Automated Trading (NEAT) system. The WDM segment, as the name
suggests, permits only high value transactions in debt securities. The
trades on the WDM segment can be executed in the continuous or
negotiated market.
In the continuous market, orders entered by the trading members are
matched by the trading system. For each order entering the trading
system, the system scans for a probable match in the order books. On fi
nding a match, a trade takes place. In case the order does not fi nd a
suitable counter order in the order books, it is added to the order books and
is called a passive order. This could later match with any future order
entering the order book and result into a trade. This future order, which
results in the matching of an existing order, is called the active order. In the
negotiated market, deals are negotiated outside the exchange between the
two counterparties, and are reported on the trading system for approval
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Settlement of Government Securities

Primary

Market
Once the allotment process in the primary
auction is fi nalized, the successful participants
are advised of the consideration amounts that
they need to pay to the government on the
settlement day. The settlement cycle for dated
security auctions is T+1, whereas that for T-bill
auctions is T+2. On the settlement date, the
fund accounts of the participants are debited
by their respective consideration amounts, and
their securities accounts (SGL accounts) are
credited with the amount of securities that
they were allotted
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Secondary

Market
The transactions relating to government securities are
settled through the members securities/ current accounts
maintained with the RBI, with the delivery of securities
and the payment of funds done on a net basis. The
Clearing Corporation of India Ltd. (CCIL) guarantees the
settlement of trades on the settlement date by becoming
a central counterparty to every trade through the process
of novation, i.e., it becomes the seller to the buyer and
the buyer to the seller. All outright secondary market
transactions in government securities are settled on a
T+1 basis. However, in the case of repo transactions in
government securities, the market participants will have
the choice of settling the fi rst leg on either a T+0 basis or
a T+1 basis, as per their requirement

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57

 Delivery

versus Payment (DvP) is the mode of settlement of securities,

wherein the transfer of securities and funds happens simultaneously. This
ensures that unless the funds are paid, the securities are not delivered,
and vice versa. The DvP settlement eliminates settlement risk in
transactions. There are three types of DvP settlements, namely, DvP I,
DvP II, and DvP III, which are explained below.

DvP I: The securities and funds legs of the transactions are settled on a
gross basis, i.e., the settlements occur transaction by transaction without
netting the payables and receivables of the participant.
DvP II: In this method, the securities are settled on a gross basis whereas
the funds are settled on a net basis, i.e., the funds payable and
receivable of all transactions of a party are netted to arrive at the fi nal
payable or receivable position, which is then settled.
DvP III: In this method, both the securities and the funds legs are settled
on a net basis, and only the fi nal net position of all the transactions
undertaken by a participant is settled. The liquidity requirement in a
gross mode is higher than that of a net mode since the payables and
receivables are set off against each other in the net mode.

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58

Clearing

Corporation of India Limited (CCIL)

The CCIL is the clearing agency for government securities. It acts as a
Central Counterparty (CCP) for all transactions in government securities
by interposing itself between two counterparties.
In effect, during settlement, the CCP becomes the seller to the buyer and
the buyer to the seller of the actual transaction. All outright trades
undertaken in the OTC market and on the NDS-OM platform are cleared
through the CCIL. Once the CCIL receives the trade information, it works
out the participant- wise net obligations on both the securities and the
funds legs. The payable/receivable position of the constituents (gilt
account holders) is refl ected against their respective custodians.
The CCIL forwards the settlement fi le containing the net position of the
participants to the RBI, where the settlement takes place by the
simultaneous transfer of funds and securities under the Delivery versus
Payment system. The CCIL also guarantees the settlement of all trades
in government securities. This means that during the settlement process,
if any participant fails to provide funds/securities, the CCIL will make the
same available from its own means. For this purpose, the CCIL collects
margins from all participants, and maintains a Settlement Guarantee
Fund.
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Corporate Bonds

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Issuers of Corporate
Bonds
Public

sector

units

including

public
financial institutions and bonds
issued by the private corporate
sector

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General Conditions for Issuance of Corporate

Bonds

No

issuer can make a public issue of

debt securities unless the following
conditions are satisfi ed (on the date
of fi ling the draft offer document
and the fi nal offer document):
(a) The issuer has to apply to one
or more recognized stock exchanges
for the listing of such securities. If
the application is made to more
than one recognized stock exchange
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62

 the

issuer should choose one of them as the designated

stock exchange (having nationwide trading terminals).
However, for any subsequent public issue, the issuer may
choose a different stock exchange as the designated stock
exchange, subject to the requirements of the SEBI (Issue
and Listing of Debt Securities) Regulations, 2008.

(b) The issuer has to obtain in-principle approval for the

listing of its debt securities on the recognized stock
exchanges where the application for listing has been
made.

(c)

Credit rating has to be obtained from at least one

credit rating agency registered with SEBI, and has to be
disclosed in the offer document.
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63

(d) It has entered into an arrangement with a depository

registered with SEBI for the dematerialization of the debt
securities that are proposed to be issued to the public, in
accordance with the Depositories Act, 1996 and other relevant
regulations.
(e) The issuer is required to appoint one or more merchant
bankers registered with the Board, at least one of whom has to
be a lead merchant banker.
(f) The issuer is required to appoint one or more debenture
trustees in accordance with the provisions of Section 117B of
the Companies Act, 1956 (1 of 1956) and the Securities and
Exchange Board of India (Debenture Trustees) Regulations,
1993.
(g) The issuer is not allowed to issue debt securities for
providing loans to or the acquisition of shares of any person
who is part of the same group or who is under the same
management.

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64

Price Discovery through Book Building

The

issuer may determine the

price of the debt securities in
consultation with the lead
merchant banker, and the issue
may be at a fi xed price or the
price may be determined through
the book building process in
accordance with the procedures
specifi ed by SEBI
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65

Minimum Subscription
The

issuer can decide the

amount of minimum
subscriptions that it seeks to
raise by the issue of debt
securities, and disclose the same
in the offer document. In the
event of non- receipt of the
minimum subscription amount,
all the application money
received in the public issue has
to be refunded to the applicants.
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66

Debenture Redemption Reserve

For

the redemption of the debt securities

issued by a company, the issuer has to create
a debenture redemption reserve in
accordance with the provisions of the
Companies Act, 1956 and the circulars issued
by the central government in this regard.
Where the issuer has defaulted in the
payment of interest on debt securities, or the
redemption thereof, or in the creation of
security as per the terms of the issue of debt
securities, any distribution of dividend would
require the approval of the debenture
trustees.
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67

Listing of Debt Securities

Mandatory

listing

An

issuer wanting to make an offer of debt securities to the public has to

apply for listing to one or more recognized stock exchanges according to
the terms of the Companies Act, 1956 (1 of 1956).
The issuer has to comply with the conditions of listing of debt securities as
specifi ed in the Listing Agreement with the stock exchange where such
debt securities are sought to be listed.
Conditions for listing of debt securities issued on private
placement basis
An issuer may list its debt securities issued on a private placement basis
on a recognized stock exchange subject to the following conditions:
(a) The issuer has issued such debt securities in compliance with the
provisions of the Companies Act, 1956, the rules prescribed in it, and other
applicable laws;
(b) Credit rating has been obtained in respect of such debt securities from
at least one credit rating agency registered with SEBI;
(c) The debt securities proposed to be listed are in a dematerialized form;
(d) The prescribed disclosures have been made.

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68

Trading of Debt securities

(1)

The debt securities issued to the public

or on a private placement basis that are
listed in recognized stock exchanges are
traded, cleared, and settled in recognized
stock exchanges, subject to the conditions
specifi ed by the SEBI.
(2) In the case of trades of debt securities
that have been made over the counter,
such trades are required to be reported on a
recognized stock exchange having a
nationwide trading terminal or another such
platform as may be specifi ed by the SEBI.
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69

Clearing and Settlement

The

corporate bonds are cleared and settled by the clearing corporations

of stock exchanges, i.e., the ICCL and the NSCCL.
All trades in corporate bonds available in demat form that are reported
on any of the specifi ed platforms (including the FIMMDA, the NSE-WDM,
and the NSE Website) are eligible for settlement through the NSCCL.
In order to facilitate the settlement of corporate bond trades through the
NSCCL, both buy as well as sell participants are required to explicitly
express their intention to settle the corporate bond trades through the
NSCCL. The trades will be settled at the participant level on a DvP I basis,
i.e., on a gross basis for securities and funds. The settlements shall be
carried out through the bank/DP accounts specifi ed by the participants.
On the settlement date, during the pay-in, the participants are required
to transfer the securities to the depository account specifi ed by the
NSCCL, and to transfer the funds to the bank account specifi ed by the
NSCCL within the stipulated cut-off time.
On successful completion of pay-in of securities and funds, the
securities/funds shall be transferred by the NSCCL to the depository/bank
account of the counterparty.

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70

Regulatory Framework
The

SEBI (Issue and Listing of Debt Securities) Regulations,

2008 (private placement) for over one year

The

SEBI is responsible for the primary and the secondary

debt market, while the RBI is responsible for the market for
repo/reverse repo transactions in corporate debt.
Issuance of Non-Convertible Debentures (Reserve Bank)
Directions, 2010 (for issuance of NCDs of original or initial
maturity up to one year) According to the Repo in Corporate
Debt Securities (Reserve Bank) Directions 2010, dated January
8, 2010, issued by the RBI, the NBFCs registered with the RBI
(other than government companies as defi ned in Section 617
of the Companies Act, 1956) are eligible for participation in
repo transactions in corporate debt securities. The NBFCs
participating in such repo transactions are advised to comply
with the directions and accounting guidelines issued by the
RBI.
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71

Corporate Bonds
The

movement in the corporate bond market

is shown in Table 5-11. The data on corporate
bonds at the NSE and the BSE includes the
trades on the respective trading systems as
well as the reports of the trades carried out in
the OTC market. The volumes of the trades on
the NSE increased by 25.2 percent to ` 2,421
billion (US $ 44.5 billion) in 201213 from `
1,934.3 billion (US $ 37.8 billion) in the
previous fiscal year. The BSE volumes in 201213 were at ` 516.2 billion (US $ 9.4 billion),
while the FIMMDA volumes were ` 4,449 billion
(US $ 81.8 billion).
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72

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73

FIMMDA-NSE MIBID/MIBOR

The NSE has been computing and disseminating the

NSE Mumbai Inter-bank Bid Rate (MIBID) and the NSE
Mumbai Inter-bank Offer Rate (MIBOR) for the
overnight money market from June 15, 1998, the 14day MIBID/MIBOR from November 10, 1998, the 1month and 3-month MIBID/MIBOR from December 1,
1998, and the 3-day MIBID/MIBOR from June 06, 2008,
which are calculated and disseminated on the last
working day of every week. In view of the robust
methodology of the computation of these rates and
their extensive use by the market participants, these
have been co-branded with the Fixed Income and
Money Market Dealers Association (FIMMDA) from
March 4, 2002. These are now known as the FIMMDANSE MIBID/MIBOR.
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74

MIBID/MIBOR
The

FIMMDA-NSE MIBID/MIBOR are based on rates

polled by the NSE from a representative panel of 32
banks/ institutions/primary dealers. Currently, the
quotes are polled and processed daily by the
Exchange at 09:40 (IST) for the overnight rate, at
11:30 (IST) for the 14-day, 1-month, and 3-month
rates, and at 09:40 (IST) for the 3-day rate, on the last
working day of the week. The rates polled are then
processed using the bootstrap method to arrive at an
efficient estimate of the reference rates. The
overnight rates are disseminated daily, and the 3-day
rates are disseminated on the last working day of the
week to the market at about 09:55 (IST), whereas the
14-day, 1-month, and 3-month rates are disseminated
at about 11:45 (IST).
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