The capital market comprises of equities market and debt market. Debt market is a market for the issuance, trading and settlement in fixed income securities of various types. Fixed income securities can be issued by a wide range of organizations including the Central and State Governments, public bodies, statutory corporations, banks and institutions and corporate bodies
Introduction to Fixed Income Instruments
Fixed Income securities are one of the most innovative and dynamic instruments evolved in the financial system ever since the inception of money. Based as they are on the concept of interest and time-value of money, Fixed Income securities personify the essence of innovation and transformation, which have fueled the explosive growth of the financial markets over the past few centuries.
Fixed Income securities offer one of the most attractive investment opportunities with regard to safety of investments, adequate liquidity, flexibility in structuring a portfolio, easier monitoring, long term reliability and decent returns. They are an essential component of any portfolio of financial and real assets, whether in the form of pure interest-bearing bonds, varied type of debt instruments or asset-backed mortgages and securitised instruments.
Fixed Income Markets - Powering the World
The Fixed Income securities market was the earliest of all the securities markets in the world and has been the forerunner in the emergence of the financial markets as the engine of economic growth across the globe. The Fixed Income Securities Market, also known as the debt market or the bond market, is easily the largest of all the financial markets in the world today. The Debt Market has, as such, a very prominent role to play in the efficient functioning of the world financial system and in catalyzing the economic growth of nations across the globe.
Indian Debt Market - Pillars of the Indian Economy
The Debt Market plays a very critical role for any growing economy which need to employ a large amount of capital and resources for achieving the desired industrial and financial growth. The Indian debt market is today one of the largest in Asia and includes securities issued by the Government (Central & State Governments), public sector undertakings, other government bodies, financial institutions, banks and corporates. The Indian debt markets with an outstanding issue size of Government securities (Central and state) close to Rs.13,474 billion (or Rs. 1,34,7435 crore) and a secondary market turnover of around Rs 56,033 billion (in the previous year 2007) is the largest segment of the Indian financial markets.(Source RBI & CCIL).
The Government Securities (G-Secs) market is the oldest and the largest component of the Indian debt market in terms of market capitalization, outstanding securities and trading volumes. The G-Secs market plays a vital role in the Indian economy as it provides the benchmark for determining the level of interest rates in the country through the yields on the government securities which are referred to as the risk-free rate of return in any economy.
Transformations in the Market Structure
The Indian Debt Markets are today poised on the threshold of momentous change and transition to an efficient, transparent and vibrant market with significant retail participation. The first half of the twentieth century had witnessed a significant amount of retail interest and participation in the G-Sec market with more than half the holdings of G-Secs issued being held by retail investors, a trend which continued until the early sixties. The administered interest rate regime and the emergence of other equity and debt instruments led to a gradual diminution in the investor interest and participation in the G-Sec market
The Indian Debt Market structure was hitherto that of a wholesale market with participation largely restricted to the Banks, Institutions and the Primary Dealers. The rapidly expanding volumes in the Wholesale Debt Market over the past few years bear the promise of an immense and attractive financial market with a strong potential for retail participation. The Retail Debt Market in India is being created, thanks to the pioneering efforts of the Exchanges and the market participants and the strong leadership and guidance by SEBI, RBI and the Govt. of India.
The Hon'ble Union Finance Minister, while presenting the Union Budget for 2006-2007, accepted the recommendations of the High Level Committee on Corporate Bonds and Securitization and made a significant policy announcement about creation of a single, unified exchange-traded market for corporate bonds in India. An internal committee under the chairmanship of SEBI Whole Time Member Dr. T.C. Nair was constituted to chalk out a plan for implementation of a Unified Exchange Traded Corporate Bond Market in India. Pursuant to the recommendations of the Committee, SEBI issued a circular on December 12, 2006, entrusting to Bombay Stock Exchange Ltd. the task of rolling out a Unified Reporting Platform for all corporate bonds traded in India with an aggressive target date of January 1, 2007.
SEBI has subsequently taken several steps towards creation of a vibrant Corporate Bond market. On July 2,2007 SEBI permitted BSE to launch a trade matching platform with essential features of an OTC Market. Several other initiatives like simplification of the Debt listing agreement, rationalization of stamp duty and introduction of Repos on Corporate Bonds have been taken by SEBI.
BSE's Bond with Investors
Bombay Stock Exchange Limited (BSE), the premier stock exchange in the country, has heralded the capital market revolution in India and has contributed immensely towards the achievement of global standards of efficiency and safety by the Indian capitals market.
BSE, with its rich experience of 133 years in the Indian capital market, offers investors an efficient and transparent nation-wide platform for trading in Equities, Debt and Derivative products. BSE is now in the throes of change, having transformed itself into a corporate entity effective August 19,2005, and several significant initiatives are in the offing.
Platforms offered by BSE for trading in Fixed Income Securities
Wholesale Debt Market Segment (WDM)
The Reserve Bank of India, vide the following circulars
DBOD. FSC. BC. No. 39 /24.76.002/2000 dated October 25, 2000
IDMC. PDRS. PDS. No PDS-2 /03.64.00/2000-01 dated November 13, 2000
DBS. FID No. C 10 / 01.08.00 / 2000-0122 dated November, 2000
permitted banks, Primary Dealers and financial institutions in India to undertake transactions in debt instruments among themselves or with non-bank clients through the members of Bombay Stock Exchange Limited (BSE). This notification paved the way for BSE to commence trading in Government Securities and other fixed income instruments. The Wholesale Debt Market Segment of BSE commenced its operations on June 15, 2001.
The membership of the Debt Segment is being granted only to the existing (equity segment) Members of BSE who possess a minimum net worth of Rs.1.5 crore. There is no security deposit applicable for the membership of the Debt Segment. The annual approval/renewal charges at present are Rs.25,000.00( currently waived).
The BSE Debt Segment offers the market participants in the Wholesale Debt Market an efficient and transparent reporting platform through its GILT System.
With the view to provide a common front-end to all participants, the GILT system shall be shortly migrated on the browser based ICDM system that is currently used by over 120 participants Members of the debt segment, as such, shall get access to the reporting/trading platforms for G-Secs as well as Corporate Bonds through a common login.
Growth in the WDM
The BSE Debt Segment has shown a gradual but consistent growth in turnover in the past few years with increased participation from the mainstream banking and institutional players. This Segment expects a sustained rise in turnover and participation in the coming years with the initiation of activity by new Members and the continued support and participation of major banks, Primary Dealers and institutions.
Retail Debt Market Segment (RDM)
The Retail Debt Market, in the new millennium, presents a vast kaleidoscope of opportunities for the Indian investor whose knowledge and participation hitherto has been restricted to the equity market.
The development of the Retail Debt Market has engaged the attention of policy makers, regulators and the Government in the past few years. The potential of the Retail Debt Market can be gauged from the investor strength of more than 40 million in the Indian equity market who have powered the tremendous growth and transformation of the stock markets in recent times. Recognizing this opportunity at a very early stage, BSE has consistently been in the forefront of the campaign for the creation of a Retail Debt Market and has expounded the potential and need for the retail trading in G-Secs in the past few years in various important forums and to the key regulatory authorities.
Emergence of the Retail Debt Market
It would surprise many to know that a retail debt market was at one point of time very much present in India. Right through the forties and the fifties and until the early sixties, a good proportion of the holdings of Government securities were concentrated with individual investors; available statistics indicate that more than half of the holdings in Government securities were concentrated with retail investors in the early 50s.
Today, there exists an inherent need for households to diversify their investment portfolio so as to include various debt instruments, including Government securities. The growing investments in the Bond Funds and the Money Market Mutual Funds are a sign of the increasing recognition of this fact by the retail investors.
Retail investors would have a natural preference for fixed income returns and especially so in the current situation of increasing volatility in the financial markets. The Central Government Securities (G-Secs) are the one of the best investment options for an individual investor today in the financial markets due to the following factors:
Zero default risk - due to their sovereign guarantee, ensures the total safety of all investments in G-Secs
Lower average volatility in bond prices
Greater returns as compared to the conventional safe investment avenues like Bank Deposits and Fixed Deposits, which also contain credit risk
Higher leverage -Greater borrowing capacity against G-Secs due to their zero risk status
Wider range of innovations in the nature of securities like TBills, Index linked Bonds, Partly Paid Bonds and others like STRIPS and securities with call and put options to follow soon
Better and greater features to suit a large range of investment profiles and investor requirements
Growing liquidity and the increased turnover in recent times in the Indian Debt Markets
Retail Trading in G-Secs
The Government of India and RBI, recognizing the need for retail participation had in early 2000 announced a scheme for enabling retail participation through a non-competitive bidding facility in the G-Sec auctions with a reservation of 5% of the issue amount for non-competitive bids by retail investors.
The Retail Trading in G-Secs. commenced on January 16, 2003 in accordance with the SEBI Circular bearing ref. no. SMD/Policy/GSEC/776/2003 dated 10th January 2003. The Indian Fixed Income Markets, which until some time ago was the mainstay of the wholesale investors, were made accessible to the retail investors, thanks to some path-breaking initiatives by the Government of India - Ministry of Finance, RBI and SEBI to enable retail trading in G-Secs through stock exchanges. BSE has, for long, been an ardent advocate of the need to enable the participation of the 28 million Indian investor multitude in the Indian Fixed Income Markets. The Indian Investor is today able to buy or sell G-Secs through the nationwide BSE BOLT Network of more than 7,000 terminals spread across 410 cities around the country.
The Retail Debt Market Module of BSE aims at providing an efficient and reliable trading system for all debt instruments and securities of different types and maturities. The key features of the system are:
Trading: by electronic order matching based on price-time priority through the BOLT (BSE OnLine Trading) System with the continuous trading sessions from 9.55 a.m. to 3.30 p.m as is operational in the Equities Segment. Retail Trading in G-secs is on a Rolling Settlements basis with a T+2 Delivery Cycle.
Clearing and Settlement: The Clearing and Settlement mechanism for the Retail trading in G-Secs is based on the existing institutional mechanism available at BSE. The trades executed throughout the continuous trading sessions are netted out at the end of the trading hours through a process of multilateral netting. The transactions are netted out member-wise and then scrip-wise so as to determine the net settlement and payment obligations of the Members.
The Delivery obligations and the payment orders in respect of these Members are generated by the Clearing and Settlement system of BSE. These statements indicate the pay-in and pay-out positions of the Members for securities and funds who then give the necessary instructions to their Clearing Banks and depositories.
The entire risk management and the clearing and settlement activities for the trades executed in the Retail Debt Market System is undertaken by BSE Exchange Clearing House.
Holding and Transfer of G-Secs: The G-secs for retail trading through BSE can be held by investors in the same Demat account (same as the Constituent SGL A/c which can be held with Banks or PDs) as is used for equity at the Depositories. NSDL and CDSL hold the combined quantity of G-Secs in their SGL-II A/cs of RBI, meant only for client holdings.
The BSE Debt Market solution would soon provide live Internet trading on its state-of-the-art BSEWebx Trading System which will offer among others a number of quintessential features and facilities, critical for the investor in the fixed Income markets. The BSE Debt Market solution would seek to provide in the course of time an integrated trading and settlement platform for the entire variety of debt securities and instruments, which are bound to expand in an enormous way in terms of variety and numbers in the near future.
BSE - Bonding with the Future
The BSE Debt segment would seek to pave the way for the development of a healthy, efficient and active debt market mechanism and market structure in line with world class standards and greater integration with the global economy. The BSE vision for the Indian Debt Market foresees the markets growing in leaps and bounds in the near future, soon attaining global benchmarks of safety, efficiency and transparency. This will truly help the Indian capital markets to attain a place of pride among the leading capital markets of the world.