Comprehensive Guide to the Indian Corporate Debt Market: Part One

This guide provides authoritative short notes on the Indian Corporate Debt Market, specifically focusing on the ecosystem, instrument types, market trends, and primary issuance mechanisms as detailed in Chapter 10 of the NISM Fixed Income Securities Workbook.

10.1 The Indian Corporate Debt Market

Corporate debt refers to the debt obligations issued by non-government entities to fund business operations, expansion, and infrastructure. Unlike the government, which frequently reopens existing securities, corporate issuers manage diverse instruments to prevent "bunching" of repayments and to cater to specific investor appetites.

Key Players in the Ecosystem

The corporate bond ecosystem in India is supported by several critical functionaries:

• Issuers: Legal entities like Corporates, Banks, and NBFCs that borrow money by selling debt papers. They use short-term instruments (CPs, CDs) for working capital and long-term bonds for asset creation.
• Debenture Trustees (DT): An entity registered with SEBI that protects the interests of debenture holders. They hold a lien on secured assets and act as an intermediary between the issuer and investors. Appointment is mandatory for bonds with maturities exceeding 18 months.
• Qualified Institutional Buyers (QIB): Sophisticated institutional investors, including Commercial Banks, Mutual Funds, Insurance Companies, and FPIs. They are the primary participants in the private placement market.
• Retail Individual Investors: Investors applying for securities valued at ₹2 lakh or less. They are most active in the tax-free bonds segment.

10.2 Types of Instruments in Corporate Debt Market

The Indian market offers a variety of instruments customized for different financing needs and risk profiles.

1. Short-Term / Money Market Instruments

• Commercial Papers (CP): Unsecured, tradable instruments issued by high-rated corporates to raise working capital.
• Certificates of Deposits (CD): Issued by banks (up to 1-year maturity) and Financial Institutions (up to 3-year maturity).

2. Coupon-Based Instruments

• Plain Vanilla Bonds: Standard bonds with fixed coupons and defined maturity.
• Floating Rate Bonds (FRB): Linked to a benchmark (e.g., MIBOR or T-Bill rates); coupons are reset periodically.
• Inverse Floaters: The coupon rate has an inverse relationship with the benchmark rate.
• Zero-Coupon Bonds: Issued at a discount and redeemed at par; no periodic interest is paid.
• Step-up/Step-down Bonds: Coupons increase or decrease over time based on the issuer's cash flow expectations.

3. Currency-Based Instruments

• Foreign Currency Denominated Bonds: Issued and payable in foreign currency (e.g., Yankee or Samurai bonds).
• Masala Bonds: Rupee-denominated debt issued in foreign markets; the investor bears the currency risk.

4. Embedded Options Based Instruments

• Callable Bonds: Give the issuer the right to redeem the bond early if interest rates fall.
• Puttable Bonds: Give the investor the right to seek early redemption if interest rates rise.
• Convertible Bonds: Can be converted into equity shares at a pre-fixed price.
• Warrants: Derivative rights to buy equity at a specific price before expiration.

5. Claim-Based Instruments

• Secured Debt: Backed by specific assets; these holders are paid first during liquidation.
• Subordinated Debt: Higher risk and higher coupon; these are paid just before equity holders during liquidation.

6. Specialized Bonds

• AT1 Bonds (Additional Tier-1): Unsecured, perpetual bonds issued by banks to meet Basel-III norms; interest can be skipped by the bank under stress.
• Green Bonds: Specifically used to fund climate and environmental projects.
• REITs and InvITs: Trust-based vehicles that allow investors to monetize real estate and infrastructure assets.

10.3 Trends in the Indian Corporate Debt Market

The Indian market is characterized by three distinct features:

1. Financial Sector Dominance: Over 90% of primary issuances come from Finance and Infrastructure companies.
2. Private Placement Preference: Approximately 95% of corporate bonds are issued via private placement due to lower regulatory complexity and cost compared to public issues.
3. Institutional Ownership: Mutual funds and insurance companies are the primary drivers of demand.

Growth Data: Outstanding corporate debt grew from ₹8 lakh crore (June 2010) to ₹31 lakh crore (December 2019). However, the market remains dominated by fixed-rate bonds, which account for nearly 90% of the total outstanding amount.

10.4 Issuance Mechanism

Issuance in India follows two primary routes: Public Issues and Private Placements.

1. Public Issuance Process

• Listing Requirement: Mandatory on one or more recognized stock exchanges.
• Approvals: "In-principle" approval is required from the stock exchange, though SEBI does not technically "approve" the offer document.
• Key Functionaries: The process requires the appointment of a Merchant Banker, Credit Rating Agency (at least one rating), and a Debenture Trustee.
• Timeline: Listing must be completed within 6 days of the issue close. The ASBA (Application Supported by Blocked Amount) mechanism is mandatory for all applicants.

2. Private Placement and Electronic Book Mechanism (EBM)

• Definition: Sale of debt to a select group of institutional investors (maximum 200 people, excluding QIBs and employees).
• Mandatory EBM: Since April 2016, SEBI has mandated the use of an Electronic Book Mechanism for private placements of ₹200 crore and above.
• EBP Providers: Recognized stock exchanges act as Electronic Book Providers (EBP).
• Bidding Process: Bidding is conducted on the EBP platform on a yield-time priority basis.
• Minimum Bid Lot: Typically ₹10 lakh, but increased to ₹1 crore for NBFCs and Housing Finance Companies (HFCs).

Key Takeaways for Students

• Debenture inter-changeability: In India, the terms "bond" and "debenture" are used interchangeably under the Companies Act.
• Liquidity Constraint: The dominance of private placement leads to market fragmentation and lower secondary market liquidity compared to G-Secs.
• Regulatory Compulsion: Appointment of a Debenture Trustee is mandatory for any issue with a maturity over 18 months.
• Valuation Standards: Corporate bonds are valued based on FIMMDA guidelines, incorporating credit ratings and payment features.

Important Terms

• DVP-I Settlement: "Delivery versus Payment" where trades are settled at the participant level without a central guarantee.
• ISIN: International Security Identification Number, a unique code assigned to every security at issuance.
• Green Shoe Option: The issuer's right to retain additional subscription amount beyond the notified size if demand is high.

Note: This concludes Part One. Part Two will cover Secondary Market Mechanisms, Regulatory Guidelines, and Corporate Bond Valuation.