1) History and overview of debt market

Bond markets link issuers, i.e., governments, state owned institutions, local
bodies and corporates having financing needs, with investors having investible
surplus. An efficient bond market is one where the requirements of both
issuers and investors are met effectively at a price (interest rates) determined
competitively, and where price adjustment to new information is seamless. For
this purpose, the basic pre-requisites are stable macro-economic environment,
absence or minimal presence of administered rates, a wide issuer and investor
base (which ensures adequate size and activity in the market), intermediaries,
infrastructure for smooth and safe trading and settlement of trades, and an
enabling regulatory and legal environment.
Government bond markets play an important role insofar as they provide the
benchmark yield curve, on the basis of which most other debt instruments are
priced. This paper presents the development of the bond markets in India. I
will also briefly deal with the corporate debt market.
There are three main segments of debt market in India, viz., Government
securities, Public Sector Units (PSU) bonds and private sector corporate bonds.
India being a federal state, Government securities are issued by Central
Government and all the provincial Governments (India has 28 states), although
in case of the latter such securities constitute a relatively small portion of their
fiscal deficits. In India, banks are required to maintain statutorily a certain
percentage of their liabilities in Government securities and other specified
liquid assets which creates a captive demand for Government securities. At
present, the Statutory Liquidity Ratio (SLR) for banks is 25 per cent. Similar
statutory requirements in varying degrees are there for other type of financial
institutions, viz., insurance companies, provident funds, non-banking financial
institutions etc.
The PSU bonds are generally treated as surrogates of sovereign paper,
sometimes due to explicit guarantee of Government, and often due to the
comfort of public ownership. Some of the PSU bonds are tax free, a status not
enjoyed even by Government securities.
Corporate bonds and debentures have maturities beyond 1 year and generally
up to 10 years. Corporates also issue short-term commercial paper with
maturity ranging from 15 days to one year.
The Indian bond market is indeed worth ~US$ 2 trillion.
Global Sizing - The purpose of this article is to break the myth that bond
markets are only for a select few or that they represent only a small proportion
of financial markets in general. As of 2019, the world’s GDP was estimated to
be US$87 trillion, world equity market cap stood at US$95 trillion and the
global bond market at US$106 trillion (Source: SIFMA).
India - Estimates of GDP stand at US$2.7 trillion with equity marketcap at
almost the same number of US$2.75 trillion (Source: BSE). As you already
know, the Indian bond market stands at about US$2.05 trillion (Economic
Survey). It is striking to observe that although the bond market in India is large,
it has a large scope for an explosive growth from here.
Structurally, the debt market remains skewed towards government securities
(G-secs). The domestic debt market in India amounts to about 74% of GDP
while the size of India’s corporate bond market is a mere 18% of GDP. To put it
into perspective, according to the Economic Survey, while the outstanding
Government securities stock stands at Rs. 115.87 lakh crore (Nov’20), the
outstanding corporate bonds are Rs. 35.87 lakh crore (Dec’20)
However, the entire bond market in India has grown at an impressive 14.68%
CAGR (Compounded Annual Growth Rate) in the past 10 years. This is
represented in the graph below:
Within the overall bond markets, our singular focus remains on the corporate
bond market as it offers a wide variety of higher returns to individual investors.
Furthermore, there has been a notable expansion in these markets in the last
10 years, where outstanding debt has grown at a CAGR of 15% from Rs 8.33
lakh crore to Rs 30.7 lakh crore during FY10-FY20. There has also been
increased policy focus to develop and deepen the corporate bond markets
given their growing importance and untapped potential. The government and
regulators (SEBI and RBI) are taking measures to address the various issues
that constrain the growth and development of the corporate bond markets.
2) Role of Government and Central on developing debt market
3) Major investors in debt market
Wholesale Debt Market - Where the investors are mostly Banks, Financial
Institutions, the RBI, Primary Dealers, Insurance companies, MFs, Corporates
and FIIs.
The Commercial Banks and the Financial Institutions are the most prominent
participants in the Wholesale Debt Market in India. During the past few years,
the investor base has been widened to include Co-operative Banks, Investment
Institutions, cash rich corporates, Non-Banking Finance companies, Mutual
Funds, and high net-worth individuals. FIIs have also been permitted to invest
100% of their funds in the debt market, which is a significant increase from the
earlier limit of 30%. The government also allowed in 1998-99 the FIIs to invest
in T-bills with a view towards broad basing the investor base of the same.
Retail Debt Market involving participation by individual investors, provident
funds, pension funds, Mutual Funds, private trusts, NBFCs and RNBCs,
Religious Trusts and charitable organizations having large investible corpus,
State Level and District Level Co-operative Banks, Housing Finance Companies,
Corporate Treasuries, Hindu-Undivided Families (HUFs) and other legal entities
in addition to the wholesale investor classes.
4) Different securities in money market and capital market
The Money Market is basically concerned with the issue and trading of
securities with short term maturities or quasi-money instruments. The
Instruments traded in the money-market are Treasury Bills, Certificates of
Deposits (CDs), Commercial Paper (CPs), Bills of Exchange and other such
instruments of short-term maturities (i.e., not those exceeding 1 year with
regard to the original maturity)
1. Treasury Bills - T-bills are one of the most popular money market
instruments. They have varying short-term maturities. The Government of
India issues it at a discount for 14 days to 364 days. These instruments are
issued at a discount and repaid at par at the time of maturity. Also, a company,
firm, or person can purchase TB’s. And are issued in lots of Rs. 25,000 for 14
days & 91 days and Rs. 1,00,000 for 364 days.
2. Commercial Bills- Commercial bills, also a money market instrument, works
more like the bill of exchange. Businesses issue them to meet their short-term
money requirements. These instruments provide much better liquidity. As the
same can be transferred from one person to another in case of immediate cash
requirements.
3. Certificate of Deposit - CD’s is a negotiable term deposit accepted by
commercial banks. It is usually issued through a promissory note. CD’s can be
issued to individuals, corporations, trusts, etc. Also, the CD’s can be issued by
scheduled commercial banks at a discount. And the duration of these varies
between 3 months to 1 year. The same, when issued by a financial institution,
is issued for a minimum of 1 year and a maximum of 3 years.
4. Commercial Paper - Corporates issue CP’s to meet their short-term working
capital requirements. Hence serves as an alternative to borrowing from a bank.
Also, the period of commercial paper ranges from 15 days to 1 year. The
Reserve Bank of India lays down the policies related to the issue of CP’s. As a
result, a company requires RBI‘s prior approval to issue a CP in the market.
Also, CP has to be issued at a discount to face value. And the market decides
the discount rate.
Denomination and the size of CP:
 Minimum size – Rs. 25 lakhs
 Maximum size – 100% of the issuer’s working capital
5. Call Money - It is a segment of the market where scheduled commercial
banks lend or borrow on short notice (say a period of 14 days). In order to
manage day-to-day cash flows. The interest rates in the market are market-
driven and hence highly sensitive to demand and supply. Also, the interest
rates have been known to fluctuate by a large % at certain times.
A capital market is a financial market in which long-term debt (over a year) or
equity-backed securities are bought and sold, in contrast to a money market
where short-term debt is bought and sold.
Capital market can be either a primary market or a secondary market. When a
company publicly sells new stocks or bonds for the first time—such as in an
initial public offering (IPO)—it does so in the primary capital market. This
market is sometimes called the new issues market. When investors purchase
securities on the primary capital market, the company that offers the securities
hires an underwriting firm to review it and create a prospectus outlining the
price and other details of the securities to be issued. The main entities seeking
to raise long-term funds on the primary capital markets are governments
(which may be municipal, local, or national) and business enterprises
(companies). Governments issue only bonds, whereas companies often issue
both equity and bonds. The main entities purchasing the bonds or stock
include pension funds, hedge funds, sovereign wealth funds, and less
commonly wealthy individuals and investment banks trading on their own
behalf. In the secondary market, existing securities are sold and bought among
investors or traders, usually on an exchange, over the counter, or elsewhere.
The existence of secondary markets increases the willingness of investors in
primary markets, as they know they are likely to be able to swiftly cash out
their investments if the need arises.
Equity Securities
Equity securities represent ownership interest held by shareholders in a
company. In other words, it is an investment in an organization’s equity stock
to become a shareholder of the organization. The difference between holders
of equity securities and holders of debt securities is that the former is not
entitled to a regular payment, but they can profit from capital gains by selling
the stocks. Another difference is that equity securities provide ownership
rights to the holder so that he becomes one of the owners of the company,
owning a stake proportionate to the number of acquired shares.
In the event a business faces bankruptcy, the equity holders can only share the
residual interest that remains after all obligations have been paid out to debt
security holders. Companies regularly distribute dividends to shareholders
sharing the earned profits coming from the core business operations, whereas
it is not the case for the debtholders.
Debt Securities
Debt securities, or fixed-income securities, represent money that is borrowed
and must be repaid with terms outlining the amount of the borrowed funds,
interest rate, and maturity date. In other words, debt securities are debt
instruments, such as bonds (e.g., a government or municipal bond) or a
certificate of deposit (CD) that can be traded between parties. Debt securities,
such as bonds and certificates of deposit, as a rule, require the holder to make
the regular interest payments, as well as repayment of the principal amount
alongside any other stipulated contractual rights. Such securities are usually
issued for a fixed term, and, in the end, the issuer redeems them. A debt
security’s interest rate on a debt security is determined based on a borrower’s
credit history, track record, and solvency – the ability to repay the loan in the
future. The higher the risk of the borrower’s default on the loan, the higher the
interest rate a lender would require to compensate for the amount of risk
taken.
It is important to mention that the dollar value of the daily trading volume of
debt securities is significantly larger than stocks. The reason is that debt
securities are largely held by institutional investors, alongside governments
and not-for-profit organizations.
Derivative Securities
Derivative securities are financial instruments whose value depends on basic
variables. The variables can be assets, such as stocks, bonds, currencies,
interest rates, market indices, and goods. The main purpose of using
derivatives is to consider and minimize risk. It is achieved by insuring against
price movements, creating favourable conditions for speculations, and getting
access to hard-to-reach assets or markets. Formerly, derivatives were used to
ensure balanced exchange rates for goods traded internationally. International
traders needed an accounting system to lock their different national currencies
at a specific exchange rate.
Hybrid Securities
Hybrid security, as the name suggests, is a type of security that combines
characteristics of both debt and equity securities. Many banks and
organizations turn to hybrid securities to borrow money from investors. Similar
to bonds, they typically promise to pay a higher interest at a fixed or floating
rate until a certain time in the future. Unlike a bond, the number and timing of
interest payments are not guaranteed. They can even be converted into
shares, or an investment can be terminated at any time. Examples of hybrid
securities are preferred stocks that enable the holder to receive dividends prior
to the holders of common stock, convertible bonds that can be converted into
a known amount of equity stocks during the life of the bond or at maturity
date, depending on the terms of the contract, etc.
Hybrid securities are complex products. Even experienced investors may
struggle to understand and evaluate the risks involved in trading them.
Institutional investors sometimes fail at understanding the terms of the deal
they enter into while buying hybrid security.
5) Role of Financial institutions in Developing debt market
In India, the banking system which incidentally has been dominated by the
public sector, played a pioneering role in initiating growth of mutual funds,
merchant banking and other financial services. Structurally, banks have been
permitted to operate through subsidiaries as asset management companies,
PDs, merchant banks and mutual funds. The Development Financial
Institutions also played a role, but they dominated in promoting credit rating
agencies, sponsoring national stock exchanges, depositories, etc. In regard to
Government Securities segment of the market, which accounts for about 75
per cent of the stock, about 60 per cent of the stock is held by the banking
system. As regards the corporate debt segment, both private placement and
public issue, over half of the issuance is by banks and financial institutions.
To take full advantage of foreign investors, a host country must provide an
appealing environment: a stable economic and political environment; a fair,
rational, and comprehensive legal system; a fair, reasonable, and balanced tax
program; a fair, productive, and balanced regulatory system; and transparency
in economic, financial, legislative, and regulatory systems. The country should
also liberalize capital account transactions. To do so successfully, and minimize
risks associated with foreign investors, capital account liberalization must be
properly sequenced. The chief danger is removing most restrictions on capital
account transactions, before addressing major problems in the domestic
financial system, hence risking a crisis. Typical major problems include shaky,
inconsistent macroeconomic management; severe asymmetric information
problems (such as inadequate accounting, auditing, and disclosure practices) in
the financial, and corporate sectors; implicit government guarantees; and
inadequate prudential supervision, and regulation of domestic financial
markets, and institutions. Essential infrastructure must be developed if
domestic debt instruments are to be opened to international portfolio
investment. Developing countries should implement well-synchronized
settlement, and depository arrangements. The risks from short-term debt -
which could threaten financial stability - are best through sound financial
management, and prudential regulation. A case could be made for additional
policy measures aimed at curbing over-reliance on short-term debt. (Chile,
Colombia, and Israel, for example, have adopted measures to influence the
level, and composition of portfolio capital inflows). Arguably, liberalization of
trade in financial services is integral to full liberalization of capital markets.
Foreign firms operating in a domestic market may transfer useful technology,
and know-how. Concern that hedge funds can dominate, or manipulate
markets, can be dealt with through measures to strengthen supervision,
regulation, and market transparency - as well as by strengthening reporting
requirements for larger traders, and positions. The ability of hedge funds, and
other foreign investors to take positions in domestic financial markets, could
also be limited to
 Taxing short-term capital flows (as Chile does).
 Requiring banks, and brokers to raise margin, and collateral
requirements.
 Limiting financial institutions; ability to provide the domestic credit
needed to short the currency, and their ability to loan the securities
needed to short equity, and fixed-income markets.
6) Who was responsible for the Crisis and how central bank and government
tried to come out of situation
Indian debt market has had a tough ride for a few years now. The slowdown in
the domestic economy and the liquidity crisis following the IL&FS fiasco had
bruised the debt market sufficiently in the pre-Covid months. And then the
lockdown and other restrictions following the outbreak of the pandemic only
accentuated the situation. In a recent episode, Franklin Templeton Mutual
Fund wound up six debt mutual fund schemes. The fund house cited high
redemption pressure and lack of liquidity in the bond market as a main reason
for the decision.
Liquidity crunch and risk aversion have been major issues plaguing the financial
sector for some time now. In the current scenario, there is a tendency among
the investors to dump risky assets and turn to safe havens amid an uncertain
economic outlook. This has, in turn, led to increased redemption pressure in
the debt market that fuelled the liquidity crunch. While RBI has announced
various measures to ensure liquidity in the market, its effectiveness seems to
be limited. RBI announced Special Liquidity Facility worth of Rs 50,000 crore for
mutual funds. Similarly, the central bank has also conducted Targeted Long-
Term Repo Operation (TLTRO) with a similar objective.

Risk aversion was dominant in the economy, and it got further heightened in
the current crisis. For instance, the asset quality review (AQR) initiated by RBI
in 2015 made the banks risk averse as they were in a hurry to clean up balance
sheets. The IL&FS and DHFL crises that ensued made the situation even worse,
as banks became more cautious in lending. The economic slowdown coupled
with risk aversion made it difficult for bond issuers to raise money from the
debt market. The NBFC sector was the worst affected, as they mainly rely on
issuance of commercial papers to meet credit requirements. However, the
IL&FS episode restricted NBFCs borrowing from the debt market, as mutual
funds limited their exposure to NBFC securities. Consequently, several sectors
such as real estate faced huge liquidity crunch, as they relied mainly on NBFCs
for funds. It needs to be highlighted that the collapse of IL&FS was linked to a
structural issue in the economy, as it was the result of a delay in the
commencement of various projects due to issues involving land acquisition.
And that crisis played a major role in creating the risk- aversion, which resulted
in the debt market crisis. In the current scenario, business activities are being
hit badly due to the Covid-19 pandemic. It creates an uncertain situation on
whether bond issuers will be able to fulfil their obligations. The measures
announced by RBI and the government only helped create buyers for top-rated
papers. But there are no takers for the low-rated ones even at higher yields, as
the risk appetite of investors weakened. Debt funds that invested in these low-
rated papers are in a difficult spot, as the investors are rushing for redemption.
Similarly, the NBFC sector is cash-strapped with limited access to funds unlike
banks. Thus, with limited liquidity in the NBFC sector, there are chances that
NBFCs would delay or default on payments on securities held by debt mutual
funds. These developments underline the fact that more measures are needed
to strengthen the corporate bond market in India. Despite various initiatives,
the performance of the debt market has not been up to the expected level.
Issues such as high cost of borrowing and inadequate liquidity continue to dog
this segment. It demands more measures from the regulators as a strong and
healthy debt market is essential to meet credit requirements of business and
industry in a growing economy.

7) Innovation in debt market due to structured Products

One innovation that has gained traction as a supplement to traditional retail
and institutional portfolios is the investment class broadly known as structured
products. Structured products offer retail investors easy access to derivatives.
This article introduces structured products, with a particular focus on their
applicability in diversified retail portfolios.
Structured products are pre-packaged investments that normally include
assets linked to interest plus one or more derivatives. They are generally tied
to an index or basket of securities and are designed to facilitate highly
customized risk-return objectives. This is accomplished by taking a traditional
security such as a conventional investment-grade bond and replacing the usual
payment features—periodic coupons and final principal—with non-traditional
payoffs derived from the performance of one or more underlying assets rather
than the issuer's own cash flow.
One of the main drivers behind the creation of structured products was the
need for companies to issue cheap debt. They originally became popular in
Europe and have gained currency in the United States, where they are
frequently offered as SEC-registered products, which means they are
accessible to retail investors in the same way as stocks, bonds, exchange
traded funds (ETFs), and mutual funds. Their ability to offer customized
exposure to otherwise hard-to-reach asset classes and subclasses make
structured products useful as a complement to traditional components of
diversified portfolios. Issuers normally pay returns on structured products once
it reaches maturity. Payoffs or returns from these performance outcomes are
contingent in the sense that, if the underlying assets return "x," then the
structured product pays out "y." This means that structured products are
closely related to traditional models of options pricing, although they may also
contain other derivative categories such as swaps, forwards, and futures, as
well as embedded features that include leveraged upside participation or
downside buffers.
One common risk associated with structured products is a relative lack of
liquidity that comes with the highly customized nature of the investment. A
significant innovation to improve liquidity in certain types of structured
products comes in the form of exchange-traded notes (ETNs), a product
originally introduced by Barclays Bank in 2006. These are structured to
resemble ETFs, which are fungible instruments traded like a common stock on
a securities exchange. However, ETNs are different from ETFs because they
consist of a debt instrument with cash flows derived from the performance of
an underlying asset. ETNs also provide an alternative to harder-to-access
exposures such as commodity futures or the Indian stock market.
Innovations in the bond market can help mobilise Rs 7-10 lakh crore via
infrastructure bonds through fiscal 2025, according to ratings form Crisil.
Pooled assets bring scale, diversification benefits and flexibility to structure the
cash flows. This can attract foreign capital and improve the confidence of bond
market investors. Take-out financing facilitated by pooling of assets can help
banks and other infrastructure financiers to free up a portion of the over Rs 20
lakh crore credit outstanding in the sector for fresh lending to new projects.
InvITs, co-obligor structures, covered bonds and securitisation are facilitative
mechanisms for pooling assets.
Crisil has suggested a number of innovations like encouraging widespread
acceptance of the INFRA EL rating scale by ensuring that various regulators
recognise the scale (the Insurance Regulatory Development Authority of India
has already allowed investments in bonds issued by infrastructure companies
rated not less than “A” along with EL1 as part of approved investments). It also
suggests implementing the draft Reserve Bank of India (Credit Derivatives)
Directions, 2021, to facilitate the development of the credit default swaps
(CDS) market. This will allow banks, NBFCs, insurers, pension funds, mutual
funds, alternate investment funds and foreign portfolio investors to write CDS,
enhancing retail participation via tax sops to investments in debt mutual funds
– similar to equity-linked savings schemes – and ensure parity in capital gains
tax between equity and debt products.
Improving liquidity in the market by fast-tracking the setting up of the
institution to provide secondary market liquidity to corporate bonds is another
suggestion and allow corporate bonds as collateral under the Reserve Bank of
India’s liquidity adjustment facility window. Crisil also recommends attracting
both domestic and foreign capital through exchange traded funds and other
index-linked bond funds, which offer lower costs, more transparency, better
liquidity and potential to build diversified portfolios.
8) Role of Regulatory bodies and Credit rating agencies
The issue and trading of fixed income securities by each of these entities are
regulated by different bodies in India. For example: Government Securities and
issues by Banks and Institutions are regulated by the RBI. The issue of non-
government securities comprising basically of Corporate Debt issues is
regulated by SEBI.
While the Reserve Bank of India (RBI) regulates the issuance of government
securities, corporate debt securities fall under the regulatory purview of
Securities and Exchange Board of India (SEBI). Coordination with Securities and
Exchange Board of India (SEBI) is ensured both at a policy level and at
operational level. In particular, at a policy level, coordination is ensured
through a High-Level Committee on Capital Markets presided by Governor, RBI,
and consisting of Chairman, SEBI, Chairman, Insurance Regulatory and
Development Authority (IRDA) and Finance Secretary, Government of India.
The Deputy Governor of RBI is on the Board of Directors of SEBI. Further, the
Standing RBI – SEBI Technical Committee consisting of officials from RBI and
SEBI assists the HLCC at an operational level. Currently, amongst other things,
RBI and SEBI are working together to devise a regulating mechanism for the
issuers of private placements which will address issues of quality,
transparency, end-use of funds and listing of such bonds.
The trading of government securities on the Stock exchanges is currently
through negotiated dealing using members of Bombay Stock Exchange
(BSE)/National Stock Exchange (NSE) and these trades are required to be
reported to the exchange. All the 23 stock exchanges in the country provide
facility for trading in corporate debt instruments. The bulk of the corporate
bonds, being privately placed, are, however, not listed on stock exchanges.
Two Depositories, National Securities Depository Limited (NSDL) and Central
Depository Services (India) Limited (CDSL) maintain records of holding of
securities in a dematerialised form. Records of holding of government
securities for wholesale dealers like banks/PDs and other financial institutions
are maintained at the RBI.
Major market segments under the regulatory ambit of the Reserve Bank are
interest rate markets, including Government Securities market and money
markets; foreign exchange markets; derivatives on interest rates/prices, repo,
foreign exchange rates as well as credit derivatives.
The Public Debt Office (PDO) of the Reserve Bank of India acts as the
registry/depository of G-Secs and deals with the issue, interest payment and
repayment of principal at maturity. Most of the dated securities are fixed
coupon securities.
The Reserve Bank’s role in the development of corporate bond markets is
indirect and is governed by its interest in monetary policy transmission and in
the stability and efficiency of the financial sector as a whole. Besides, banks,
whose financial health is the responsibility of the central bank, have a large
exposure to the corporate bond market with more than 80 per cent of such
investments being in privately placed corporate securities. Activity in the
secondary market is thus rather thin. As the non-transparent practices in this
market is a matter of concern, Reserve Bank issued guidelines in June 2001
specifying the due diligence to be undertaken, disclosures to be obtained and
credit appraisal to be made by investing banks. Subsequently a Working Group
set up by RBI (February 2002) went into the detailed disclosure norms and data
collection measures on private placements. Currently, RBI and SEBI are
working together to devise a regulating mechanism for the issuers of private
placements which will address issues of quality, transparency, end-use of funds
and listing of such bonds.
SEBI’s responsibility is to ensure that the securities market in India functions in
an orderly manner. It is made to protect the interests of investors and traders
in the Indian stock market by providing a healthy environment in securities and
to promote the development of and regulating the equity market. Further, as
stated earlier, one of the prime reasons for establishing SEBI was to prevent
malpractices in the Indian capital market.
The SEBI carries out the following three key functions to perform its roles.
 Protective Functions - SEBI performs these functions for protecting the
interests of investors and financial institutions. Protective functions
include checking price rigging, prevention of insider trading, promoting
fair practices, creating awareness among investors and prohibition of
fraudulent and unfair trade practices.
  Regulatory Functions - Through regulatory functions, SEBI monitors the
functioning of the financial market intermediaries. It designs the
guidelines and code of conduct for financial intermediaries and regulates
mergers, amalgamations, and takeovers takeover of companies. SEBI
also conducts inquiries and audits of stock exchanges. It acts as a
registrar for the brokers, sub-brokers, merchant bankers and many
others. SEBI has the power to levy fees on the capital market
participants. Apart from controlling the intermediaries, SEBI also
regulates the credit rating agencies.
 Development Functions - Among the list of SEBI’s development
functions, one of them is imparting training to intermediaries. SEBI
promotes fair trading and malpractices reduction. It also educates and
makes investors aware of the stock market by utilizing the funds
available in IEPF.
SEBI takes care of the three most important financial market participants.
 Issuer of Securities - These are the companies listed in the stock
exchange which raise funds through the issue of shares. SEBI ensures
that the issue of IPOs and FPOs can take place in a transparent and
healthy way.
 Players in the Capital Market i.e. The Traders and Investors - The capital
markets are functioning only because the traders exist. SEBI is
responsible for ensuring that the investors don’t become victims of any
stock market manipulation or fraud.
 Financial Intermediaries - They act as mediators in the securities market
and ensure that the stock market transactions take place in a smooth
and secure manner. SEBI monitors the activities of the stock market
intermediaries like brokers and sub-brokers.
In the context of Indian debt market, self-regulatory bodies like the Fixed
Income Money Market and Derivatives Association of India (FIMMDA) and the
Primary Dealers Association of India (PDAI) have been encouraged in the
recent past, as part of reform process to give an impetus to the development
of the bond and money markets in India. These bodies have served as crucial
layers between the regulator and market and have contributed to developing
new benchmarks and products besides providing training and development
support to participants. They have formulated guidelines for dispute resolution
mechanisms and are also involved in the process of developing standard
practices and codes of conduct. Both PDAI and FIMMDA are represented in the
Technical Advisory Committee (TAC) of the Reserve Bank of India meant for
deliberating and advising RBI, on issues pertaining to Government Securities
and Money Markets. TAC is constituted by Reserve Bank and includes, apart
from RBI officials, important market participants, academicians, and policy
makers. FIMMDA is involved in the task of valuation of all Central Government
Securities. The daily FIMMDA yield curve of Central Government bonds is fast
emerging as an accepted benchmark to price securities. In addition to this,
FIMMDA has also been contributing to developing guidelines for
documentation of repo, securitised debt, and several other debt market
instruments.
Role of Rating Agencies in Capital Markets
Rating agencies assess the credit risk of specific debt securities and the
borrowing entities. In the bond market, a rating agency provides an
independent evaluation of the creditworthiness of debt securities issued by
governments and corporations. Large bond issuers receive ratings from one or
two of the big three rating agencies. In the United States, the agencies are held
responsible for losses resulting from inaccurate and false ratings.
The ratings are used in structured finance transactions such as asset-backed
securities, mortgage-backed securities, and collateralized debt obligations.
Rating agencies focus on the type of pool underlying the security and the
proposed capital structure to rate structured financial products. The issuers of
the structured products pay rating agencies to not only rate them, but also to
advise them on how to structure the tranches.
Rating agencies also give ratings to sovereign borrowers, who are the largest
borrowers in most financial markets. Sovereign borrowers include national
governments, state governments, municipalities, and other sovereign-
supported institutions. The sovereign ratings given by a rating agency shows a
sovereign’s ability to repay its debt.
The ratings help governments from emerging and developing countries to issue
bonds to domestic and international investors. Governments sell bonds to
obtain financing from other governments and Bretton Woods institutions such
as the World Bank and the International Monetary Fund.
In India, there are four Credit Rating Agencies (CRAs)+ and each of them has
collaboration with internationally renowned CRAs to supplement the local
knowledge and skills. The RBI prescribes a number of regulatory uses of
ratings. Of those related to the money and debt markets, a corporate must get
an issue of Commercial Paper rated and may issue such paper subject to a
minimum rating. Securities and Exchange Board of India (SEBI), which is the
regulator of CRAs has stipulated that ratings are compulsory on all public issues
of debentures with maturity exceeding 18 months. Pension funds can only
invest in debt securities that have high ratings, as per the stipulations of
Government.
9) Positive and negative aspects of debt market.
Advantages of Debt Market
 The debt market capitalizes and mobilizes the funds in the economy.
 This market gives a platform to the government, companies, and other
bodies to raise funds.
 Sometimes raising equity becomes very costly for the corporate. In such
a situation raising money through the debt market is the best possible
option.
 This market gives fixed returns to investors with lesser risk. Government
Debt Market securities are less risky than Corporate Debt securities.
 In absence of any other sources of finances, the Central/State
Government takes the help of this market. It saves the Government
bodies, from suffering from any cash crunch.
 Debt Market securities backed by assets get the preference as compared
to other unsecured and business debts, at the time of liquidation.
 The money raised through this market helps the companies to boost its
expansion and growth plans.
 The debt market helps the Government authority to boost
infrastructural projects.
These advantages are non-exhaustive in nature.
Disadvantages of Debt Market
 One of the biggest disadvantages of this market is that it provides fixed
returns to the investors and completely ignores the inflation rate. The
inflation can make the actual return falls down to a record low.
 The second disadvantage is, in the case of premature withdrawal or sell-
off in the market, the investor gets the current market bond’s price and
 not the principal amount invested. It is possible that the company might
lose its credibility and the bond prices might have fallen down.
 The investors will get a fixed interest rate return only, irrespective of an
increase in the interest rate in the market.
 For issuing authority, it becomes very difficult to get a good credit rating.
This becomes the biggest task to meet all requirements of credit rating
agencies.
These disadvantages are non-exhaustive in nature.
Causes for the underdevelopment of Indian Money market: Dichotomy in the
structure or presence of unorganized sector. Inadequate banking system with
lack of control by Central bank. Disparity in interest rates.

10) Suggestion and recommendations for Indian debt market