Bond Market India

A debt market is also known as a fixed income market as debt instruments pay fixed returns. The Bond Market is part of the debt market. Debt markets are now considered an alternative route to banking channels for finance. 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 on these instruments. Therefore, a lot of debt securities also 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.

Some of the benefits to the investors in debt instruments are:

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.

Almost all debt instruments have a rating assigned to them by a Rating Agency which enables the investor to choose his degree of risk and corresponding returns.

Do you know the impact of the debt market on the economy? The Asian financial crisis in the 1990s stressed the importance of a fully active debt market; the lack of which aggravated the crisis. For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies.

How do the debt markets impact the economy?

Opportunity for investors to diversify their investment portfolio. Higher liquidity and control over credit. Better corporate governance. Improved transparency because of stringent disclosure norms and auditing requirements. Less risk compared to the equity markets, encouraging low-risk investments. This leads to inflow of funds in the economy.

Increased funds for implementation of government development plans. The government can raise funds at lower costs by issuing government securities.

Implementation of a monetary policy. Reduced role of banks and political intervention in use of funds, as banks have to follow norms laid down by the central bank.

SBI DFHI Ltd. is an active participant in the Bond Market. Through SBI DFHI Invest Plus, investors can purchase investment grade Corporate Bonds for their portfolio (details available on the website).

Capital Market India

The capital market is the market for securities, where companies and governments can raise longterm funds. Selling stock and selling bonds are two ways to generate capital and long term funds. Thus bond markets and stock markets are considered capital markets. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded.The Indian Equity Markets and the Indian Debt markets together form the Indian Capital markets

The Indian Equity Market depends mainly on monsoons, global funds flowing into equities and the performance of various companies. The Indian Equity Market is almost wholly dominated by two major stock exchanges -National Stock Exchange of India Ltd. (NSE) and The Bombay Stock Exchange (BSE). The benchmark indices of the two exchanges - Nifty of NSE and Sensex of BSE are closely followed. The two exchanges also have an F&O (Futures and options) segment for trading in equity derivatives including the indices. The major players in the Indian Equity Market are Mutual Funds, Financial Institutions and FIIs representing mainly Venture Capital Funds and Private Equity Funds.

Indian Equity Market at present is a lucrative field for investors. Indian stocks are profitable not only for long and medium-term investors but also the position traders, short-term swing traders and also very short term intra-day traders. In India as on December 30 2007, market capitalisation (BSE 500) at US$ 1638 billion was 150 per cent of GDP, matching well with other emerging economies and selected matured markets.

For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies.

How do the debt markets impact the economy?

1. Increased funds for implementation of government development plans. The government can raise funds at lower costs by issuing government securities. 2. Conducive to implementation of a monetary policy. 3. Less risk compared to the equity markets, encouraging low-risk investments. This leads to inflow of funds into the economy. 4. Higher liquidity and control over credit. 5. Opportunity for investors to diversify their investment portfolio. 6. Better corporate governance. 7. Improved transparency because of stringent disclosure norms and auditing requirements.

SBI DFHI Limited is trading in equities and equity derivatives after RBI allowed stand-alone PDs to diversify their activities in 2006. It remains an active participant in the Indian debt market . Through SBI DFHI Invest Plus, investors can purchase investment grade Corporate Bonds for their portfolio (details available on the website).

Certificates of Deposit India

CDs are negotiable money market instrument issued in demat form or as a Usance Promissory Notes. CDs issued by banks should not have the maturity less than seven days and not more than one year. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years. CDs are like bank term deposits but unlike traditional time deposits these are freely negotiable and are often referred to as Negotiable Certificates of Deposit. CDs normally give a higher return than Bank term deposit. CDs are rated by approved rating agencies (e.g. CARE, ICRA, CRISIL, and FITCH) which considerably enhance their tradability in the secondary market, depending upon demand. SBI DFHI is an active player in secondary market of CDs. Features of CD

All scheduled banks (except RRBs and Co-operative banks) are eligible to issue CDs. They can be issued to individuals, corporations, trusts, funds and associations. NRIs can also subscribe to CDs, but on non-repatriable basis only. In secondary market such CDs cannot be endorsed to another NRI.

They are issued at a discount rate freely determined by the issuer and the market/investors. CDs issued in physical form are freely transferable by endorsement and delivery. Procedure of transfer of dematted CDs is similar to that of any other demat securities.

For CDs there is no lock-in period.

CDs are issued in denominations of Rs. 1 Lac and in the multiples of Rs. 1 Lac thereafter. Discount/Coupon rate of CD is determined by the issuing bank/FI.Loans cannot be granted against CDs

and Banks/FIs cannot buy back their own CDs before maturity.SBI DFHI Limited, participates in both the Primary and Secondary Market for CDs. Investors can buy CDs through SBI DFHI Invest Plus scheme of SBI DFHI Ltd. (details available on website).

Commercial Paper India

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

They are unsecured debts of corporates and are issued in the form of promissory notes, redeemable at par to the holder at maturity.

Only corporates who get an investment grade rating can issue CPs, as per RBI rules. It is issued at a discount to face value Attracts issuance stamp duty in primary issue Has to be mandatorily rated by one of the credit rating agencies It is issued as per RBI guidelines Its held in Demat form CP can be issued in denominations of Rs. 5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs.5 lakh (face value).

Issued at discount to face value as may be determined by the issuer. Bank and FIs are prohibited from issuance and underwriting of CPs. Can be issued for a maturity for a minimum of 15 days and a maximum upto one year from the date of issue.

Issuer: Can be issued by corporates, Primary Dealers and the all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP. All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from CRISIL or ICRA or CARE or the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose.

The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review and the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.

Investment in CP: CP may be issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI). SBI DFHI is actively involved in trading and investing in investment grade Commercial Paper. Investors can participate through SBI DFHI Invest Plus scheme (details available on website)

State Development Loans India

State Development Loans (SDLs) are issued by the State Governments and RBI coordinates the actual process of selling these securities. Each state is allowed to issue securities up to a certain limit each year. This limit is determined by the planning commission in consultation with the respective state governments. Generally, the coupon rates on State Development Loans are marginally higher than those of GOI-Secs issued at the same time. The State Development Loans are normally sold through the auction process. All the auctions are multiple price auctions, through competitive bidding, conducted by Reserve Bank of India and allotment procedure is similar to that for GOI-Secs. Non-competitive bidding has still to be introduced in the auction of SDL. State Development Loans also qualify for SLR status. Interest payment frequency is half yearly and other modalities are similar to GOI-Secs. They are issued in dematerialized form. State Government Securities are also issued in the physical form (in the form of Stock Certificate) and are transferable. Like in the case of G-Secs no stamp duty is payable on transfer of State Development Loans also. State Development Loans are eligible securities for Liquidity Adjustment Facility (LAF)-Repos. Schedule Commercial Banks (excluding RRBs) and Primary Dealers can offer State Development Loans as eligible securities to the RBI under LAF Repo. SBI DFHI is a Primary Dealer and an active player in State Development Loans market. It also participates in the SDL auction. As a primary dealer SBI DFHI also participates in the underwriting of auction of SDLs. One day prior to the auction, bids are submitted by Primary Dealers (PD) to RBI indicating the amount they are willing to underwrite and the fee expected. RBI, along with State Govt representatives, then examine the bids on the basis of the market conditions and take a decision on the amount to be underwritten and the fee to be paid. State Development Loans are traded in secondary market but are much less liquid than GOI Secs. SBI DFHI is an active player in secondary market.

RBI Auction Calendar India

The Government to finance its fiscal deficit, or for the purpose notified by the Government in the official Gazette, issues securities which are called Government Securities. These sovereign securities

are issued by the Reserve Bank of India (RBI) on behalf of Government of India as per the Central Government's market borrowing programme. On the basis of the Borrowing Programme, RBI issues an indicative auction calendar to enable the institutional and retail investors to plan their investment. RBI indicates in this core calendar for issuance of dated government securities the amounts and maturities of the loans to be raised. The calendar is subject to variations - depending on market conditions and other factors. The Reserve Bank, reserves the right to make additional issuances outside the calendar or make changes in the calendar as per emerging requirements of the Government or even cancel an auction depending on market conditions. The calendar also helps in providing transparency and stability to the Government securities market. The Reserve Bank of India announces the Auction calendar in advance for each half of the Financial Year separately, in March and September. You can download the Auction calendar by logging onto www.sbidfhi.com

Primary Dealers in India

The system of Primary Dealers (PDs) in the Government Securities Market was introduced by Reserve Bank of India in 1995 to strengthen the market infrastructure of Government Securities and put in place an improved, efficient secondary market trading system. This was to encourage holding of Government Securities on large scale and make the market more vibrant and liquid. In 2006-07, RBI gave Banks the option to undertake Primary Dealership business departmentally. DFHI was set up by RBI along with public sector banks and financial institutions in March 1988 to activate the Money Market. It got the status of Primary Dealer in February 1996. Over a period of time, RBI divested its stake and DFHI became a subsidiary of State Bank of India (SBI). SBI had also set up a subsidiary in 1996 for doing PD business namely SBI Gilts Limited. Both these companies were merged in 2004 to become the largest Primary Dealer in the country in terms of net worth (Rs. 1,059 crores as on March 31, 2008) Primary Dealers can also be referred to as Merchant Bankers to Government of India as only they are allowed to underwrite primary issues of government securities other than RBI who have since shed this role. Stand-alone PDs are allowed the following activities as core activities:

Dealing and underwriting in Government securities. Dealing in Interest Rate Derivatives. Providing broking services in Government securities. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures. Lending in Call/ Notice/ Term/ Repo/ CBLO market. Investment in Commercial Papers.

Investment in Certificates of Deposit. Investment in Security Receipts issued by Securitization Companies/ Reconstruction Companies, Asset Backed Securities (ABS), Mortgage Backed Securities (MBS).

Investment in debt mutual funds where entire corpus is invested in debt securities.

PDs are permitted to undertake the following activities under non-core activities: a) Activities, which are expected to consume capital, such as: 1. Investment / trading in equity and equity derivatives market 2. Investment in units of equity oriented mutual funds 3. Underwriting public issues of equity b) Services which do not consume capital or require insignificant capital outlay, such as: 1. Professional Clearing Services 2. Portfolio Management Services 3. Issue Management Services 4. Merger & Acquisition Advisory Services 5. Private Equity Management Services 6. Project Appraisal Services 7. Loan Syndication Services 8. Debt restructuring services 9. Consultancy Services 10. Distribution of mutual fund units 11. Distribution of insurance products PDs are not allowed to undertake broking in equity, trading / broking in commodities, gold and foreign exchange. Their total investment pattern should include minimum 50% in Government Securities. PDs are permitted to borrow, lend and trade in the money market including call money market, CBLO of CCIL and participate in Repos. They are eligible for memberships of electronic dealing, trading and settlement systems (NDS platforms / INFINET / RTGS / CCIL). Stand-alone PDs can also open CSGL accounts to enable customers to hold government securities in demat form.

G-Secs India
Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities. Mostly Government Securities are interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon. Since the date of

maturity is specified in the securities, these are known as dated Government securities, e.g. 8.24% GOI 2018 is a Central Government security maturing in 2018, which carries a coupon of 8.24% payable half yearly.

Features of Government Securities

1. Issued at face value 2. No default risk as the securities carry sovereign guarantee. 3. Ample liquidity as the investor can sell the security in the secondary market 4. Interest payment on a half yearly basis on face value 5. No tax deducted at source 6. Can be held in D-mat form. 7. Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs). 8. Redeemed at face value on maturity 9. Maturity ranges from of 2-30 years. 10. Securities qualify as SLR investments (unless otherwise stated).

The dated Government securities market in India has two segments: 1. Primary Market: The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include Commercial Banks, Primary Dealers, Financial Institutions, Insurance Companies & Co-operative Banks. RBI also has a scheme of noncompetitive bidding for small investors (see SBI DFHI Invest on our website for further details). 2. Secondary Market: The Secondary Market includes Commercial banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporates and Individuals can invest in Government Securities. The eligibility criteria are specified in the relative Government notification.

Auctions: Auctions for government securities are normally multiple- price auctions either yield based or price based.

Yield Based: In this type of auction, RBI announces the issue size or notified amount and the tenor
of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then its rejected otherwise it is accepted

Price Based: In this type of auction, RBI announces the issue size or notified amount and the tenor
of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing government securities. Bids at price lower then the cut off price are rejected and bids higher then the cut off price are accepted. Price Based auction leads to a better price discovery then the Yield based auction. Occasionally RBI holds uniform-price auctions also.

Underwriting in Auction: One day prior to the auction, bids are received from the Primary Dealers (PD) indicating the amount they are willing to underwrite and the fee expected. The auction committee of RBI then examines the bid on the basis of the market condition and takes a decision on the amount to be underwritten and the fee to be paid. In case of devolvement, the bids put in by the PDs are set off against the amount underwritten while deciding the amount of devolvement and in case the auction is fully subscribed, the PD need not subscribe to the issue unless they have bid for it. G-Secs, State Development Loans & T-Bills are regularly sold by RBI through periodic public auctions. SBI DFHI Ltd. is a leading Primary Dealer in Government Securities. SBI DFHI Ltd gives investors an opportunity to buy G-Sec / SDLs / T-Bills at primary market auctions of RBI through its SBI DFHI Invest scheme (details available on website itself). Investors may also invest in high yielding Government Securities through SBI DFHI Trade where buy and sell price and a buy and sell facility for select liquid scrips in the secondary markets is offered.

G-Secs Retail India

Retailing the G-Secs means taking the G-Secs market to retail investors. Today, the G-Secs market in the country is predominantly inhabited by wholesale players like Banks, Financial Institutions, Primary Dealers, FIIs, Mutual Funds, Insurance Companies, Brokers, Pension Funds, etc. For vibrant G-Secs market, it is necessary to attract retail investors so that they can participate in the market that will bring them a reasonable return with no credit risk. Recently, with the introduction of Government Securities Act, 2006 and the Government Securities Regulations, 2007 (See Postings on the homepage

of our website), Government Securities have become more investor friendly while giving attractive returns for a longer duration to investors.

Government Securities can also be held in demat form. CSGL facility was started with this objective so that any person or a body corporate, etc. could hold their portfolio of Government Securities with RBI through an intermediary like Bank or a Primary Dealer. Now they can also be held through a D.P.

To safeguard the interest of small investors who may not have the sophistication in bidding in auction and to save them from winners curse, RBI has also introduced a non-competitive bidding facility for retail investors in G-Secs. Through this non-competitive bids are accepted up to 5 percent of the notified amount in the specified auctions of dated securities. Retail investors when they bid through this system get assured allotment (may be partial) at the weighted average price of the winning bids. SBI DFHI offers retail investors an opportunity to participate in primary auction through noncompetitive bidding through its SBI DFHI Invest Scheme. SBI DFHI is a major player in secondary market of G-Secs and retail investors can deal in secondary market through us. Those retail investors who are registered, details are available on our website can see the quotes of some highly traded Government Securities which will help them taking their investment decisions. The basic requirement for dealing with us is the investor should have either CSGL account or Demat account and he should be registered with us.

G-Secs Auction India

G-Secs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of the borrowing program approved by the parliament in the union budget. G-Secs are normally issued in dematerialized form (SGL) but can be issued in the physical form (in the form of Stock Certificate) on request. When issued in physical form or otherwise, they are issued in the multiples of Rs. 10,000/-. Dated Government Securities (along with SDLs) are Securities usually bearing a fixed interest rate with interest payable semi-annually and principal as per schedule on due date of redemption. The tenor of these instruments can extend upto 30 years.

Government securities are normally sold through an auction process although they can also be sold on tap or through OMO (Open Market Operations). Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism. There are several variants of auction. Auction can be price based or yield based. RBI conducts auction of Government Securities. In securities market, we come across below mentioned auction methods.

French Auction System: All auctions under the competitive bidding are multiple price or multiple yield auctions, with scrips being allotted to the highest bidder downwards in terms of price, or lowest yield upwards in terms of yields, whichever is applicable, upto the pre-determined notified amounts.

Dutch Auction Price: This is identical to the French auction system as defined above. The only difference being that the concept of premium does not exist. This means that all winning bids are at cut-off price / yield and successful bidders need not pay any premium. This type of auction is also known as Uniform Price Auction.

Private Placement: If on account of some special circumstances the Government/ Reserve Bank of India decide to issue a new security, or further issue an existing security to expand the outstanding quantum, the government can privately place the security with RBI. The RBI in turn may sell these securities at a later date through their open market window albeit at a different yield.

On-tap issue : Under this scheme of arrangements after the initial primary placement of a security, the issue remains open to yet further subscriptions. The period for which the issue remains open may be sometimes time specific or volume specific. Actually, even the primary issue can be on tap.

RBI also has a non-competitive bidding facility for retail investors for purchasing Dated Government Securities. Non-competitive bids are accepted upto 5 per cent of the notified amount in the specified auctions of dated securities. RBI announces a half yearly auction calendar for auctions of G-Secs, which is also available on their website.

As a primary dealer SBI DFHI has to mandatorily participate in auction of G-Secs. As a primary dealer SBI DFHI also does the underwriting of auction. Auction calendar of RBI is also available on SBI DFHI website.

CSGL Accounts
CSGL accounts are a demat form of holding government securities with the RBI, just as an investor can hold shares in demat form with a depository participant. Government Securities are largely issued as Stocks and held in demat form to the credit of the holder in the Subsidiary General Ledger account (SGL) maintained in the books of RBI. When these securities are held by the investor through an agent like PD or Bank the agent holds another SGL account with RBI for keeping the Government Securities owned by its customers. This second account is called the Constituent Subsidiary General Ledger account (CSGL) and is a segregated SGL account for keeping securities on behalf of customers by banks and Primary Dealers.

Features of CSGL Accounts Like a bank account gets debited or credited whenever the customer withdraws or deposits money, CSGL account also gets debited or credited on the sale or purchase of the securities. The account holder receives a statement at periodic intervals showing the balance of securities in his account. All the securities are maintained in demat mode, which can be converted into physical mode whenever required by the Gilt Account Holder. Advantages of opening CSGL Accounts 1. Treasury bills and Government Securities are maintained in a demat form. 2. Expeditious transactions can be undertaken. 3. The government securities are transferred to Gilt Account on the settlement day. 4. Reduces counterparty risk due to speedy settlement. 5. Collection and payment of maturity proceeds and interest is faster as the interest and maturity proceeds would be collected by the Primary Dealer, and paid to the Gilt Account Holder. 6. Reduces administrative burdens for the Gilt Account Holder. You can open CSGL Accounts with SBI DFHI Ltd for keeping your Government Securities, State Development Loans & Treasury Bills and for ease of your transactions.