1) Executive Summary
3) Financial Market & Its Classification
4) Financial Instruments & Its Classification
5) Definition & Types Of Debt Instruments
6) Importance Of Debt Instruments
7) Types Of Debt Instruments
8) Comparison Between Debt & Ownership Instruments
9) RBI/SEBI Guidelines On Debt Instruments
10) Case Study
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Understanding and measuring liquidity of government bond markets is
important to various market participants. Primarily, these markets serve to
governments for financing purposes. Market participants use government
bonds as collateral, as benchmarks for pricing other financial instruments
and as hedging or investment instruments. Central banks extract from
these markets information on future interest rates and use government
bonds as a monetary policy instrument. Liquidity directly affects the
usability of government bonds for these purposes.
Until recently, most research articles focused on stock or foreign exchange
markets and only few were dedicated to government bond markets.
Researchers and regulators started to focus on the liquidity of government
bond markets after the financial market turmoil in 1998, which had an
impact even on such liquid markets like the U. S. Treasury market.
Through the efforts of this project, we understood in depth the various
instruments used by individuals as well as by organizations for raising and
using debt. Earlier we were under the impression that we have limited
instruments and limited scope to the debt markets but after this study, we
are aware of the various opportunities in the debt instrument market
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The debt market is a bigger source of borrowed funds than the banking
system. The market for debt is larger than the market for equities (i.e., is
larger than the stock market). The debt market is commonly divided into the
so-called money market (short-term debt, maturity of one year or less) and
the so-called capital market (long-term debt). Both of these terms are
misnomers. All productive assets are capital (including equities). The
terminology may be rationalized by the convention that capitalized
expenses are amortized over periods in excess of one year. "Money
market" instruments are debt and although they can be used as a store of
value they can only be regarded as a medium of exchange in the sense
that they are readily sold at a price which is usually predictable within a
short time frame. Moreover, it is hard to base a conceptual distinction
between money & non-money based on a one-year maturity dividing line.
Most debt instruments are not traded through exchanges, but are traded
over-the-counter (OTC) in a telephone/electronic network market where
dealers or brokers frequently act as direct intermediaries. Money-market
instruments usually have such large denominations that they are not
accessible to small investors except through mutual funds.
The market for debt can be viewed as a market for money in the sense that
sellers of debt (lenders) have a supply of money which is demanded by
would-be buyers (borrowers). In this model, interest rates are the "price" of
money. An increase in demand to borrow money due to increased
economic opportunity increases interest rates (everything else being
equal). The market for debt is influenced by term-to-maturity, credit-
worthiness of borrowers, security for loan and many other factors. By their
control of money supply, government central banks try to manipulate
interest rates to stimulate their economies without causing inflation.
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FINANCIAL MARKET & ITS CLASSIFICATION
A financial market is a mechanism that allows people to buy and sell (trade)
financial securities (such as stocks and bonds), commodities (such as
precious metals or agricultural goods), and other fungible items of value at
low transaction costs and at prices that reflect the efficient-market
Both general markets (where many commodities are traded) and
specialized markets (where only one commodity is traded) exist. Markets
work by placing many interested buyers and sellers in one "place", thus
making it easier for them to find each other. An economy which relies
primarily on interactions between buyers and sellers to allocate resources
is known as a market economy in contrast either to a command economy
or to a non-market economy such as a gift economy.
In finance, financial markets facilitate:
The raising of capital (in the capital markets)
The transfer of risk (in the derivatives markets)
International trade (in the currency markets)
– and are used to match those who want capital to those who have it.
Typically a borrower issues a receipt to the lender promising to pay back
the capital. These receipts are securities which may be freely bought or
sold. In return for lending money to the borrower, the lender will expect
some compensation in the form of interest or dividends.
In mathematical finance, the concept of a financial market is defined in
terms of a continuous-time Brownian motion stochastic process.
Typically, the term market means the aggregate of possible buyers and
sellers of a certain good or service and the transactions between them.
The term "market" is sometimes used for what are more strictly exchanges,
organizations that facilitate the trade in financial securities, e.g., a stock
exchange or commodity exchange. This may be a physical location (like
the NYSE) or an electronic system (like NASDAQ). Much trading of stocks
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takes place on an exchange; still, corporate actions (merger, spinoff) are
outside an exchange, while any two companies or people, for whatever
reason, may agree to sell stock from the one to the other without using an
Trading of currencies and bonds is largely on a bilateral basis, although
some bonds trade on a stock exchange, and people are building electronic
systems for these as well, similar to stock exchanges.
Financial markets can be domestic or they can be international.
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Types Of Financial Markets
The financial markets can be divided into different subtypes:
Capital markets which consist of:
o Stock markets, which provide financing through the issuance of
shares or common stock, and enable the subsequent trading
o Bond markets, which provide financing through the issuance of
bonds, and enable the subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and
Derivatives markets, which provide instruments for the management
of financial risk.
Futures markets, which provide standardized forward contracts for
trading products at some future date; see also forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign
The capital markets consist of primary markets and secondary markets.
Newly formed (issued) securities are bought or sold in primary markets.
Secondary markets allow investors to sell securities that they hold or buy
Raising the capital
To understand financial markets, let us look at what they are used for, i.e.
Without financial markets, borrowers would have difficulty finding lenders
themselves. Intermediaries such as banks help in this process. Banks take
deposits from those who have money to save. They can then lend money
from this pool of deposited money to those who seek to borrow. Banks
popularly lend money in the form of loans and mortgages.
More complex transactions than a simple bank deposit require markets
where lenders and their agents can meet borrowers and their agents, and
where existing borrowing or lending commitments can be sold on to other
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parties. A good example of a financial market is a stock exchange. A
company can raise money by selling shares to investors and its existing
shares can be bought or sold.
The following table illustrates where financial markets fit in the relationship
between lenders and borrowers:
Relationship between lenders and borrowers
Banks Stock Exchange
Individuals Insurance Companies Money Market
Companies Pension Funds Bond Market
Mutual Funds Foreign
Many individuals are not aware that they are lenders, but almost everybody
does lend money in many ways. A person lends money when he or she:
puts money in a savings account at a bank;
contributes to a pension plan;
pays premiums to an insurance company;
invests in government bonds; or
invests in company shares.
Companies tend to be borrowers of capital. When companies have surplus
cash that is not needed for a short period of time, they may seek to make
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money from their cash surplus by lending it via short term markets called
There are a few companies that have very strong cash flows. These
companies tend to be lenders rather than borrowers. Such companies may
decide to return cash to lenders (e.g. via a share buyback.) Alternatively,
they may seek to make more money on their cash by lending it (e.g.
investing in bonds and stocks.)
Individuals borrow money via bankers' loans for short term needs or longer
term mortgages to help finance a house purchase.
Companies borrow money to aid short term or long term cash flows. They
also borrow to fund modernization or future business expansion.
Governments often find their spending requirements exceed their tax
revenues. To make up this difference, they need to borrow. Governments
also borrow on behalf of nationalised industries, municipalities, local
authorities and other public sector bodies. In the UK, the total borrowing
requirement is often referred to as the Public sector net cash requirement
Governments borrow by issuing bonds. In the UK, the government also
borrows from individuals by offering bank accounts and Premium Bonds.
Government debt seems to be permanent. Indeed the debt seemingly
expands rather than being paid off. One strategy used by governments to
reduce the value of the debt is to influence inflation.
Municipalities and local authorities may borrow in their own name as well
as receiving funding from national governments. In the UK, this would
cover an authority like Hampshire County Council.
Public Corporations typically include nationalised industries. These may
include the postal services, railway companies and utility companies.
Many borrowers have difficulty raising money locally. They need to borrow
internationally with the aid of Foreign exchange markets.
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During the 1980s and 1990s, a major growth sector in financial markets is
the trade in so called derivative products, or derivatives for short.
In the financial markets, stock prices, bond prices, currency rates, interest
rates and dividends go up and down, creating risk. Derivative products are
financial products which are used to control risk or paradoxically exploit
risk. It is also called financial economics.
Seemingly, the most obvious buyers and sellers of currency are importers
and exporters of goods. While this may have been true in the distant past,
when international trade created the demand for currency markets,
importers and exporters now represent only 1/32 of foreign exchange
dealing, according to the Bank for International Settlements.
The picture of foreign currency transactions today shows:
Government spending (for example, military bases abroad)
Analysis of financial markets
Much effort has gone into the study of financial markets and how prices
vary with time. Charles Dow, one of the founders of Dow Jones & Company
and The Wall Street Journal, enunciated a set of ideas on the subject which
are now called Dow Theory. This is the basis of the so-called technical
analysis method of attempting to predict future changes. One of the tenets
of "technical analysis" is that market trends give an indication of the future,
at least in the short term. The claims of the technical analysts are disputed
by many academics, who claim that the evidence points rather to the
random walk hypothesis, which states that the next change is not
correlated to the last change.
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FINANCIAL INSTRUMENTS & ITS CLASSIFICATION
A real or virtual document representing a legal agreement involving some
sort of monetary value. In today's financial marketplace, financial
instruments can be classified generally as equity based, representing
ownership of the asset, or debt based, representing a loan made by an
investor to the owner of the asset. Foreign exchange instruments comprise
a third, unique type of instrument. Different subcategories of each
instrument type exist, such as preferred share equity and common share
equity, for example
Types of Financial Instruments:
There are many kinds of financial instruments in the market that are widely
1) Futures - This is the type of currency that is defined as forward
transactions that have standard sizes as well as dates of maturity.
One example is 500,000 British pounds for next December at a rate
previously agreed upon. The Futures have been standardized and
usually they are traded on the exchange rates created for such
purpose. The contract has an average length of 3 months roughly.
The contracts usually include interest of any amount.
2) Forward Transaction - Another way to deal with the risk of the
Foreign exchange is to deal in a transaction termed as forward
transaction. In this type of transaction, one's money doesn't change
the hands actually not until there is an agreed upon date in the future.
The buyer and the seller agree on an exchange rate for a date
anytime in the future, and the deal occurs on that particular date, and
this is regardless of what the rates in the market would be then.
Duration of trading could be carried out in a few days, months and
3) Spot - This type of transaction is defined by its two-day delivery which
when compared to the future type of contracts that have the duration
of usually three months. The spot trade represents the "direct
exchange" between two kinds of currencies. The spot has the
shortest length of time. It involves money or cash rather than the
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contract. The interest is exclusive in the agreed transaction. The spot
market is the source for the data of this study.
4) Swap - This is the most common kind of forward transaction. The
currency swap consists of two parties exchanging currencies for a
period of time. The two parties agree to reverse the trade at a certain
later date. The Swap however is not considered as contracts and
swaps are not traded through the exchange.
5) Commercial Paper- commercial paper is a short term negotiable
money market instrument. CP is a note in evidence of the debt
obligation of the issuer. On issuing commercial paper the debt
obligation is transformed into an instrument. CP is thus an unsecured
promissory note privately placed with investors at a discount rate to
face value determined by market forces. CP is freely negotiable by
endorsement and delivery. A company shall be eligible to issue CP
provided - (a) the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore (b) the working
capital (fund-based) limit of the company from the banking system is
not less than Rs.4 crore and (c) the borrowal account of the company
is classified as a Standard Asset by the financing bank/s. The
minimum maturity period of CP is 7 days. The minimum credit rating
shall be P-2 of CRISIL or such equivalent rating by other agencies.
6) Treasury Bills-Treasury Bills are short term (up to one year)
borrowing instruments of the union government. It is an IOU of the
Government. It is a promise by the Government to pay a stated sum
after expiry of the stated period from the date of issue (14/91/182/364
days i.e. less than one year). They are issued at a discount to the
face value, and on maturity the face value is paid to the holder. The
rate of discount and the corresponding issue price are determined at
7) Certificate Of Deposit-Certificates of Deposit (CDs) is a negotiable
instrument and issued in de-materialized form or as a Usance Promissory
Note, for funds deposited at a bank or other eligible financial institution for a
specified time period. Guidelines for issue of CDs are presently governed by
various directives issued by the Reserve Bank of India, as amended from
time to time. CDs can be issued by (i) scheduled commercial banks
excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and
(ii) select all-India Financial Institutions that have been permitted by RBI to
raise short-term resources within the umbrella limit fixed by RBI. Banks
have the freedom to issue CDs depending on their requirements. An FI may
issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD
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together with other instruments viz., term money, term deposits, commercial
papers and intercorporate deposits should not exceed 100 per cent of its net
owned funds, as per the latest audited balance sheet.
8) American Depository Receipt (ADR) -Certificates issued by a U.S.
depository bank, representing foreign shares held by the bank,
usually by a branch or correspondent in the country of issue. One
ADR may represent a portion of a foreign share, one share or a
bundle of shares of a foreign corporation. If the ADR's are
"sponsored," the corporation provides financial information and other
assistance to the bank and may subsidize the administration of the
ADR "Unsponsored" ADRs do not receive such assistance.
9) Global Depository Receipt (GDR)-A global depository receipt is a
dollar denominated instrument traded on a stock exchange in Europe
or the U.S.A . or both. It represents a certain number of underlying
equity shares. Though the GDR is quoted & traded in dollar terms,
the underlying equity shares are denominated in rupees. The shares
are issued by the company to an intermediary called depository in
whose name the shares are registered. It is the depository which
subsequently issues the GDRs.
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DEFINITION & TYPES OF DEBT INSTRUMENTS
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, for instance, 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 is borrowing at a pre-announced coupon rate
targeting a captive group of investors, such as banks. This, coupled with
the automatic monetization of fiscal deficit, prevented the emergence of a
deep and vibrant government securities market.
The bond markets exhibit a much lower volatility than equities, and all
bonds are priced based on the same macroeconomic information. The
bond market liquidity is normally much higher than the stock market
liquidity in most of the countries. The performance of the market for debt is
directly related to the interest rate movement as it is reflected in the
yields of government bonds, corporate debentures, MIBOR-related
commercial papers,and non-convertible debentures.
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IMPORTANCE & SIGNIFICANCE OF DEBT
The debt market is a market where fixed income securities issued by the
Central and state governments, municipal corporations, government
bodies, and commercial entities like financial institutions, banks, public
sector units, and public limited companies. Therefore, it is also called fixed
The key role of the debt markets in the Indian Economy stems from the
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 and
long term objectives.
Since the Government Securities are issued to meet the short term and
long term financial needs of the government, they are not only used as
instruments for raising debt, but have emerged as key instruments for
internal debt management, monetary management and short term liquidity
The returns earned on the government securities are normally taken as the
benchmark rates of returns and are referred to as the risk free return in
financial theory. The Risk Free rate obtained from the G-sec rates are often
used to price the other non-govt. securities in the financial markets.
Advantages of debt instruments:
Reduction in the borrowing cost of the Government and enable
mobilization of resources at a reasonable cost.
Provide greater funding avenues to public-sector and private sector
projects and reduce the pressure on institutional financing.
Enhanced mobilization of resources by unlocking illiquid retail
investments like gold.
Development of heterogeneity of market participants
Assist in development of a reliable yield curve and the term structure
of interest rates.
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Risks associated with debt securities
The debt market instrument is not entirely risk free. Specifically, two main
types of risks are involved, i.e., default risk and the interest rate risk. The
following are the risks associated with debt securities:
Default Risk: This can be defined as the risk that an issuer of a bond
may be unable to make timely payment of interest or principal on a
debt security or to otherwise comply with the provisions of a bond
indenture and is also referred to as credit risk.
Interest Rate Risk: can be defined as the risk emerging from an
adverse change in the interest rate prevalent in the market so as to
affect the yield on the existing instruments. A good case would be an
upswing in the prevailing interest rate scenario leading to a situation
where the investors' money is locked at lower rates whereas if he had
waited and invested in the changed interest rate scenario, he would
have earned more.
Reinvestment Rate Risk: can be defined as the probability of a fall in
the interest rate resulting in a lack of options to invest the interest
received at regular intervals at higher rates at comparable rates in the
The following are the risks associated with trading in debt securities:
Counter Party Risk: is the normal risk associated with any transaction
and refers to the failure or inability of the opposite party to the
contract to deliver either the promised security or the sale-value at
the time of settlement.
Price Risk: refers to the possibility of not being able to receive the
expected price on any order due to a adverse movement in the
The Indian debt market is composed of 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.
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The trading platforms for government securities are the ‗Negotiated Dealing
System‘ and the Wholesale Debt Market (WDM) segment of NSE and BSE.
In the negotiated market, the trades are normally decided by the seller and
the buyer, and reported to the exchange through the broker, whereas the
WDM trading system, known as NEAT (National Exchange for Automated
Trading), is a fully automated screen-based trading system, which enables
members across the country to trade simultaneously with enormous ease
Price determination of debt instruments
The price of a bond in the markets is determined by the forces of demand
and supply, as is the case in any market. The price of a bond also depends
on the changes in:
• Economic conditions
• General money market conditions, including the state of money supply in
• Interest rates prevalent in the market and the rates of new issues
• Future Interest Rate Expectations
• Credit quality of the issuer
Debt Instruments are categorized as:
• Government of India dated Securities (G Secs) are 100-rupee face-value
units/ debt paper issued by the Government of India in lieu of their
borrowing from the market. They are referred to as SLR securities in the
Indian markets as they are eligible securities for the maintenance of the
SLR ratio by the banks.
• Corporate debt market: The corporate debt market basically contains PSU
bonds and private sector bonds. The Indian primary Corporate Debt market
is basically a private placement market with most of the corporate bonds
being privately placed among the wholesale investors, which include
banks, financial Institutions, mutual funds, large corporates & other large
The following debt instruments are available in the corporate debt market:
• Non-Convertible Debentures
• Partly-Convertible Debentures/Fully-Convertible Debentures (convertible
into Equity Shares)
• Secured Premium Notes
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• Debentures with Warrants
• Deep Discount Bonds
• PSU Bonds/Tax-Free Bonds
.Interest Rate Derivatives
An interest rate futures contract is "an agreement to buy or sell a package
of debt instruments at a specified future date at a price that is fixed today."
The price of debt securities and, therefore, interest rate futures, is inversely
proportional to the prevailing interest rate. When the interest rate goes up,
the price of debt securities and interest rate futures goes down, and vice
versa. Some of the assets underlying interest rate futures include US
Treasuries, Euro-Dollars, LIBOR Swap, and Euro-Yen futures.
Interest rate futures contracts can have short-term (less than one year) and
long-term (more than one year) interest bearing instruments as the
underlying asset. In the US, short-term interest rate futures like 90-day T-
Bill and 3-month Euro-Dollar time deposits are more popular. Long-term
interest rate futures include the 10-year Treasury Note futures contract, and
the Treasury Bond futures contract.
Hedging with Interest rate futures
Interest rate futures can be used to protect against an increase in interest
rates as well as a decline in interest rates. By selling interest rate futures,
also known as short hedging, an investor can protect himself against an
increase in interest rates; and by buying interest rate futures, also known
as long hedging, an investor can protect himself against a decline in
interest rates. Thus, short, medium, and long-term interest rate risks can be
managed with products based on Euro-Dollars, US Treasuries, and Swaps
in Europe and the US. In India, interest rate derivatives would be used for
hedging in the near future.
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Money market opportunities for SMEs
To begin with a brief rejoinder, the Indian money market is a market for
short term securities like T-bills, certificates of deposits, commercial
papers, repos and others. These debts are issued by the government,
banks, companies and financial institutions, respectively. The papers
traded are almost like a promissory note which usually has a fixed interest
rate and a maturity of less than one year.
Since the securities in this market are less than one year, and the source of
these securities is the government/banks/highly-rated companies, the credit
risk involved is considered to be low (though slightly higher than an FD).
Moreover, the tax incidence on the income from these schemes (depending
on the plan) is usually lower than the one that the interest on savings
accounts or FDs invite.
Therefore, from the SME point of view, the leveraging of the debt market
can actually come in two forms. First, as a supplier of debt, and second, as
the buyer. The capacity of the SME to tap the debt market is correlated
directly to the growth trajectory of the corporate debt segment. However,
the real and immediate gain potential for SMEs rests on their ability as the
buyer of debt, especially of short term debts.
A convenient alternative and yet a potentially enhanced ‗revenue-
generative‘ method of parking the surplus is in the liquid, ultra-short term
and the bond/gilt schemes of mutual funds. These schemes usually also
invest your money in the money market and debt market securities,
depending on the investment mandate of the fund.
.Debt market refers to the financial market where investors buy and sell
debt securities, mostly in the form of bonds. These markets are important
source of funds, especially in a developing economy like India. India debt
market is one of the largest in Asia. Like all other countries, debt market in
India is also considered a useful substitute to banking channels for finance.
The most distinguishing feature of the debt instruments of Indian debt
market is that the return is fixed. This means, returns are almost risk-free.
This fixed return on the bond is often termed as the 'coupon rate' or the
'interest rate'. Therefore, the buyer (of bond) is giving the seller a loan at a
fixed interest rate, which equals to the coupon rate.
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Classification of Indian Debt Market
Indian debt market can be classified into two categories
Government Securities Market (G-Sec Market): It consists of central and
state government securities. It means that, loans are being taken by the
central and state government. It is also the most dominant category in the
India debt market.
Bond Market: It consists of Financial Institutions bonds, Corporate bonds
and debentures and Public Sector Units bonds. These bonds are issued to
meet financial requirements at a fixed cost and hence remove uncertainty
in financial costs.
The biggest advantage of investing in Indian debt instrument is its assured
returns. The returns that the market offer is almost risk-free (though there is
always certain amount of risks, however the trend says that return is almost
assured). Safer are the government securities. On the other hand, there
are certain amounts of risks in the corporate, FI and PSU debt instruments.
However, investors can take help from the credit rating agencies which rate
those debt instruments. The interest in the instruments may vary depending
upon the ratings.
Another advantage of investing in India debt instrument is its high liquidity.
Banks offer easy loans to the investors against government securities.
As there are several advantages of investing in India debt instrument, there
are certain disadvantages as well. As the returns here are risk free, those
are not as high as the equities instrument at the same time. So, at one
hand you are getting assured returns, but on the other hand, you are
getting less return at the same time.
Retail participation is also very less here, though increased recently. There
are also some issues of liquidity and price discovery as the retail debt
instrument is not yet quite well developed.
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TYPES OF DEBT INSTRUMENTS
There are various types of debt instruments available that one can find in
It is the Reserve Bank of India that issues Government Securities or G-
Secs on behalf of the Government of India. These securities have a
maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where
interests are payable semi-annually. For shorter term, there are Treasury
Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364
Advantages of Government Securities
Greater safety and lower volatility as compared to other financial
Variations possible in the structure of instruments like Index linked
Higher leverage available in case of borrowings against G-Secs.
No TDS on interest payments
Tax exemption for interest earned on G-Secs. up to Rs.3000/- over
and above the limit of Rs.12000/- under Section 80L (as amended in
the latest Budget).
Greater diversification opportunities
Adequate trading opportunities with continuing volatility expected in
interest rates the world over
These bonds come from PSUs and private corporations and are offered for
an extensive range of tenures up to 15 years. There are also some
perpetual bonds. Comparing to G-Secs, corporate bonds carry higher risks,
which depend upon the corporation, the industry where the corporation is
currently operating, the current market conditions, and the rating of the
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corporation. However, these bonds also give higher returns than the G-
Advantages of Corporate Bonds:
They are provide a fixed stream of income so they are safer than
Bond holders get paid by companies before stock holders. For
example, companies are required to make interest payments to
bondholders, but are not required to make dividend payments to
stock holders. Another example of this is that if the company went
bankrupt, the bond holders would be the ones to get the proceeds
from auctioning off the company's assets and the stock holders would
Another advantage of corporate bonds over government bonds is that
they provide higher interest. The reason for this is because interest
rates are made up of a few ingredients. First is the real interest rate
(the actual money you are receiving simply for loaning money), then
the inflation premium (bonds have to pay extra interest so that bond
holders don't have the value of their payments decline due to
inflation), then is the liquidity premium (this is extra interest bond
issuers have to pay if their bond is not easily bought and sold.
Disadvantages of Corporate Bonds:
As we said earlier, bonds are considered safer than stocks because
they offer a steady flow of income while there is no guaranteed
income from stocks. However, stocks offer greater potential returns if
its price increases. So in this way, bonds and stocks obey a
fundamental rule of economics: with greater risk there is greater
reward. So in periods of slow economic growth, bonds may look more
attractive because it is unlikely stocks will provide good returns. In a
period of expansion, however, stocks look much more attractive than
bonds because you could make a lot more in much less time if your
stocks go up.
Another disadvantage of corporate bonds over government bonds is
that corporate bonds have more risk. While this does offer a higher
yield in return, if you are risk averse, you would view this as a
disadvantage of corporate bonds. This is where the biggest difference
between corporate and government bonds lies. Government bonds
are considered to be the safest investments having basically no risk
KISHINCHAND CHELLARAM COLLEGE Page 21
that the government will default on its loans. On the other hand,
corporations can and do go bankrupt. Because of this, corporate
bonds are considered riskier than government bonds.
Because bonds are a fixed investment, they may not offer protection
against inflation changes within an economy. If the interest rates on a
bond investment are low and inflation increases more than average
or expected, the investor has the potential to lose purchasing power
within their portfolio.
The prices of bonds are affected by fluctuations in interest rates
within the economy. Bond prices move inversely to interest rates;
when interest rates rise, bond rates fall and vice versa.
Some bonds are callable, meaning that the Issuer can redeem the
bonds issued. This is common when interest rates decline, making it
more favorable for the Issuer to refinance their debts. If this occurs,
the investor would be forced to redeem their bond and replace it with
a new one that potentially would have lower coupon rates. For an
investor who is relying on this income for their lifestyle, this can be a
Certificate of Deposit
These are negotiable money market instruments. Certificate of Deposits
(CDs), which usually offer higher returns than Bank term deposits, are
issued in demat form and also as a Usance Promissory Notes. There are
several institutions that can issue CDs. Banks can offer CDs which have
maturity between 7 days and 1 year. CDs from financial institutions have
maturity between 1 and 3 years. There are some agencies like ICRA,
FITCH, CARE, CRISIL etc. that offer ratings of CDs. CDs are available in
the denominations of Rs. 1 Lac and in multiple of that.
Advantages of Certificate of Deposit:
CDs typically offer a higher rate of interest than Treasury bills and
savings account due to the higher risk associated with them.
As the rate of interest is fixed, your return on investment is ensured
despite the rate fluctuations in the market.
CDs are insured by Federal Deposit Insurance Corporation and
hence are a good investment option for single income households
and retired folks. CDs are a risk-free investment.
The return on CDs is assured and helps in financial planning.
KISHINCHAND CHELLARAM COLLEGE Page 22
It‘s very easy to set up a CD. One needs to just walk to their local
bank and request for purchase of CD. Money from the existing
savings account will be ear-marked against the CD that has been
purchased. The only thing to be made sure that the bank is FDIC
CDs can be purchased and sold through a brokerage firm. This way
you can encash the CD before the maturity term without paying the
Disadvantages of Certificate of Deposit :
Money is tied down for long durations of time. Though the investor
can withdraw money, he has to generally incur penalty in terms of
some amount of loss of interest on the deposit amount. You can get a
waiver on the penalty in case of special circumstances like disability,
death or retirement.
As the rate of interest is fixed, it is difficult to change or to take
advantage of the market situation when the market rates are
favorable. You will not be able to get an interest rate that favors
Though the return rate is higher on CDs than savings account, it is
much lower than other money market instruments where you can
make possible investments.
In the global money market, commercial paper is a unsecured promissory
note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-
market security issued (sold) by large banks and corporations to get money
to meet short term debt obligations (for example, payroll), and is only
backed by an issuing bank or corporation's promise to pay the face amount
on the maturity date specified on the note. Since it is not backed by
collateral, only firms with excellent credit ratings from a recognized rating
agency will be able to sell their commercial paper at a reasonable price.
Commercial paper is usually sold at a discount from face value, and carries
higher interest repayment dates than bonds. Typically, the longer the
maturity on a note, the higher the interest rate the issuing institution must
pay. Interest rates fluctuate with market conditions, but are typically lower
KISHINCHAND CHELLARAM COLLEGE Page 23
than banks' ratesThere are short term securities with maturity of 7 to 365
days. CPs are issued by corporate entities at a discount to face value.
Advantage of commercial paper:
High credit ratings fetch a lower cost of capital.
Wide range of maturity provide more flexibility.
It does not create any lien on asset of the company.
Tradability of Commercial Paper provides investors with exit options.
Disadvantages of commercial paper:
Its usage is limited to only blue chip companies.
Issuances of Commercial Paper bring down the bank credit limits.
A high degree of control is exercised on issue of Commercial Paper.
Stand-by credit may become necessary
Non-convertible debentures, which are simply regular debentures, cannot
be converted into equity shares of the liable company. They are debentures
without the convertibility feature attached to them. As a result, they usually
carry higher interest rates than their convertible counterparts.
Advantages of Non-Convertible Debentures:
The advantage of issuing corporate bonds can be seen in achieving a
higher degree of company capital structure flexibility, and a company
is thus more able to react promptly to constantly changing conditions,
which consequently leads to generating larger financial sources.
Another advantage means that corporate bonds emissions can make
up a considerable amount of money provided by a large number of
As a consequence of a risk distribution among a large number of
creditors the bond emission is a lower costs alternative in comparison
to bank loans under a certain debt level condition.
Companies first accept bank loans, and that is to the degree to which
the loan is cheaper and otherwise more advantageous than bonds
emissions. Then they issue bonds and use a part of the gained
KISHINCHAND CHELLARAM COLLEGE Page 24
finance to paying loans and other liabilities off, which increases the
ability to accept other bank loans. After reaching the top limit of bank
loans a company issues bonds again and the cycle repeats itself.
In the third cycle a company issues shares and a part of sources is
used for paying off the bank loans, paying off the bonds and the rest
is used to finance a further development. Then a company increases
bank loans and the cycle repeats itself again.
A significant advantage rests in the fact that returns of corporate
bonds represent a tax base and in case of a company profitability an
interest tax shield can be used.
Furthermore shareholders do not lose a company activity control
when issuing corporate bonds, while issuing them often does not
even need a collateral in a form of a property pledge.
It is due to say that as a consequence of an obligation to pay back
the principal and returns of bonds managers get a clearer view of rate
of returns and that successful issuing of corporate bonds (especially
their placement) is considered a prestigious thing helping the
company to gain respect by the public and business partners.
Disadvantages of Non-Convertible Debentures:
On the other hand, the disadvantage of corporate bonds rests in the
fact that investors require a lot from credit issuer credibility, while
returns and principal must be always paid in time regardless the
A substantial disadvantage of bonds emissions lies in considerable
emission costs created by costs of issue (costs directly connected
with issuing corporate bonds) and costs of bonds life cycle (costs
connected with the particular emission, arising in course of the life
cycle and in connection to paying back the emission).
On the top of it creditors may restrict the issuing company in various
ways and have a right to express their opinions on problem issues
the solution of which may affect setting up claims to the bonds
The bond holder meeting decides common concerns of bond holders
and expresses opinions on problem issues that may affect setting up
claims to a bond, especially on suggestions of changes in terms of
bond emission conditions, on suggestions regarding: issuer
exchanges, issuer takeover bids by another subject, conclusions of a
KISHINCHAND CHELLARAM COLLEGE Page 25
contract to control a company or contracts on the profit transfer, a
sale of a company, a hire of a company or its part - all this in the
meaning of a Commercial Code; further on suggestions regarding a
bond programme, however also on problem issues of a common
process providing a bond issuer delays in discharging the bond
If a bond holder meeting does not agree on any of the suggestions,
they can decide an issuer obligation to pay back bond holders a
nominal bond value or an emission rate (in case of zero coupon
bonds) including a proportionate return. An issuer must do so before
one-month time from the date of this decision at the very latest.
Partly-Convertible Debentures/Fully-Convertible Debentures (convertible in
to Equity Shares)
Convertible debenture is basically is a type of commercial loan or a
debenture. A convertible debenture, as the name suggests gives a lender
the option of converting a loan into stock. So the company who has issued
the debentures can convert these into equity shares after, during or on
certain dates, making the debenture holder, a share holder. This
conversion factor also depends upon the type of convertible debenture the
company has issued and the exact agreement between company and
debenture holders. The 'convertible' factor is often added to the commercial
loan so as to attract the buyers as they can be the share holders later.
Advantages of Convertible Debenture:
Convertible bonds are usually issued offering a higher yield than
obtainable on the shares into which the bonds convert.
Convertible bonds are safer than preferred or common shares for the
investor. They provide asset protection, because the value of the
convertible bond will only fall to the value of the bond floor. At the
same time, convertible bonds can provide the possibility of high
Also, convertible bonds are usually less volatile than regular shares.
Indeed, a convertible bond behaves like a call option.
The simultaneous purchase of convertible bonds and the short sale of
the same issuer's common stock is a hedge fund strategy known as
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convertible arbitrage. The motivation for such a strategy is that the
equity option embedded in a convertible bond is a source of cheap
volatility, which can be exploited by convertible arbitrageurs.
In limited circumstances, certain convertible bonds can be sold short,
thus depressing the market value for a stock, and allowing the debt-
holder to claim more stock with which to sell short. This is known as
death spiral financing
Disadvantages of Convertible Debenture:
To convert the debentures into shares, if these are new:
They don‘t pass immediately through the quotations.
The securities have a less quotation price due that temporarily they
have lesser rights.
They are less liquid, due that there is a lesser amount of them.
You can‘t dispose of money soon due to the former explanation.
Usually the type of interests that they offer is inferior to that of the
ordinary debentures due that they offer the additional advantage of
placing them as shares on the markets
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COMPARISON BETWEEN A MONEY INSTRUMENT AND A DEBT
Both debt and money instruments are popular financial instruments on
which large amounts of money are traded between different businesses
and investors; however, they each deal with a different type of funding. The
instruments give businesses different types of obligations and investors
different perks when they deal in one or the other. Both, however, are used
by public businesses to raise money.
1. Debt Instrument
Debt instruments are used to trade debt instruments. In other words, the
business issues a debt instrument, and an investor buys it. In a specific
period of time, the investor is paid back for the debt, along with interest.
Interest rates and time frames can vary according to the instrument. Bonds
are one of the most widely trade debt instruments on the debt instrument.
Both large corporations and governments use the debt instrument to raise
money or to change economic conditions.
2. Money Instrument
On the money instrument, equity is traded instead of debt. this instrument
is more commonly known as the stock instrument. In the stock instrument,
stocks are sold as securities that give investors the right to a certain
amount of the company's earnings and assets. There are many different
types of stock shares sold to different types of investors, but they do not
exist as a debt to be paid off.
3. Business Differences
To the business, the difference between a money and debt instrument is
important. Every bond that the business issues must be paid back over
time--it is a loan, and the business is borrowing from investors. Eventually
the loan comes due. Businesses should only sell bonds when they are
confident they will have enough money in the future to meet their debt
obligations. Stocks, on the other hand, do not incur debt, but they do divide
ownership of the company among investors.
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4. Holder Difference
To the investor holding the bond or stock, the difference deals mostly with
the return on his investment. When an investor buys stock, he is buying
ownership of the business and can claim the right to vote on matters the
directors of the business decide. Investors do not have any ownership of
the business when they buy bonds; they receive only an obligation from the
business to repay the loan.
Traditionally, the debt instrument is more secure than the money
instrument. Stock dividends can be reduced or suspended when a
business suffers, but bond obligations must be paid as the contract
stipulates. This also means that stocks have a greater chance for growth
than bonds because their success depends on the success of the
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RBI/SEBI GUIDELINES FOR DEBENTURES
Issue of FCDs having a conversion period more than 36 months will not
be permissible, unless conversion is made optional with ―put‖ and ―call‖
Compulsory credit rating will be required if conversion is made for FCDs
after 18 months.
Premium amount on conversion, the conversion period, in stages, if
any, shall be pre-determined and stated in the prospectus.
The interest rate for above debentures will be freely determinable by the
Issue of debenture with maturity of 18 months or less are exempt from
the requirement of appointing Debenture Trustees or creating a
Debenture Redemption Reserve (DRR).
In other cases, the names of the debenture trustees must be stated in
the prospectus and DRR will be created in accordance with guidelines
laid down by SEBI.
The trust deed shall be executed within six months of the closure of the
Any conversion in part or whole of the debenture will be optional at the
hands of the debenture holder, if the conversion takes place at or after
18 months from the date of allotment, but before 36 months.
In case of NCDs/ PCDs credit rating is compulsory where maturity
exceeds 18 months.
Premium amount at the time of conversion for the PCD, redemption
amount, period of maturity, yield on redemption for the PCDs/NCDs
shall be indicated in the prospectus.
The discount on the non-convertible portion of the PCD in case they are
traded and procedure for their purchase on spot trading basis must be
disclosed in the prospectus.
In case, the non-convertible portions of PCD/NCD are to be rolled over,
a compulsory option should be given to those debenture holders who
want to withdraw and encash from the debenture programme.
Roll over shall be done only in cases where debenture holders have
sent their positive consent and not on the basis of the non-receipt of
their negative reply.
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Before roll over of any NCDs or non-convertible portion of the PCDs,
fresh credit rating shall be obtained within a period of six months prior to
the due date of redemption and communicated to debenture holders
before roll over and fresh trust deed shall be made.
Letter of information regarding roll over shall be vetted by SEBI with
regard to the credit rating, debenture holder resolution, option for
conversion and such other items, which SEBI may prescribe from time
The disclosures relating to raising of debentures will contain, amongst
other things, the existing and future equity and long term debt ratio,
servicing behavior on existing debentures, payment of due interest on
due dates on terms loans and debentures, certificate from a financial
institution or bankers about their no objection for a second or pari-passu
charge being created in favour of the trustees to the proposed debenture
And any other additional disclosure requirement SEBI may prescribe
from time to time.
Most of the listing requirements are common for both equity and debt
instruments in terms of disclosures with some additional provisions
specified for the debt instruments.
Until recently only infrastructure and municipal corporations could list
debt before equity, subject to certain requirements. SEBI now permits
listing of debt before equity subject to the condition that the debt
instrument is rated not below a minimum rating of ‗A‘ or equivalent
1. Short title and commencement of the directions
These directions may be called the Issuance of Non-Convertible
Debentures (Reserve Bank) Directions, 2010 and they shall come into
force with effect from August 02, 2010.
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For the purposes of these Directions,
Non-Convertible Debenture (NCD) means a debt instrument issued by a
corporate (including NBFCs) with original or initial maturity up to one year
and issued by way of private placement;
―Corporate‖ means a company as defined in the Companies Act, 1956
(including NBFCs) and a corporation established by an act of any
3. Eligibility to issue NCDs
A corporate shall be eligible to issue NCDs if it fulfills the following criteria,
the corporate has a tangible net worth of not less than Rs.4 crore, as per
the latest audited balance sheet;
the corporate has been sanctioned working capital limit or term loan by
bank/s or all-India financial institution/s; and
the borrowal account of the corporate is classified as a Standard Asset by
the financing bank/s or institution/s.
4. Rating Requirement
4.1 An eligible corporate intending to issue NCDs shall obtain credit rating
for issuance of the NCDs from one of the rating agencies, viz., the Credit
Rating Information Services of India Ltd. (CRISIL) or the Investment
Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit
Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd or
such other agencies registered with Securities and Exchange Board of
India (SEBI) or such other credit rating agencies as may be specified by the
Reserve Bank of India from time to time, for the purpose.
KISHINCHAND CHELLARAM COLLEGE Page 32
4.2 The minimum credit rating shall be P-2 of CRISIL or such equivalent
rating by other agencies.
4.3 The Corporate shall ensure at the time of issuance of NCDs that the
rating so obtained is current and has not fallen due for review.
5.1 NCDs shall not be issued for maturities of less than 90 days from the
date of issue.
5.2 The exercise date of option (put/call), if any, attached to the NCDs shall
not fall within the period of 90 days from the date of issue. 3.
5.3 The tenor of the NCDs shall not exceed the validity period of the credit
rating of the instrument.
NCDs may be issued in denominations with a minimum of Rs.5 lakh (face
value) and in multiples of Rs.1 lakh.
7. Limits and the Amount of Issue of NCDs
7.1 The aggregate amount of NCDs issued by a corporate shall be within
such limit as may be approved by the Board of Directors of the corporate or
the quantum indicated by the Credit Rating Agency for the rating granted,
whichever is lower.
7.2 The total amount of NCDs proposed to be issued shall be completed
within a period of two weeks from the date on which the corporate opens
the issue for subscription.
8. Procedure for Issuance
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8.1 The corporate shall disclose to the prospective investors, its financial
position as per the standard INSTRUMENT practice.
8.2 The auditors of the corporate shall certify to the investors that all the
eligibility conditions set forth in these directions for the issue of NCDs are
met by the corporate.
8.3 The requirements of all the provisions of the Companies Act, 1956 and
the Securities and Exchange Board of India (Issue and Listing of Debt
Securities) Regulations, 2008, or any other law, that may be applicable,
shall be complied with by the corporate.
8.4 The Debenture Certificate shall be issued within the period prescribed
in the Companies Act, 1956 or any other law as in force at the time of
8.5 NCDs may be issued at face value carrying a coupon rate or at a
discount to face value as zero coupon instruments as determined by the
9. Debenture Trustee
9.1 Every corporate issuing NCDs shall appoint a Debenture Trustee (DT)
for each issuance of the NCDs.
9.2 Any entity that is registered as a DT with the SEBI under SEBI
(Debenture Trustees) Regulations, 1993, shall be eligible to act as DT for
issue of the NCDs only subject to compliance with the requirement of these
9.3 The DT shall submit to the Reserve Bank of India such information as
required by it from time to time.
10. Investment in NCD
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10.1 NCDs may be issued to and held by individuals, banks, Primary
Dealers (PDs), other corporate bodies including insurance companies and
mutual funds registered or incorporated in India and unincorporated bodies,
Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).
10.2 Investments in NCDs by Banks/PDs shall be subject to the approval of
the respective regulators.
10.3 Investments by the FIIs shall be within such limits as may be set forth
in this regard from time to time by the SEBI
11. Preference for Dematerialisation
While option is available to both issuers and subscribers to issue/hold
NCDs in dematerialised or physical form, they are encouraged to issue/
hold NCDs in dematerialised form. However, banks, FIs and PDs are
required to make fresh investments in NCDs only in dematerialised form.
12. Roles and Responsibilities
12.1 The role and responsibilities of corporates, DTs and the credit rating
agencies (CRAs) are set out below:
12.2 Corporates shall ensure that the guidelines and procedures laid down
for issuance of NCD are strictly adhered to.
(b) Debenture Trustees
12.3 The roles, responsibilities, duties and functions of the DTs shall be
guided by these regulations, the Securities and Exchange Board of India
(Debenture Trustees) Regulations,1993, the trust deed and offer document.
KISHINCHAND CHELLARAM COLLEGE Page 35
12.4 The DTs shall report, within three days from the date of completion of
the issue, the issuance details to the Chief General Manager, Financial
INSTRUMENTs Department, Reserve Bank of India, Central Office, Fort,
12.5 DTs should submit to the Reserve Bank of India (on a quarterly basis)
a report on the outstanding amount of NCDs of maturity up to year.
12.6 In order to monitor defaults in redemption of NCDs, the DTs are
advised to report immediately, on occurrence, full particulars of defaults in
repayment of NCDs to the Financial INSTRUMENTs Department, Reserve
Bank of India, Central Office, Fort, Mumbai-400001, Fax: 022-
12.7 The DTs shall report the information called for under para 12.4, 12.5
and 12.6 of these Directions as per the format notified by the Reserve Bank
of India, Financial INSTRUMENTs Department, Central Office, Mumbai
from time to time.
(c) Credit Rating Agencies (CRAs)
12.8 Code of Conduct prescribed by the SEBI for the CRAs for undertaking
rating of capital INSTRUMENT instruments shall be applicable to them
(CRAs) for rating the NCDs.
12.9 The CRA shall have the discretion to determine the validity period of
the rating depending upon its perception about the strength of the issuer.
Accordingly, CRA shall, at the time of rating, clearly indicate the date when
the rating is due for review.
12.10 While the CRAs may decide the validity period of credit rating, they
shall closely monitor the rating assigned to corporates vis-à-vis their track
record at regular intervals and make their revision in the ratings public
through their publications and website.
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13. Documentary Procedure
13.1 Issuers of NCDs of maturity up to one year shall follow the Disclosure
Document brought out by the Fixed Income Money INSTRUMENT and
Derivatives Association of India (FIMMDA), in consultation with the
Reserve Bank of India as amended from time to time.
14. Violation of the directions will attract penalties, which would include
debarring of the entity from the NCD INSTRUMENTs
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NCD Issue Of Shriram Transport Fianance Limited
Shriram Transport Finance Company Limited (STFC), India's largest player
in commercial vehicle finance, was established in the year 1979. The
company has a network of 484 branches and service centres.
STFC is the flagship company of the Shriram Group which has significant
presence in Chit Funds, Consumer Durable Finance, Life Insurance,
General Insurance , Stock Broking, Property Development, Project
Engineering, Wind Energy among others.
Non-banking finance company, Shriram Transport Finance, plans to raise
up to Rs 250-crore through Non Convertible Debentures (NCDs) with an
option to retain over-subscription up to Rs 250-crore for issuance of
additional NCDs, a top company official said.
The issue opens on May 17 and closes on May 31. "The company wil use
the amount to expand its business and repay loans. The issue may be
closed on May 31 with an option to close earlier or extend up to a period as
may be determined by the Board of Directors of the company," Shriram
Transport Finance's Managing Director, R Sridhar, told reporters today.
The company's current loan-book stands at around Rs 30,000-crore,
Sridhar said, adding the company is repaying between Rs 5,000-crore-Rs
6,000-crore every year.
The issue offers three options for investing in secured bonds and two for
unsecured paper. The secured debt is rated 'AA-plus' by CARE and 'AA' by
Crisil while the unsecured debt is rated 'AA' by CARE and and 'AA' by
JM Financial and ICICI Securities are lead managers to the issue and RR
Investors Capital Services is co-lead manager.
"Shriram Transport Finance is the largest asset financing non banking
finance company in the country," he said adding the company is growing
KISHINCHAND CHELLARAM COLLEGE Page 38
around 20 per cent year-on-year.
"We are growing very fast and will continue to grow in the truck financing
segment. We are currently growing around 20 per cent year-on-year and
will continue to keep the same momentum in FY 11 also," Sridhar said.
The company had raised Rs 1,000-crore through NCDs last year.
"We will continue to raise money to expand our business in future through
NCDs," he said.
The company currently has 7-lakh customers. Last year, it added 3.5-lakh
"We are adding at least 3-4-lakh customers every year. Our business
model is very unique in the industry," he said.
In FY 10, the company's profit jumped around 42 per cent at Rs 874-crore
as against Rs 612-crore last year
NCD Issue Of Larsen & Turbo Limited
Engineering major Larsen & Toubro group firm L&T Finance on Tuesday
opened its debentures issue to raise up to Rs 1,000 crore to fund its
financing activities, including lending and investments.
L&T Finance along with L&T Capital Holdings would offer 50 lakh
secured non-convertible debentures (NCD), debentures that cannot be
converted into equity, at Rs 1,000 each, totaling to Rs 500 crore, with an
option to raise an additional Rs 500 crore if the subscription is over
subscribed, the company said.
The NCD issue is with various investment options and yield on
redemption of up to 10.5 per cent. The issue would close on September
The NCDs have been rated AA+ by rating agency CARE and LAA+ by
ICRA, which indicate low credit risk.
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Talking on L&T Finance's growth plans, L&T Executive Vice-President
(Finance) R Shankar Raman said, "We have asset base of Rs 5,500 crore
as of March 31,2009. We plan to grow that by about 25 to 30 per cent in
the current fiscal."
He further said indications in the first three months of the current fiscal
have been encouraging and L&T Finance hopes to do better in the coming
Larsen & Toubro arm L&T Finance has opted for the non-convertible
debentures (NCDs) route to raise funds for the second time in the past six
months. It has also applied for a preliminary application for receiving a
licence from the Insurance Regulatory & Development Authority (IRDA) to
enter the general insurance business.
―We have learnt from our earlier issue that the NCD route is the best option
to raise funds. So we are going for it without giving a second thought and
we intend to raise up to Rs 500 crore through this issue where the maturity
period is 36 months from the date of allotment,‖ L&T Finance senior vice
president (financial services) N Sivaraman said.
It will offer 25 lakh secured non-convertible debentures of Rs 1,000 each,
totalling Rs 250 crore. ―The company has retained the option to raise the
additional Rs 250 crore if the issue is over-subscribed,‖ Sivaraman said. It
will sell two series of bonds with a maximum yield of 8.58 per cent — the
first series has a coupon rate of 8.40 per cent payable half-yearly and the
second option pays a coupon of 8.50 per cent payable annually. The issue
is priced based on the company‘s borrowing costs, which currently stand at
a weighted average of around 8.25 per cent.
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For a developing economy like India, debt instruments are crucial sources
of capital funds. The debt instrument in India is amongst the largest in Asia.
It includes government securities, public sector undertakings, other
government bodies, financial institutions, banks, and companies.
An investor can invest in money market mutual funds for a period of as little
as one day.
Avenues are also available for investing for longer horizons according to
In conclusion, the ability of a continuously evolving and self-propelling
enterprise is its ability to not only learn and adapt to changes and
opportunities, but also to make full use of them as and when possible.
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Financial Accounting By Marian Powers
Times Of India
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