What are Bonds?
A bond is a debt security in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals. Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds have a maturity period of more than one year which differentiates it from other debt securities like commercial papers, treasury bills and other money market instruments. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. History of Bond Market in India:
During the post independence era India had only traditional commercial banks, all with private sector ownership. These banks were ready to provide working capital to industries but not long term financing because of the fear of asset liability mismatch. The Government was in urgent need of some financial intermediaries that could provide term finance for infrastructure development and expansion. Thus came into picture national and state level development financial institutions (DFIs) which were backed by Reserve Bank of India and Govt. of India through various incentives and other supportive measures for providing long term financing to all range of industrial units. To enable DFIs to finance industry at concessional rates, the Govt. and RBI gave them access to low cost funds; also they were allowed to issue bonds under Govt. guarantee and were given funds from budget too. The whole financial sector was regulated by RBI, so much so that commercial banks were not allowed to provide working capital loans on an interest rate lower than DFIs long term project finance loan. Hence DFIs enjoyed a virtual monopoly in long term finance. Then came the decade of Financial Sector Liberalization with deregulation being introduced in 1991. DFIs were no longer given access to concessional source of finance. Also with liberalization came more liberal imports which impacted profitability of many industries assisted by DFIs in the past. Hence DFIs were getting saddled with increasing level of NPAs. DFIs realized that their role as purveyors of development finance is no longer relevant. Also they found that they are not in the position to finance long term maturity funds and have to satisfy themselves with short and medium term maturity bond funds. This retreating of DFIs left a gap, and the Govt. realized that there is an urgent need of an alternative supply of term finance to industry and infrastructure. Then it was realized the best course of action for the Govt. would be to strengthen capital and, in particular, encourage active bond market. Present Scenario:
The two important pillars of the Indian capital market are- the equity market and the bond market. While the equity market has expanded in leaps and bounds, the bond market is poorly developed and lacks enough depth as it formed merely 41.6 percent of the GDP as of 2007 (38.3 per cent in government debt and 3.2 per cent in corporate debt). Boasting of one of the largest debt capital markets in Asia (after China) there still exist lots of structural defects as we delve deeper into this market. The trading volume in the US debt market is said to be much higher than the size of the equity trading. In India the average daily trading in debt is insignificant compared to equity segment. The different types of bond market in India:
* Corporate Bond Market
* Municipal Bond Market
* Government and Agency Bond Market
* Funding Bond Market
* Mortgage Backed and Collateral Debt Obligation Bond Market The bond market in India is typically classified into three categories viz. the government, the corporate and the financial. Of these three the...