In the primary market, new debt issues are floated either through prospectus, rights or privates placement.
The debt instruments are traded on the OTCEI, BSE, and WDM segment of NSE. BSE is the first exchange in the country to provide an electronic trading platform for corporate and other non-government debt securities rough the order matching system. The clearing and settlement of the trades is undertaken through the clearing house of the exchange.
The National Stock Exchange of India Ltd, se up a separate segment for trading in debt securities known as the Wholesale Debt Market segment of the exchange. In fact, NSE commenced operations in June 1994 with the WDM segment of the exchange. Prior to he commencement of trading in the WDM segment of NSE, the only trading mechanism available in debt market was the telephone. The NSE provided, for the first time in the country, an on-line automated screen based system known as NEAT (National Exchange for Automated Trading) across a wide range of debt instruments. This system is an order driven system which matches the best buy and sell orders on a price time priority and simultaneously protects the identity of the buyer and the seller. Trading under this system leads to a risk free, efficient price mechanism and transparency.
Initially, government securities, T-bills, and bonds issued by public sector undertakings were made available for trading. Now his range has been widened to include non-traditional instruments such as floating rate bonds, zero coupon bonds, index bonds, commercial a paper, certificate of deposit, corporate debentures state government loans, SLR and non-SLR bonds issued by financial institutions and local bodies, units of mutual funds and securitized debt.
On the NSE-WDM segment, brokers are involved merely in order execution for their clients only. Besides brokers there are two types of entities in this segment: (1) trading members and (2) participants. Trading membership is open to corporates, subsidiaries of banks and financial institutions satellite dealers and primary dealers who have a minimum net worth of Rs 2 crore. They can place orders and execute Trades on the system. Participants take direct settlement responsibility for trades executed on the exchange on their behalf by an NSE Trading member. Participants comprise of large investors such as banks, primary dealers and institutions who are not members of NSE and therefore cannot directly transact but effect transactions through the NSE-WDM segment.
The trades on the WDM segment could be outright trades or repo transactions with flexibility for varying days of settlement. Trades are settled gross on a trade for trade basis and netting of transactions is not allowed.
The number of securities listed on the WDM segment of NSE was 1,159 as on March 31, 2002, while the total number of securities available for trading on this segment was 1,790. Te turnover on the WDM segment of NSE was 947,161 crore in 2001-02 reflecting an increase of 121 per cent on account of softening of interest rates. The market capitalization of the securities available or trading was Rs756,794 crore on March 31, 2002 as compared with Rs 580,835 crore on March 31, 2002 reflecting an increase in gilt prices. Government securities dominate this segment, accounting for more than 95 per cent of the transactions.
The Private Corporate debt Market:
Private sector companies raise funds from the debt market by issuing debentures. These debentures can be converted into equity (partially or fully convertible debentures) or non-convertible debentures (NCDs). These are governed by the provisions of the Companies Act. Interest on these debentures is calculated on an actual 365 day basis. Tax deduction at source (TDS) is applicable.
Corporate adopt either the public offering route or the private placement route for issuing debentures/bonds. The public issues of debentures are open to all investors and allotment is made on a pro- rata basis. Coupon rates are fixed by the issuer and lead manager prior to the offering. In the case of privately placed debentures, the terms of the issue are decided by negotiations between issuers and bidders. Some privately placed debt instruments are subsequently listed on stock exchanges.
The private corporate sector has designed a hybrid variety of instruments combining the features of both debt and equity. A wide variety of instruments with longer maturity and with call and out options have been issued by the private corporate sector. Many corporate have issued floating rate bonds (FRB) besides fixed rate bonds.
The corporate debt market constitutes a small segment of the debt market despite measures taken to promote this market during 1990s.