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 From the desk of Head, Equity Research Cell
 Thank You Note To All Our Subscribers.

 Debt Market/Funds are in limelight as Equity Market

Crashed!!!
 Indian Bond Market & Its Future Prospects?
 When Equity Goes Down, Bond Market Flourish.
 Bond Market : Expected to participate in Next Bull Run.

 Are you looking for a great company from bond market,

with potential to give 10x return in 3 years (10in3)?

 India's debt market could touch $1.5 trillion by 2016

 HBJ Capital, India – Our Services.

“Make the rest follow your path” – HBJ Capital.

 From the desk of Head, Equity Research Cell.
In matured economies
debt market is three
times the size of the
equity market. As per
this our debt market
should be $1.5trillion!!!
“Rupees are lot like seeds, you can eat the seeds or sow them”. Choice is yours?
Dear Investors,
India is a fast growing country with consumption,
infrastructure development & outsourcing driving
the growth. Financial sector which is also called
mother of all sector s is helping the entire industry
to achieve their growth target. But one of the major
part of financial sector which is “debt market” is still
underdeveloped in India.
The debt market is much more popular than the equity
markets in most parts of the world. In India the
reverse has been true. Nevertheless, the Indian debt
market has transformed itself into a much more
vibrant trading field for debt instruments from the
rudimentary market about a decade ago.
So, as a part of HBJ Capital’s “Street Smart”
newsletter we have covered debt market which
has massive potential to create long term
wealth, this sector will be in demand soon.
Head, Equity Research, HBJ Capital
 Thanks To All Our Subscribers.
Let’s have a look at our testimony for “10in3” report sent in Sept’08 by HBJ Capital
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Many more to follow………….

A crash really occurs when you suddenly have a violent downturn in the market that then
heralds a long bull market.
 d s
u n
t /F as
k e h t
ar lig t
M e k e
b t lim ar
De e in ity M d!!!
ar qu she
E ra
C
Dear HBJ, Could you Pls brief us on
Indian Bond Market & its future
prospects?
Development of bond/debt market in India
 Bond or debt are used synonymously to each other. In layman terms, if you buy a piece of paper
issued by govt. (PPF, NSC, Infrastructure or Municipal papers etc) or paper backed by a
corporate & rated by the rating agencies and if you get paid x% interest on it with some
maturity period associated. Your paper will be called bond and interest earned will be called
yield on the bond. Interest rate on these papers will be more or less close to our fixed deposits.
Risk involved in owning these bonds are very low compare to risk in equity market.

 The debt market is much more popular than the equity markets in most parts of the world. In
India the reverse has been true. Nevertheless, the Indian debt market has transformed itself
into a much more vibrant trading field for debt instruments from the rudimentary market
about a decade ago.

Development of Government Bond Market Development of Corporate Bond Market

 Prior to 1992, the GOI bond market did not use  In the recent past, the corporate debt
trading on an exchange. It featured bilateral market has seen high growth of innovative
negotiation between dealers. The market thus asset-backed securities. The servicing of
lacked price-time priority and the bilateral debt and related obligations for such
transactions imposed counterparty credit risk instruments is backed by some sort of
on participants. This narrowed down the market financial assets and/or credit support from a
into a “club” with homogeneous credit risk. third party.
 The major reforms that took place in the 1990’s
were…The Primary market for G-Securities  Over the years greater innovation has been
registered an almost ten-fold increase between witnessed in the corporate bond issuances,
1990-91 and 1998-99. like floating rate instruments, zero coupon
bonds, convertible bonds, callable (put-able)
bonds and step-redemption bonds.
As the bull market goes on, people who take great risks achieve great rewards, seemingly
without punishment. It's like crime without punishment or sex without sin.
 Two segments of debt market…
 Historically, India debt market has suffered a severe neglect of policymakers in spite of the
fact that India has a fairly strong debt preference among households for their financial
investment portfolio.

 Government Securities Market.  Corporate Debt Market (PSU Bonds and

 It dominates the market in terms of
outstanding issues, market
capitalization and volume of trade thus
setting a standard for the rest of the
market through instruments like floating
rate bonds, zero-coupon bonds, treasury
bills and state government bonds.
 At 38% of GDP, the Indian government
debt market compares well with markets
such as Thailand, Singapore, Malaysia
and PRC.
 In absolute terms, however, given India’s
greater overall size, the Indian
government bond market is considerably
larger than most other emerging East
Asian markets.
Private Sector Bonds).
 It encompasses private corporate debts
consisting of debentures, fixed deposits,
bonds issued by private sector enterprises,
commercial papers and other institutions
relating to financial and infrastructural
development.
 The corporate bond market is less
developed than most in emerging East
Asia, with private placements dominating.
 At 3% of GDP, corporate bonds are
comparable to levels in the Philippines and
Indonesia where corporate finance is less
well developed. In absolute terms India’s
corporate bond market is minuscule in
relation to its economic size.

In the 1920s you could buy stocks on margin. You could put 10 percent down and borrow the rest
against your stocks.
The Structure of the Indian Debt Market

 How retail investment in debt securities will increase?

 Returns on G-securities have increased to approx 8-10 per cent per annum currently for long tenure bonds. This
is more than the comparable rate on small saving tools like post office monthly income schemes and KVP.
 The regulatory authorities are trying to being a trading platform for debt securities, thereby imparting
liquidity.
 Equity return expectation is being scaled down due to equity market crash.
 There are efforts to boost the tax-free municipal bonds market in India.
 Debt Market is among the largest segments in countries like the US in terms of retail participation.

In the 1970s we saw a massive shift of household savings from the banks to the brokerage
firms.
 FIIs shift focus on government debt market
 FIIs shift focus on government
debt market, SEBI also hiked the
investment limits in bonds.

 SEBI recently hiked the investment limit for FIIs to

$11-bn in the domestic debt markets, which includes
up to $5-bn in the government securities and up to
$6-bn in the corporate bonds.

 These FII funds, which were initially channelized

into the stock market, may now find an entry into
the debt market.

 FIIs have two routes to enter India. One is the 70:30

SEBI has hiked route for equity, for FIIs, who can invest a
the investment maximum 30% of the money in debt here. The
in debt market second is the route for pure debt FIIs, where the
foreign investor has to register with Sebi as an FII.
to $11 billion,
FII funds are  Foreign banks contributes 26.85% of trade in
flow to Debt wholesale debt market.
Market now.

Mutual funds give people the sense that they're investing with the big boys and that they're
really not at a disadvantage entering the stock market.
Opportunity in Corporate bond market.

Corporate bond market is just 3.2% of GDP compare to average 30% for other
emerging market.
India has developed a world-class equities market from relatively unpromising beginnings. Since 1996, the ratio of
equity market capitalization to GDP has more than trebled to 108%, from 32.1% in 1996.
In contrast, the development of government and corporate bond markets has not been so fast: the bond market
grew to a more modest 43.4% of GDP, from 21.3% in 1996.
In June 2007, the government bond market represented 38.3% of GDP, compared with the corporate bond
market, which amounted to just 3.2% of GDP.

One of the very nice things about investing in the stock market is that you learn about all
different aspects of the economy. It's your window into a very large world.
But, India has already well developed
Equity Market, then why do we need
bond markets?
 From where you will finance these developments?

 In India, high economic growth has created ample demand for funds from the corporate sector which is reflected in
sharp growth in Bank credit and increased resource mobilization from the international market. Infrastructure
financing requirements are large and could not be expected to be met by the banking sector alone.

 Commercial banks have managed to fill this gap, but only in a limited way. There are asset-liability mismatch
issues that banks must handle. Banks already appear to have significant exposure to long-term funds. They
may, therefore, not be in a position to support long-term projects in future in the way they have been able to
do in recent years.
 Inadequate long-term resources can, therefore, act as a constraint on India’s future growth prospects. Several
initiatives to develop the corporate bond market have been taken in recent times.
 For widening investor base, the scope of investment by provident/pension/gratuity funds and insurance
companies in corporate bonds should be enhanced. Retail investors should be encouraged to participate in the
market through stock exchanges and mutual funds.

Stock market corrections, although painful at the time, are actually a very healthy part of the
whole mechanism, because there are always speculative excesses that develop, particularly
during the long bull market.
 India rely heavily on Bank loans for finance.
Among other countries, the UK has a long-
standing bond market, but the European one is
still developing, with financing in many countries
still being bank dominated. Among developing
countries, it is perhaps only South Korea that has a
reasonably well-developed bond market.
India remains bank-dominated but its financial
system is transforming rapidly—equity and
government bond markets have developed
strongly, while corporate bond markets lag behind.
That strategy of buy and hold, which is the sound and sensible one for the individual, can have
very dangerous and perverse effects for the market as a whole.
 Indians prefer bank deposits more than buying
debt papers . They also prefer taking loan from
bank only
 The total deposits in bank during 2007-08 is close to
$900billion to $1 trillion and is growing at average
30% per year.
 Corporate debt in developing countries has
traditionally been raised from banks through plain
vanilla bank lending. In spite of a well developed
regulatory and financial system corporate bond
markets in India are only 3.2 % of GDP compared to
Korea at 58%.
 Infrastructure projects are generally are of long
gestation periods and financing these through bank
loans is not feasible. This is because banks accept
deposits for 5-10 years and thus cannot give 30-year
loans, as this would create asset liability mismatch.
 But a bank would be perfectly comfortable buying a
30-year bond if a liquid market exists in case it needs
an exit route.
 An insurance firm or a pension fund would be
perfectly comfortable holding on to a long tenure
bond but even they would like the flexibility to sell
which a vibrant secondary market would provide.
When Equity Markets are down? How
do you expect bond market to flourish?
 When Equity goes down, bond market flourish.

 Bonds will be in more demand due to fall in equity….

 Looking at the past data of “wholesale debt market” from the exchange, one can easily see that
number of trades & trading value sharply increases from 2000-2004 (4 years), this is the period
when equity market were sluggish and in downturn.
 When expected returns from equity is low, demand for debt goes high due to its risk free /low
risk and stable return nature.
 Once again from 2008 till (God only knows), until equity is in downturn, bond will be in more
demand and this is one of the best time to start investing in companies related with dealing
bonds.

The Great Inflation of the 1970s destroyed faith in paper assets, because if you held a bond,
suddenly the bond was worth much less money than it was before.
Whole Sale Debt Market (high demand) during 2000-04

When news of the crash came, probably a lot of people in small towns and farms across
America felt a sense of grim satisfaction that the sinners had finally been punished for their
wicked ways.
Is there any Scale of Opportunity in
this sector?
India's debt market could touch $1.5 trillion by 2016
 Opportunity $1.5 trillion……

 India's debt market can rise nearly four-

fold to $1.5 trillion by 2016, but the
government will have to push reforms
forward, global financial services firm
Goldman Sachs has said in a report.

 We estimate the total debt market could

grow roughly four-fold, from about $400
billion or 45% of the GDP in 2006, to about
$1.5 trillion, or some 55% of the GDP, by
2016,” Goldman Sachs said.

 Within this, the non-government segment

could grow nearly six-fold, from $100
billion today to $575 billion in 2016, it said
in its report.
Six-fold increase  Goldman Sachs expected the government
from $100 billion to introduce some reforms to boost the
debt market. “India now has a chance to
today to $575 billion capitalize on a favorable domestic and
in 2016 for external environment in order to push
ahead with reforms to promote the
Corporate Bonds. maturation of the domestic debt capital
market,” it said.

The price pattern reminds you that every movement of importance is but a repetition of
similar price movements
Debt market ~ Three times the size of the equity market.
Spreading credit risk from banks’ balance sheets more
broadly through the financial system (opening up debt
financing) would lower the risks to financial stability.

The problems in the banking sector can interrupt the

flow of funds from savers to investors for a dangerously
long period of time. Indeed, one of the lessons from the
1997 Asian financial crisis has been the importance of
having nonbank funding channels open.

In the wake of this crisis, a number of countries in the

region, including Korea, Malaysia, Singapore and Hong
Kong, have made progress in building their own
corporate debt markets. Indian is yet to catch up.

The economic advantages of having a viable private Debt Capital

Market
1. It providers access to capital to a broader set of diversification opportunities.
2. More active insurance and pension markets, for example, would allow families to spread
investment risks more broadly. In turn, these institutional investors would contribute to
enhancing credit price disclosure as they allocate resources into interest-bearing securities.
3. Roughly 80% of the debt market is in the form of private placements. These liabilities are
negotiated and priced on the principles of relationship lending, are issued with virtually no
public disclosure, and are typically held to maturity by banks.
Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the
consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.
 Increasing the width & depth of debt market.

 Public issue of Debt: More than 95 % of the fund raising in the Corporate debt market happens through the Private
Placement (Institutional) market route, thus reflecting absence of retail participation in the Corporate debt market.
 The Government, along with the capital market regulator – SEBI, has recognized this inconsistency, and has made
considerable progress in developing a vibrant & active “Public Issue of Debt market”. This would considerably increase
the size of the Indian debt market.
 Increasing share of Corporate borrowing through the Corporate debt market:
 The share of corporate borrowing through the debt securities market is showing an increasing trend and has grown
from approx 10 % in 2005-06 to almost 19 % in 2007-08. This reflects that there are increasing number of corporate
resorting to borrow from the debt securities market as against the traditional loan market.
 Introduction New financial products in the Debt market –
 Securitization products; Structured products; Forex products; Retail distribution of debts

 Scalability through increased brand awareness, market penetration and service offerings across all categories of
financial services

I rarely think the market is right. I believe non dividend stocks aren’t much more than baseball
cards. They are worth what you can convince someone to pay for it.
Government's Large Debt Burden Impedes
Broadening Of Debt Capital Markets
 Government debt is equivalent to over 90% of GDP at today's exchange rates. The government‘s need
to finance its deficit and massive debt-service obligations, plus its social policy agenda has led to
restrictions in the local debt markets. These include:

 Mandating banks to buy government-related securities to fulfill SLR and CRR requirements;
 Directed lending, wherein all locally incorporated banks must lend 40% of their total advances to "priority
sectors," namely agriculture, export credits and other small businesses;
 Restrictions on investment guidelines for insurance companies and pension funds.

 Banks May Not Keep Up With Growth In Demand For Credit

 Bank credit dominates corporate debt funding. Banks account for 90% of financial-sector assets. However,
credit growth has significantly outpaced the growth in bank deposits these last three years. The domestic
credit to deposits ratio has risen from about 55% to about 70%, and the loan-GDP ratio from about 30% to
over 50% over that same period. These ratios remain low in comparison to other Asian countries, indicating
that the growth in credit utilization may have some way to go.

 The domestic banking system does not have sufficient capacity to provide the long-term lending necessary for
improvements to India's infrastructure, particularly given the changing role in recent years of the
Development Financial Institutions which historically specialized in providing long-term infrastructure
finance15. Problems in bank asset-liability mismatches are well known and have prompted renewed efforts for
the development of a domestic corporate bond market. The larger private-sector banks are also actively
attempting structured finance activity.

 Despite publicity surrounding gains in the equity market, the vast majority of household savings are in gold18,
bank deposits and government-savings programs. Given the steady growth in the savings rate – which is now
almost 30% of GDP – one challenge is to deploy these funds to greater effect within India's formal financial
system.

Every once in a while, the market does something so stupid it takes your breath away.
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