Participants In Debt Market
Debt markets are pre-dominantly wholesale markets, with institutional investors being major participants. Banks, financial institutions, mutual funds, provident funds, insurance companies and corporate are the main investors in debt markets. Many of these participants are also issuers of debt instruments. The small number of large players has resulted in the debt markets being fairly concentrated and evolving into a wholesale negotiated dealings market. Most debt issues are privately placed or auctioned to the participants. Secondary market dealings are mostly done on telephone, through negotiations. In some segments, such as the government securities market, market makers in the form of primary dealers have emerged, which enable a broader holding of treasury securities. Debt funds of the mutual fund industry, comprising of liquid funds, bond funds and gilt funds, represent a recent mode of intermediation of retail investments into the debt markets. The participants in the debt market are described below:
a) Central government raises money through bond and T-bill issues to fund budgetary deficits and other short and long term funding requirements.
b) Reserve Bank of India (RBI), as investment banker to the government, raises funds for the government through dated securities and T-bill issues, and also participates in the market through open-market operations in the course of conduct of monetary policy. RBI also conducts daily repo and reverse repo to moderate money supply in the economy. RBI also regulates the bank rates and repo rates, and uses these rates as tools to its monetary policy. Changes in these benchmark rates directly impact debt markets and all participants in the market as other interest rates realign themselves with these changes.
c) Primary Dealers (PDs), who are market intermediaries appointed by RBI, underwrite and make market in government securities by providing two-way quotes, and have access to the call and repo markets for funds. Their performance is assessed by RBI on the basis of their bidding commitments and the success ratio achieved at primary auctions. In the secondary market, their outright turnover has to three times their holdings in dated securities and five times their holdings in treasury bills. Satellite dealers constituted the second tire of market makers till December 2002.
d) State government, municipal and local bodies issues securities in the debt markets to fund their developmental projects as well as to finance their budgetary deficits.
e) Public Sector Undertakings (PSUs) and their finance corporations are large issuers of debt securities. They raise funds to meet the long term and working capital needs. These corporations are also investors in bonds issued in the debt markets.
f) Corporate issue short and long term paper to meet their financial requirements. They are also investors in debt securities issued in the market.
g) Development Financial Institutions (DFIs) regularly issue bonds for funding their financing requirements and working capital needs. They also invest in bonds issued by other entities in the debt markets. Most FIs hold government securities in their investment and trading portfolios.
h) Banks are the largest investors in the debt markets, particularly the government securities market due to SLR requirements. They are also the main participants in the call money and overnight markets. Banks arrange CP issues of corporate and are active in the inter-bank term markets and repo markets for their short term funding requirements. Banks also issue CDs and bonds in the debt markets. They also issue bonds to raise funds for their Tier-II capital requirements.
i) The investment norms for insurance companies make them large participants in government securities market.
j) Mutual funds have emerged as important players in the debt market, owing to the growing number of debt funds that have mobilised significant amounts from the investors. Most mutual funds also have specialised debt funds such as gilt funds and liquid funds. Mutual funds are not permitted to borrow funds, except for meeting very short-term liquidity requirements. Therefore, they participate in the debt markets pre-dominantly as investors, and trade on their portfolios quite regularly.
k) Foreign Institutional Investors (FIIs) are permitted to invest in treasury and corporate bonds, with certain limits.
l) Provident and pension funds are large investors in the debt markets. The prudential regulations governing the deployment of the funds mobilised by them mandate investments pre-dominantly in treasury and PSU bonds. They are, however, not very active traders in their portfolio, as they are not permitted to sell holdings, unless they have a funding requirement that cannot be met through regular accruals and contributions.
m) Charitable institutions, trusts and societies are also large investors in the debt markets. They are, however, governed by their rules and bye-laws with respect to the kind of bonds they can buy and the manner in which they can trade on the debt portfolios.
n) Since January 2002, retail investors have been permitted submit non-competitive bids at primary auction through any bank or PD. They submit bids for amounts of Rs. 10,000 and multiples thereof, subject to the condition that a single bid does not exceed Rs. 1 Crore. The non-competitive bids upto a maximum of 5% of the notified amount are accepted at the weighted average cut off price/yield.
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