Analysis on CDS guidelines and convertible bond primary market in India

Abstract

India is on the fast lane again soon after the global recession, with GDP growing at 7.4% for the year 2009-2010. Apart from being one of the fastest growing economies, INDIA along with China has also been dragging the world out of recession. To keep the momentum going, it needs to ensure availability of necessary financial resources. So far banks have been the only source of credit support to most of the Indian companies. Outstanding loans from banks were at Rs 33.7 trillion as of November 2010. This is quite high compared to the size of the corporate bond market in India. Apart from the highly rated companies and government backed entities, most of the small companies have been unsuccessful in mobilizing funds in the bond markets. The primary reason behind this has been weak investor confidence in the relatively low rated bonds. This has led to high credit risk concentration on the banking sector, which poses a serious systemic risk on the economy. All these issues call for a more developed and liquid bond market, where even small companies can get enough interest from investors. Recent CDS guidelines for credit default swap have been one very positive step for the development of bond markets in the country. Through this is report; we will evaluate the RBIs guidelines for introduction of CDS, with a little comparison with similar Chinese guidelines. Convertible Bonds were a very hot product in India pre 2008 financial crisis. More that USD 8 billion worth of convertible bonds was issued in Indian in 2007. But, after the recession, as the recovery is in progress in the financial markets, Convertible Bond market has not come up with the goods promised pre 2008. Primary issuance of Convertible Bonds has been very poor for 2009, 2010 and so far in 2011. Whereas, Chinese convertible bonds primary market have been doing great. Through this report, we will also present an understanding of Convertible bonds, its complex structures prevalent in the markets and will make an evaluation of its present scenario in India in comparison to China.