Corporate bond market in India: Analysis from investor’s and borrower’s perspective

Abstract

Corporate Bond is one of the instruments of raising fund for business and one of the debtbased investment tools. These include commercial paper, debentures (convertible & nonconvertible) and corporate bonds. Public issue and private issue – these two types of placement of corporate bonds happen in Indian market. This study begins with understanding size and growth of corporate bond market in India from 1999 till 2009. It elaborated the positions of different investors (Banks, Foreign institutional investors, Pension Provident funds, Mutual funds, Insurance companies). It also touches upon the demand-supply interaction effects which subsequently lead to analyze the influencing factors on corporate bond market in India. Thereafter it exhaustively and analytically explores how different macro-economic factors are affecting net corporate debt raised and market capitalization of corporate bonds in India. Univariateregression analysis is executed in all possible combinations and thereby some strong correlations are found. To note, these factors are absolute value of real GDP, broad money supply (M3), banks’ investment in G-sec, RBI & banks’ credit to commercial sector and equity issue in capital market. Consequently it leads to forecasting the size of corporate debt market in the forthcoming year. After this study at macro-level, this study analytically explores how yield-spread is affects the wholesale trading of corporate bonds in different categories (AAA, AA, AB etc). Again regression analysis is carried out on monthly trading-data of different categories of corporate bond. Credit rating is an important part of corporate bond-issue from both investor and borrower’s perspective. This study brings forth the analytical aspects of how corporate debt-issue impacts the firm’s issuer’s risk of default and ultimately how do investors react to it with changing creditworthiness (probability of default). KMV Moody’s estimated default measure (EDF) is widely used and popular method of calculating risk of default of firm. It is illustrated with underlying assumptions and structural model. Then this method is applied on some select public firms which has issued corporate bonds and taken loans. Case-studies on two firms – Tata Steel and Wockhardt Ltd were used to show the significance of credit risk measurement in corporate bonds. Tata Steel (manufacturing firm) took huge debt on its balance sheet and at the same time it managed to keep healthy cash flow. However this study shows how its financing liabilities strained its EDF measure and consequent implication on investor’s sentiment in different periods. On the other hand Wockhardt Ltd (health care firm) was on the verge of default owing to huge liabilities. This study shows how Wockhardt moves towards the verge of default with increasing default-probability and how investors reacted to this.