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Summer Internship |FII Investment in Indian Debt Market|
|BRIJESH BERIWALA|PGDM 2015-17
INDUSTRY GUIDE: MR. JAGDEEP KANNARATH
FACULTY MENTOR: DR. MADHAVI LOKHANDE
|RESEARCH OBJECTIVE|To study Foreign Institutional Investor’s Investment in Indian Bond Market, identify the opportunities and hurdles in the
bond market and come up with recommendations to overcome these hurdles.
|METHODOLOGY FOR THE STUDY|
The study is qualitative in nature & the research conducted is primarily of exploratory type.
The data collected is secondary in nature.
Most of the data is collected from RBI , NSE and SEBI website and further analysed.
The Edelweiss Group is one of India's leading diversified financial services conglomerates providing a broad range of financial products and services to a substantial and diversified client base that includes corporations, institutions and individuals.
Its businesses are broadly divided into Credit Business (Housing Finance, Structured Collateralized Credit, Distressed Assets Credit, SME and Agri Finance, Rural Finance and other loans), Agency Business (Financial Markets, Asset Management and Agri and Commodity Services) and Life Insurance.
|DEBT MARKET IN INDIA|
Indian debt market majorly consists of :
Government Securities Market (G-Sec): Government Securities comprises the Centre, State and State-sponsored securities.
Corporate Bond Market: Corporate bond markets comprise of Financial Institution Bonds, Corporate Bonds and PSU Bonds.
|FOREIGN INSTITUTIONAL INVESTORS|Foreign institutional investors are institutional investors or entities which invest in assets that belong to a different country than the country in which the investor belongs
1992
-93
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2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
2015
-16
2016
-17
**
-100000
-50000
0
50000
100000
150000
200000
Equity and Debt FII Invesment (1992-2016)Equity Debt
INR
Cror
es
Source: NSDL
|FII INVESTMENT IN INDIA|
Until 1980s most of the current account deficit and other debt requirement were financed by investments from the domestic market
After 1992, Foreign Institutional investors (FII) were allowed to invest in all securities.
Though FII’s net investments in Indian equities and debt have touched record highs in the past financial year, the perception was that debt inflows are dangerous to the economy, so there are strict rules to control inflows.
|EXTERNAL DEBT IN INDIA|External Debt of Indian bond market consists of two parts: Foreign Currency Denominated Debt Rupee Denominated Debt
24.4%
13.4%
28.8%
2.6%
30.8%
Figure 3: Currency composition of India's Sovereign External Debt at end March 2015 (per cent)
US Dollar
Japanese Yen
Indian Rupee
Euro
SDR
Source : SEBI (FIIGBM)
CAPITAL CONTROL ON INVESTMENT IN BOND MARKET BY FII
Cap (USD Bn) Cap (INR Cr.)
Remarks
Government Debt 25 1,24,432 Available on demand. Eligible investors may invest only in dated securities of residual maturity of one year and above, and existing investment in Treasury Bills will be allowed to taper off on maturity/sale.
Government Debt 5 29,137 Available on demand for FIIs registered withSEBI as Sovereign Wealth Funds, multilateral Agencies, and Endowment funds, Insurance Funds, Pension Funds and Foreign Central Banks. Eligible investors may invest only in dated securities of residual maturity of one year and above.
Corporate Debt 51 2,44,323 Available on demand. Eligible investors mayinvest in Commercial Papers only up to US$2 billion within the limit of US$ 51 billion
Source: NSDL
FII CAPITAL UTILISATION ING-SEC AND CORPORATE BOND
Source: NSDL
Government Debt Corporate Debt**0
50,000
100,000
150,000
200,000
250,000
Cap Utilization in G-Sec and Corporate Bonds by FII
Upper Cap Free Limit (INR Cr)
Source: SEBI
Indonesia Malaysia Thailand Korea India0
5
10
15
20
25
30
35
Foreign Holding in Local CurrencyGovernment Bonds in 2013
Percentage of Total Outstanding
|FOREIGN HOLDINGS|
Source: Deloitte(Tax Guide Report)
|TAXATION RULES FOR FII IN BOND MARKET| Corporate Taxpayer Non-Corporate Taxpayer Total Income (upto
Rs 10mn)Total Income (Exceeding Rs. 10mn but up to Rs. 100mn)
Total Income (Exceeding Rs. 100mn)
Total Income (upto Rs. 10mn)
Total Income (Exceeding Rs. 10mn)
Transfer of equity shares, units of equity oriented fund chargeable to Securities Transaction Tax (STT)Short-term CG 15.45% 15.75% 16.2225
%15.45% 17.7675%
Long-term CG Exempt Exempt Exempt Exempt Exempt
Transfer of Securities not chargeable to STTShort-term CG 30.90% 31.51% 32.445% 30.90% 35.535%
Long-term CG 10.30% 10.506% 10.815% 10.30% 11.845%
| TAXATION RULES FOR FII IN BOND MARKET |
The government had reduced the withholding tax to 5% from 20% in 2013 which was supposed to expire in May 2015.
Non-infrastructure bond still have withholding tax as 20%.
Countries like Mauritius, Singapore and Cyprus have DTAA with India which exempts capital gains from tax.
| OPPORTUNITIES FOR FII IN INDIAN MARKET |
High Interest rates in India
61% utilization of Cap in Corporate bonds (39% still can be invested).
Withholding tax decreased from 20% to 5% in most of the bonds.
Stable and reform oriented government at the center.
| HURDLES FOR FII IN INDIAN MARKET |
No reliable yield curves across maturities.
Capital gain tax in corporate bond market is not at par with the equity market.
KYC norms are complicated.
| RECOMMENDATIONS|
Exemption from long term capital gain tax
Removal of Artificial Investors Classes
India's inclusion in Global Bond Indices
Simplified KYC Norm
Let go 5% withholding tax on corporate bonds
| THANK YOU|