Capital Markets are the important source of fund generation for Corporate. Various instruments have been used by the corporate for the capital structure of the Organizations. Most popular of capital market instruments being Equity Public Issues, Rights Issue, Qualified Institutional Placements, Corporate Bonds Public Issues and Private placement of Corporate Bonds. When it comes to the Primary Market and fund generation through Initial Public issues, over the years it has been seen that Equity is the most preferred instrument when it comes to fund generation for Corporate, and has been the major component of Capital structure when it comes to funds generated from Initial Public Offerings or Private Placement. But the biggest change in traditional trends of fund generation can be seen with the introduction of Non-convertible Debentures since 2008. The NCD public issues have replaced equity public issues in capital structure of Indian Corporate. Further it has been a significant contributor in overall fund generation as well, increasing the overall resources mobilized by the corporate.
The Introduction of Non-Convertible Debentures in the Capital market has been a significant reform, which has shown its effects in the last few years. The Instrument has become the most favorite instrument of the Corporate for Fund Generation through Public Issues replacing Equity issues. Equity was the most preferred source till 2003-2004 with nearly 25% contribution in overall Fund Generation. But since 2008, after the introduction of NCD's there has been a gradual replacement and in the year 2013-14 the NCD's have contributed nearly 25% in overall Fund generation with Equity contributing just 2% including Private Issues. When it comes to fund generation only through Public Issues, Corporate Bonds have crossed 90% out of Total funds generated through Public Issues.
To analyze and to assess this significant change Correlation between Total Resources mobilized and resources mobilized though Equity Public Issues and through Corporate Bond Public Issues between 2004-05 to 2008-09 and 2009-10 to 2013-14 has been calculated and further Regression tool has been used to prove the reliability of the statement and to prove that it has been a significant contributor in overall fund generation as well, increasing the overall resources mobilized by the corporate.
Key Words
Corporate Bond, Non-convertible Debentures, Primary Market, Initial Public Issue.
Introduction
Capital markets are the financial markets in which corporate equity and long term debt are issued and traded. It is a center where the demand and supply of long term debt and equity capital meet together. It is a channel to direct the scattered small savings of the investors are directed towards the corporate for its productive application. It is the medium through which corporate can mobilize the resources required and so capital markets are the barometer of the health of the economy. Capital markets work as a facilitator for the sustainable development of the economy, as it does a dual job of providing long term funds to the corporate and an opportunity to invest in financial assets to investors. It is necessary that it should be well organized and regulated.
One of the important segments of Capital markets is Primary Market. It deals with issuance of new securities. The major function of the segment is it helps corporate, public sector institutions as well as the government raise resources (through issuance of debt or equity based securities).
To serve the economy better it is necessary for the capital markets to develop continuously. Indian capital market, though one of the oldest and largest capital markets in the world has seen a rapid growth and transformation in last few years. Major of the transformations are deregulation and economic reforms, disintermediation and financial sector reforms, institutionalization of capital markets, investors' preference for better disclosures and corporate governance measures on similar grounds to developed markets, globalization and tax reforms etc.
Market Segments
The securities market has two important segments, namely, the primary market dealing with new issues and the secondary or stock market facilitating the trading of the issued securities.
Another segmentation of Capital/ securities market can be done based on the instruments issued i. e. Stock or Equity Market and Debt (Bond) Market.
Debt or Bond Market: The bond or fixed income securities market where participants issue, buy and sell debt securities, usually in the form of bonds.
Introduction of non-convertible debentures
One of the big Developments in the primary Capital Market was Introduction of Non-convertible Corporate debentures (bonds).
Corporate BondsIn broader terms Corporate bonds are fixed income securities issued by the corporates i.e. entities other than Government. In general Bonds are also known as debentures. And is defined in Section 2(12) in The Companies Act, 1956 as “Debenture” includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.
These are securities issued by private or public sector companies to borrow funds from the market. As per the companies act there is no specific distinction given between Corporate Bonds and Debentures. The term Debentures has been defined in Companies Act 1956 as follows “debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company”.
Corporate Bond Market in India
The Corporate Bond Market in India is in existence since quite a long time but in real sense it is in existence since December 2003. With the amendment in disclosure norms to make listing of companies made mandatory and with an initiative to provide a similar trading system for the bond market as like equity market. The objective being to provide a platform for corporate and investors to exchange and fulfill their needs, i. e. mobilizing the funds at affordable rate in case of corporate and for investors, a good investment with good long term returns at less risk.
Need for a well-developed Corporate Bond Market
Supplement and a substitute to the banking system for funding- It is the need of the economy today to have a well-developed bond market to supplement and can even work as a substitute for the banking system for meeting the requirements of the corporate sector for long term capital investment.
Necessity for Infrastructure Funding- Corporate bonds are the most necessary market for generating funds for infrastructure projects. Banking industry fails to do so because of the long term nature of the infrastructure funds which cause an asset liability mismatch for banks.
Bank Funding Regulations- The banking industry faces several lending restrictions such as maximum position exposure, sector exposure etc. which play a role in the lending decisions. Debt market allows the corporate to raise funds directly from the public bypassing the intermediaries.
Mopping Public Savings- Corporate bonds can work as an attractive investment instrument for investors seeking higher but secured returns as compared to time deposits; this would help in accelerating the mobilization of funds to savings which again can be used in the investment by the companies concerned.
Need of the Study
To achieve the expected GDPgrowthof Indian Economy, Developmentof Corporate Bond Market has been on the top list of agenda of the Government this being the highly untapped market. Many such reforms are taking place since 2007 in full force. It is important to assess if the reforms are in a right direction by checking the contribution of Debt public issues into the Total resources generated and also by comparing it with the equity issue market, the most favored market of corporates in case of public issues.
Review of Literature
One of the major function and very reason for existence of SEBI is to promote the capital market and protect investor interests. Various major far reaching reforms have taken place before the initiation of SEBI as well, but with the availability of a specific dedicated authority the process has speeded up Developments in Capital Market Since 1991.
Various reforms have taken place post SEBI reforms. It has helped the capital market reach new highs. Some of the important measures are:
Since 1991/92 many initiatives in the capital market mainly primary markets of equity and debt were taken by the new authority along with removal of restrictions imposed by the Capital Issues Control Act. To activate the corporate debt market in India the interest rate ceiling on corporate debentures was abolished giving way to market-based pricing of corporate debt issues. The rating was made mandatory In order to improve the quality of debt issues. The role of trustees in case of bond and debenture issues was strengthened over the years. It was made compulsory to list all privately placed debt issues on the stock exchanges and follow the disclosure requirements.
As a result tremendous growth was seen in the primary market the funds raised amount increased to Rs. 276.21 billion in 1994/95 in comparison to Rs. 62.15 billion in year 1991/92. Year 1995-96 saw another set of reforms where tighter entry barriers introduced by SEBI for investor protection as a result in 1995/1996 smaller amounts were raised due to the overall downtrend in the market. The number of new capital issues by private sector in 1991/92 was only 364 with 4,312 crores generated from it. It increased to 1,678 in 1994-95 and the amount rose increased to 26,418 crores. Since 1995 the capital market was sluggish and the resources raised saw a negative turn and fell to 10,409 crores in 1996-97. In 2003-04, the amount raised from primary equity market was 18,900 crores with only 51 issues. And then the primary equity market saw a steady increase in funds mobilized till the year 2007-08 with around 20% increase ever year.
During the same period the debt market was losing its shine. The proportion of resources mobilized through Debentures (bonds) went down to -1.2% in 2001-02 to 2003-04 from 11% in the year 1985-90 even after many above mentioned reforms taking place.
With a view to develop Corporate Bonds Market in India many reforms have been suggested and implemented. Many such changes were made since 2003 onwards to make the Corporate Bond Market more vibrant, both primary and secondary market.
Since 1991/92 many initiatives in the capital market mainly primary markets of equity and debt were taken by the new authority along with removal of restrictions imposed by the Capital Issues Control Act. To activate the corporate debt market in India the interest rate ceiling on corporate debentures was abolished giving way to market-based pricing of corporate debt issues. The rating was made mandatory In order to improve the quality of debt issues. The role of trustees in case of bond and debenture issues was strengthened over the years. It was made compulsory to list all privately placed debt issues on the stock exchanges and follow the disclosure requirements.
As a result tremendous growth was seen in the primary market the funds raised amount increased to Rs. 276.21 billion in 1994/95 in comparison to Rs. 62.15 billion in year 1991/92. Year 1995-96 saw another set of reforms where tighter entry barriers introduced by SEBI for investor protection as a result in 1995/1996 smaller amounts were raised due to the overall downtrend in the market. The number of new capital issues by private sector in 1991/92 was only 364 with 4,312 crores generated from it. It increased to 1,678 in 1994-95 and the amount rose increased to 26,418 crores. Since 1995 the capital market was sluggish and the resources raised saw a negative turn and fell to 10,409 crores in 1996-97. In 2003-04, the amount raised from primary equity market was 18,900 crores with only 51 issues. And then the primary equity market saw a steady increase in funds mobilized till the year 2007-08 with around 20% increase ever year.
During the same period the debt market was losing its shine. The proportion of resources mobilized through Debentures (bonds) went down to -1.2% in 2001-02 to 2003-04 from 11% in the year 1985-90 even after many above mentioned reforms taking place.
With a view to develop Corporate Bonds Market in India many reforms have been suggested and implemented. Many such changes were made since 2003 onwards to make the Corporate Bond Market more vibrant, both primary and secondary market.
Recent Developments in Corporate Bond Market In India
The Securities and Exchange Board of India (SEBI) has taken the initiative to collect all the important data of corporate bonds issued domestically and then create a comprehensive database of all corporate bonds issued in the country.
Capital Structure of Indian Corporates in Primary Market
Primary market has been the major source of funds for corporate Year 2013-14 saw an increase of 16.0% in the resource mobilization by corporates in the primary market i. e. to `4,033 billion (US $67 billion). This was the result of an increase in resources mobilized through private placement route; capital raised through private placement saw an increase by 18.1% to `3,899 billion (US $65 billion). But, resources mobilized through public issues went down by 4.4% to `133 billion (US $2 billion), accounting for a mere 1% of the total resources mobilized domestically.
Objectives of the study
Scope and Limitations of the Study
In this paper the researcher has concentrated on the specific part of the Capital Structure only, i.e. the proportion of Equity and Debt public issues in the Capital Structure of the Corporate and the impact of Corporate Bond Markets reforms (Introduction of Non-Convertible Debentures) on the same.
The study is limited for the period of 10 years (2004 to 2014) and is limited to the comparison of public issue trends and the contribution of debt public issues in to total fund generation.
Hypotheses
H1: Corporate Bond Market reforms have resulted in change in preference of instruments for Capital with special reference to resources mobilized from Initial Public offerings by the Indian Corporate
H2: The corporate bond market reforms increased the fund generation for the corporate sector in India.
Research Methodology
For the purpose of this research paper the secondary data source was applied for the collection of the data. The sources mainly being SEBI guidelines on issue of Debt Securities, RBI Handbook and SEBI statistics and ISMR statistics, for the period of 10 years i. e. from 2004 to 2014. Data collected are edited and coded by using the excel bars. This helps in converting the gathered data into a tabulated grouped data.
For the purpose of analysis the data is grouped in to two groups' i. e. 2004-05 to 2008-09 and 2009-10 to 2013-14.
The data analysis methods used are as follows:
T test (sample for two means) is used to do the critical analysis.
Analysis of Data and its Interpretation
Capital structure is the combination of debt and equity that funds an organization's strategic plan. Capital Structure management has been impacted by a number of the developments like operational reforms in the area of credit assessment and delivery, interest rate deregulation, changes in the competitive structure of the banking and credit systems, and the emergence of money and debt markets. Based on these factors the components of Capital structure and their proportion vary. The following table gives us the glimpse of the Resource mobilization by Indian companies divided in Corporate Securities and Government Securities
The data above clearly shows a steady increase in amount collected by corporate through public Issues in last few years.
In this paper the researcher has concentrated on this part of the Capital Structure only, i.e. the proportion of Equity and Debt public issues in the Capital Structure of the Corporate and the impact of Corporate Bond Markets reforms on the same.
The study of literature and the developments made in the Capital market in India and specifically Corporate Bond Market in India are with a view to increase the resources mobilized by the corporates and make the Debt Market a strong debt market. And it can be seen that a major step towards it was taken in the year 2008 with the introduction of Non-convertible Debentures. Despite the policy initiatives, the corporate debt constitutes a small segment of the debt market in India. While the primary market for debt securities is dominated by the private placement market, the secondary market for corporate debt is characterized by poor liquidity, although this has improved just slightly in recent years.
One of the reasons for the un-favored treatment towards Public issues is Private Placements market. Due to the advantages the Private placement brings with it, it became the most favored source of funding for corporates even taking over the Equity Market Issues and amount generated.
The researcher here aims to analyze the impact of the policy initiatives, especially introduction of Non-convertible debentures on the funds generated through Capital markets in India through the comparison of the situation in pre- introduction period that is before the year 2009 when the first public issue of NCDs hit the market and the post introduction period, till date.
For the Analysis the data for 10 years has been collected i. e. since 2003- 04 and divided in to two i.e. 2004-05 to 2008-09 and 2009-10 to 2013-14.
Table No. 1 - Proportion of Equity and Debt IPO's to funds generated through IPO's and Total Resources Mobilized
Source: SEBI Handbook of Statistics 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013 ISMR 2004 to 2013 The
above table shows the data related to the Resources generated by corporates through Equity and Debt Public Issues,
Total resources mobilized through Public Issues and Total Resources mobilized by the corporate overall and
Proportions. It clearly show the preferences by corporates when it comes to fund generation.
Chart No. 1: Resource
Mobilization through Public Issues (Rs.)
Chart No. 2: Resource Mobilization through Public Issues (%)
The reforms implemented in Corporate Bond Market specially the Regulations on Issue and Listing of Debt Securities gave a new instrument to generate funds for Indian Corporate, Non-Convertible Debentures. The First Issue of NCD's came in the year 2009 by Tata's. And since then there has been a tremendous growth in using this instrument for resource mobilization. Equity has always been the preferred source of funds generation for the Indian Corporates when it comes to the Primary Capital markets. But as seen in Table No. 1 the Private debt placement has taken over drastically over the Equity both in terms of number of issues and amount generated. And now with the introduction of NCD's the change in preferences can be clearly seen. It is not that no steps have been taken to develop the equity markets. In fact it has always got the preferred treatment and many reforms have taken place recently. But with all those drastic changes as well the NCD's have taken over the place of equity as a most favored instrument. The proportion of Equity as a source of funds has gone down significantly over the years. If observed it can be seen that there has been a drastic fall in equity proportion in total resource mobilization since the year 2008-09 onwards. At the same time it can be seen that Debt public issue proportion has been growing consistently since the Issue guidelines have been put in force. The proportion of NCD's has gone up from less than 1% to more than 12% in just a span of 6 years and from less than 5% to more than 75% when compared with Total resources mobilized through Public Issues. The exactly reverse trends can be seen in equity proportion. The change can be clearly seen in the following tables. The following tables show the change in trends pretty clearly. The percentage change in resources mobilized clearly is a signal of change in trends. The table shows that the proportion of equity which was increasing continuously and had even reached nearly 100% mark in the years 2005 to 2007 started falling and has reached just 7% in the year 2013-14 and the newly introduced NCD's proportion has gone up drastically to reach 93% in total resources mobilized by the Corporates through public issues.
But at the same time how much this new instrument is contributing to the total resources generated by the corporate and what is the contribution of Non-convertible Debentures in to the growth of funds generated is yet to be tested. Though the percentage analysis shows a significant increase in the proportion of resources generated through NCD's to total resources generated but if it has been because of the introduction of NCDs only is an unanswered question. For the purpose further analysis is important. The analysis helps us state that Debt issue have been replacing Equity public Issues over a period of time. Further it also helps us state that Total resources mobilized are also on an increasing trend. But it is important to understand the relation between the Debt Public Issues and the Total resources mobilized and Total Resources Mobilized through public Issues to find out if the Introduction of NCDs has been the reason for increase in Total resources mobilized. The correlation table will help us understand the same.
Table No. 2: Correlation between Total Resources mobilized Resources Mobilized through Public Issues and Debt Public Issues between 2004-05 to 2008-09 and 2009-10 to 2013-14
The debt proportion has increased to 63% whereas Equity has gone down to just 5% But if a detailed analysis is done between the Debt Public issues mainly Introduction of Non-convertible debentures in the year 2009 and other variables that is total Resources mobilized, Total resources mobilized through Debt and Resources mobilized through public issues, the relation has become positive and stronger in the post reforms period suggesting a significant contribution of Public issues of Non- Convertible Debentures.
Table No. 3: Growth in Total Resources mobilized
Same result can also be reached because of the p value for one tailed test is less than alpha (0.05). P value is (0.0000333773120038582)
T value is 17.21 is larger than the critical t value for the two tailed test (2.77) means it can be stated with 95% certainty that there has been a change in the means from before to after.
P value for two tail is (0.0000667546240077164) less than alpha supporting the above statement.
Debt Public Issues
T value (2.51) is greater than the critical test for a one tailed test (2.13)so we can state with 95% certainty that there has been an increase in total funds generated through Debt IPO post 2009.
Same result can also be reached because of the p value for one tailed test is less than alpha.
T value is 2.51 is lesser than the critical t value for the two tailed test (2.77) means it can be stated with 95% certainty that there hasn't been a change in the means from before to after.
P value is greater than alpha supporting the above statement
Analysis
From the results of Regression Test and T test it can be said that
H1: Corporate Bond Market reforms have resulted in change in preference of instruments for Capital with special reference to resources mobilized from Initial Public offerings by the Indian Corporate.
H2: The corporate bond market reforms increased the fund generation for the corporate sector in India. Conclusion
Capital markets are the backbone of the economy of a country because of the major role it plays to generate funds the
Corporates. Over the years it was seen that equity was the most favored instrument when it comes to fund generation through public issue. With the introduction of Non-convertible Debentures there has been a shift in preference by the Corporates. NCDs have now become the most favored source of fund generation through public issue. And further are contributing significantly to the total resources mobilized by the corporate. But at the same time the relation between Debt public issues and resources mobilized through public issues has turned negative post reforms. So it can be said to be a start of new era as far as Total resource generation is concerned. And it can also be said that the efforts are put in a right direction as they are generating expected results. Still the regulatory authorities need to introduce few more corporate and investor friendly reforms to continue the trend by making the issues more corporate friendly so that to end up contributing more to the fund generation.
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