Participants in Debt Market

Who Regulates the Indian Debt Market?

The participants in debt market are a small number of large players which has resulted in the debt market evolving into a wholesale market. Most primary debt issues are privately placed or auctioned to the participants while secondary market dealings are negotiated over the telephone. The NSE Wholesale Debt Market Segment (WDM) has emerged as an active platform for trading in debt instruments.

Recently, the BSE also started trading in debt instruments. The debt market has become more diversified with the entry of new participants such as high net worth individuals, cooperative banks, large corporate, mutual funds, and insurance companies.

Types of Debt Market

The debt market is differentiated by the characteristics of the investors and the structure of the market. The two types of debt market are:

  1. Wholesale Debt Market
  2. Retail Debt Market

Wholesale Debt Market

The participant investors in these markets are mostly banks, financial institutions, the RBI, primary dealers, insurance companies, mutual funds, corporations, and FIIs. The RBI permits banks, primary dealers, and financial institutions in India to trade debt instruments among themselves or with nonbank clients through members of the stock exchanges.

Retail Debt Market

The main investors permitted to participate in the retail debt market include Mutual funds, Provident funds, Pension funds, Private trusts, Housing finance companies, Corporate treasuries, Hindu-undivided families, Individual investors, State-level and district-level cooperative banks, Large religious trusts and charitable organizations, Non-Banking Financial Companies (NBFC) and Residuary Non-Banking Companies (RNBC), in addition to the wholesale investor classes.

Participants in Debt Market

The major participants in debt market are as follows:

  1. Central and State Governments
  2. Banks
  3. Primary Dealers (PDs)
  4. Mutual Funds
  5. Remainder
  6. Foreign Institutional Investors (FIIs)
  7. Public Sector Undertakings (PSUs)
  8. Financial Institutions (FIs)
  9. Mutual Fund Houses
  10. Insurance Companies
  11. Provident Funds (PFs) and Pension Funds
  12. Satellite Dealers (SDs)
  13. Credit Rating Agencies
  14. The Regulatory Bodies

Central and State Governments

The central government raises money through the issue of dated securities and treasury bills to finance the budget deficit and other short-term and long-term financial requirements. The RBI is the investment banker for the central government and runs auctions to issue GOI bonds and T-bills.

Treasury bills are issued to the market on a regular calendar by the RBI. The calendar is fixed and released to participants at the beginning of the financial year by the RBI. The state government, municipalities, and local bodies also issue securities to finance their budgetary deficits and developmental projects.


They are the captive investors in the government securities market. They participate both as lenders and borrowers in the call money market and as arrangers and investors in the commercial paper market.

They issue certificates of deposits (CDs) to finance their short-term requirements and bonds to finance their long-term requirements. The Government securities are approved securities for the maintenance of Statutory Liquidity Ratio (SLR) by banks.

Primary Dealers (PDs)

Primary Dealers act as market makers for the placement of GOI debt. They are obliged to place bids in the auction for the issuance of government bonds, as well as provide liquidity in the secondary market for these bonds. They are appointed by the Reserve Bank and have emerged as active intermediaries in the government securities market and money market.

They require achieving a minimum success ratio of 40 per cent for both dated Government securities and treasury bills vis-à-vis bidding commitment and providing underwriting support to the auctions of Government securities.PDs underwrite government securities.

They are allowed to underwrite 100 percent of the notified amounts. A minimum of 25% of each issue of Government of India dated securities and treasury bills are offered for underwriting by PDs. At present 21 primary dealers including the bank’s own PDs have been operating in this market.

Mutual Funds

Other than the state-promoted Unit Trust of India (UTI), mutual funds and asset management companies are relatively new entrants into the Indian financial sector. Therefore, these firms are much smaller in size compared with the financial firms listed above.

However, they are less constrained by restrictions on investments and are an active participant in the GOI debt market. In the last ten years, there has been a rapid growth in the number and size of debt fund schemes, which took place with the shift to a market-based regime for interest rates.

They are now the predominant investors, in the debt market. They have specialized debt funds such as money market mutual funds, gilt funds, and so on. They have also emerged as active participants and traders in the debt market.


These are as such charitable institutions, trusts and societies, nonfinancial firms and individuals—often somewhat confusingly termed retail investors. Of these, firms and individuals do not have regulatory constraints on their investment in government debt.

But trusts and charities are forced to invest largely in government bonds. In addition, these investments are held to maturity. This makes for a captive audience for government bonds that do not contribute to the liquidity of these instruments.

Foreign Institutional Investors (FIIs)

Foreign investors can buy GOI bonds domestically. The main aim is to encourage the further flow of foreign capital into the Indian capital market and bridge the gap between domestic saving and investment in a more cost-effective manner.

FIIs have also been permitted to invest 100 percent of their funds in the debt market, which is a significant increase from the earlier limit of 30 percent. However, the limit of total foreign institutional investor investment in GOI bonds is $2.6 billion. The government also allows FIIs to invest in T-bills.

Public Sector Undertakings (PSUs)

Several central, as well as state-level public sector undertakings (PSUs), entered the market for the first time in 1985-86 to raise funds through debt instruments. They issue tax-free and taxable bonds to meet their long-term and working capital needs.

They also invest in debt securities to park their surplus funds. The bonds issued by PSUs have been subscribed by banks, insurance companies, mutual funds and other institutions as well as retail investors.

The investors prefer to invest in tax-free bonds issued by PSUs because the interest income from these bonds is completely exempt from income tax. Bonds are issued by well-known PSUs like the National Thermal Power Corporation, Railway Finance Corporation HUDCO. Most of the PSU bonds are sold on a private placement basis to the targeted investors at market-determined interest rates.

Financial Institutions (FIs)

Public and private financial institutions which cannot accept demand deposits comprising of savings and current deposits, depend on bond instruments to raise funds from the bond market. Because of higher ratings from rating agencies, these institutions issue bonds at lower interest rates.

In the past, many financial institutions like SIDBI, NABARD, IFCI, raised funds through various bonds such as capital gain bonds, deep discount bonds, floating-rate bonds, etc. The maturity of these bonds is between five to twenty-five years. Most of the bonds have early exit options.

The private corporate enterprises issue debentures to raise funds for a longer period. However, the companies cannot issue any debentures carrying voting rights. Further, the companies have to issue secured debentures.

In the recent past, the Companies have issued various types of debentures such as convertible debentures, debentures with put and call options, floating rate debentures etc., a very large proportion of such debts instruments have been issued to institutional investors such as banks, mutual funds, insurance companies, etc., through private placement.

The companies also issue debentures through a public offer to the institutional as well as retail investors. They are both issuers and investors in the debt market.

Mutual Fund Houses

Mutual funds are the predominant investors, in the debt market. They have specialized debt funds such as money market mutual funds, gilt funds, and so on. They have also emerged as active participants and traders in the debt market.

MFs have many schemes with various proportions of investment on debt instruments. Unlike other investors, mutual funds are affected by the volatile inflows and outflows of the funds and affect the secondary market activity.

Insurance Companies

They have been permitted to invest in the debt market and the limits of investment have been specified by the IRDA. They are interested in the longer-dated papers.

Provident Funds (PFs) and Pension Funds

They are large investors in government securities and PSU bonds. They are not active traders in their portfolios. They invest in bonds and debentures in accordance with the prescribed guidelines. These funds mainly aim at the safety of the funds. That is why they prefer government securities and bonds of PSUs. A very small portion is invested in private sector bonds.

Satellite Dealers (SDs)

They were also one of the participants in the debt market but the Reserve Bank discontinued their participation from May 2002. This was a second level dealers system linked with PDs and acted as a distribution channel. Later, it was felt that the SD system resulted in higher transaction costs to retail investors and so discontinued.

Credit Rating Agencies

Simply speaking, these agencies rate or assess the ability of the borrower company to repay its debt. They thus provide useful information to the investors. Ratings are given to financial instruments and not the company.

Debentures carrying a first charge on the company’s assets are rated higher than those carrying the second charge. However, both rated higher than unsecured debentures. This shows that the debentures from the same company could carry different ratings depending on the nature of the security and the amount raised.

Some of the important credit rating agencies in India are:

  • Credit Rating Information Services of India Limited (CRISIL)
  • Investment and Credit Rating Agency of India Limited (ICRA)
  • Credit Analysis and Research Limited (CARE)
  • Onida Individual Credit RatingAgency of India Limited (ONICRA)
  • Duff and Phelps Credit Rating India (P) Limited (DPCRI)

The Regulatory Bodies

The debt market is mainly regulated by the Reserve Bank of India and the Securities and Exchange Board of India. The RBI mainly regulates the government securities market and the issue of financial institutions and public corporations. SEBI regulates the issue of corporate debt and trading of dated securities and corporate debt instruments.

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