Author: Monica Samuel

Indian Corporate Bond Market – Waiting for Godot?

Corporate bonds, as a percentage of India’s GDP, are at an abysmal low. This is in stark contrast to the equities market which has seen tremendous growth over the last few decades. Corporate bonds in India add a mere 5.48% to GDP versus USA (90.27%), Japan (37%) and China (24.05%).

Source: BIS Quarterly Review and IMF World Economic Outlook Database

Growth of the corporate bond market is vital as it creates low cost investment opportunities for businesses apart from banks, and offers yield premium opportunities for investors. Did you know that the National Stock Exchange (NSE) was originally set up to facilitate bond trading? The picture today belies the fact.

How did this happen?

Corporate bond market in India – The premise

The bond market segment in the country predominantly consists of government securities. Corporate bonds capture a small slice of 4.74% of the debt market. YoY growth in corporate bonds is also slow – only 19% versus 90% in Treasury bills. Also, the existing corporate bond market in India is largely driven by banks and other financial institutions rather than infrastructure companies or the manufacturing sector (considered indicators of infrastructural growth in the country). The lack of participation has dampened corporate interest and media attention in corporate bonds, making bank loans the primary source of debt capital. This lack of liquidity also forces corporate borrowers to prefer private placements over public issues for bonds.

bonds as a percentage of gdp

Lastly, the RBI controls most of the bond market and is not in any hurry to loosen its control. Interestingly, there has never been a dearth of corporate bond buyers with foreign investors more than willing to put in their money into creditable bonds. There just hasn’t been much for them to buy.

Challenges facing the corporate bond market

Infrastructural improvements made to facilitate the equity market are conspicuously absent in the debt market space that has to contend with:

  • Reduced incentive of Indian banks as the statutory lending ratio of 23% requires them to put roughly a quarter of their deposits into government bonds
  • Illiquid securities
  • Low investor awareness
  • Lack of transparency – no live trading market or access to live pricing
  • Resistance from bond houses and debt arrangers

The future of corporate bonds

In February, Reliance Industries Limited [stockquote]RELIANCE[/stockquote] raised $800m via perpetual bonds from investors abroad at a coupon rate of 5.875% – a first strong move in a struggling national corporate debt market. In fact, all Indian issues that completed in Jan 2013 have been very well received and oversubscribed, demonstrating the strength of international capital markets for Indian corporate bonds.

Recently, the government decided to reduce withholding tax on infrastructure bonds – a positive move for the corporate bond market. Are these reforms too late in the day for the corporate bond market to thrive? I don’t think so. The Indian market is gradually opening up to foreign investors and larger corporate stakeholders. Once liquidity starts pouring in, corporate bonds are sure to become a critical pillar supporting India’s growth.

Turning coding coolies into solution architects

It hasn’t been easy for the Indian IT outsourcing sector since the global meltdown in 2008. Even as the recession abated and markets began improving, unemployment and economic instability in US and Europe compelled governments to create more favorable conditions for domestic markets. But that’s just the tip of the problematic iceberg that’s denting IT outsourcing growth in India.

IT outsourcing has contributed significantly to the Indian economy. In the initial years, outsourcing came easy – Indian IT professionals were cheaper, work could be done faster with more people on less pay, and the Indian Rupee was not as strong. IT companies made huge profits while keeping 20-30 percent of their workforce on bench at a time. Today, the situation is quite different.

Challenges galore

The demand for IT services from US and Europe (accountable for three quarters of the work and revenue that came India’s way) has dwindled on account of their recovering economies. Furthermore, the popularity of cloud solutions has enabled more SMBs and large enterprises to manage well with a smaller workforce. Businesses no longer need bulk IT labor from India. If they have expectations, they are for experienced professionals who will add measurable value to their business.

Research firm Ovum reveals that the total contract value (TCV) of outsourcing deals in India fell by 30 percent during the last 2012 quarter. That’s a record low in 9 years.

Indian IT companies are seeing much slower growth; lesser attrition and higher productivity owing to enterprise mobility, automation and cloud implementations. Consequently, recruitment have frozen. IT freshers who were recruited on-campus in 2011 are waiting for appointment letters as their employers (like HCL Tech) try to cut costs and maintain profits. The golden dream of joining an IT company for a 6 or 7 figure annual package has just gotten tougher for college graduates.

Another challenge for Indian IT outsourcing companies is the emergence of countries like the Philippines as alternative IT/ITeS destinations.


NASSCOM has forecasted a reduced growth rate of 11-14 percent in IT outsourcing exports in 2013-14. However, the good news is that of the top IT outsourcing providers in India – Infosys, Wipro and Tata Consultancy Services (TCS) – only Wipro fell short of the guidance predicted for the quarter ending December 2012.

Indian outsourcers like Infosys are promoting “mini CEOs” to tap their intellectual property to the maximum rather than hiring new people. The demand for experienced personnel who can adapt to changing environments and stay productive is growing and companies are taking steps to retain such talent. As Tech Mahindra HR, Sujitha Karnad, points out – coding coolies are passé, the demand now is for solution architects. That’s where the new outsourcing opportunities lie.

IT companies are also diversifying their service offerings to stay profitable. Infosys has signed a 5 year agreement with RWE Supply and Trading (RWEST), a leading European energy trading house to provide technology services based on ‘gain-share’ – Infosys gets paid when RWEST makes a transaction on the platform.

NASSCOM predicts that the Indian IT industry will generate $225 billion by 2020 by leveraging on emerging technologies, mobile and cloud platforms, social collaboration, SMB outreach, and the integration of core business applications. It’s not an unbelievable target as India is well placed to address new opportunities and emerging markets. For all you know, this shakeup could be the re-making of Indian IT outsourcing as it matures in value as well as viability.

[stockquote]INFY[/stockquote] [stockquote]WIPRO[/stockquote] [stockquote]TCS[/stockquote] [stockquote]HCLTECH[/stockquote] [stockquote]TECHM[/stockquote]

Falling Demand Impacts Profitability of Indian Steel Industry

The Indian steel industry is on a slow growth curve. Domestic demand for steel has fallen because of inflation and high interest rates. Low availability of raw materials, high cost, upheaval in the mining sector, state bans, and environmentalist pressures are creating more problems for steel producers. The Editorial March 2013 reveals that the growth rate of the Indian iron and steel industry fell from 11% in 2010 to 4.3% in 2011.

finished steel - india

India is the fourth largest producer of crude steel in the world today. It is also an importer of steel since 2007. It is projected that if the 12th Five Year Plan proposals are implemented as per schedule, India could grab second place by 2015-16. However, as the 12th Plan Period (2012-17) commences, the prospect does not look bright for domestic demand of steel though per capita consumption in India has increased from 36.6kg in 2005 to 51.7kg in 2010.

Challenges facing the Indian steel industry

There are many problems that are hurting the growth of the Indian steel industry:

  • Non-availability of iron ore: Iron ore is available in plenty in India but unregulated mining and large scale exports have raised concerns on the long-term availability of raw materials to address domestic demand. For the sake of sustainability, the Ministry is restricting exports and making efforts to preserve the non-renewable iron ore fields.
  • Non-availability of coking coal: Coking coal is largely imported as domestic availability of the resource is limited. Raw material security and price volatility are challenges. Non-coking coal used for sponge iron production is growing scarce; imports will create heavy cost burdens on the steel sector.
  • Inadequate infrastructure: Inadequate sintering and pelletisation facilities for steel as well as domestic technology to process low grade iron ore are significant challenges. Existing road, railway, port and power facilities are not good enough to support the 12th Plan working group’s optimistic projection of steel production doubling in the next 5 years.
  • Outdated technology and R&D: The performance of Indian steel plants is lagging because of low quality inputs, obsolete technology in treating resources, and insufficient R&D on alternate technologies to reduce wastes and cost, and address environmental concerns.
  • Cheap steel imports: Indian steel industry players are concerned about the cheap steel dumped into India by Japan and Korea, following the Free Trade Agreement and lower import duties. “India has spent over $5.5 billion of precious foreign exchange Iast year in importing steel which Indian steel mills are capable of producing,” says Dilip Oommen, CEO & MD, Essar Steel India Limited.

 Steel industry prospects

As per the 12th Five Year Plan, infrastructure will receive an investment of $1 million. If that happens, domestic demand, infrastructure and the economy will receive a boost. The Steel Ministry proposes to increase steel production to 60 million tonnes in the next 5 years with an investment of ₹2.5 crore. Therefore, the Ministry plans to review steel-related sectoral caps by banks and consider relaxation of norms on External Commercial Borrowings (ECBs).

The Steel Ministry also expects domestic steel demand to rise by 10.3% annually by the final year of the 12th Plan. World Steel Association, a leading global steel body, predicts steel consumption will increase by 5% in India in 2013.

steel demand - india

As of now, the steel industry is experiencing immense pressure on profit margins. Rising input costs have increased steel production outlay. At the same time, low demand has created over-capacity. JSW Steel reported ₹669 crore in losses (analysis) in the second quarter of this fiscal. Tata Steel also saw profits going down by 89% (analysis). Steel companies may have to look at export options to maintain profits but the global scenario is hardly more encouraging. To be sure, it’s a tough time for steel manufacturers.


[stockquote]JSWSTEEL[/stockquote] [stockquote]TATASTEEL[/stockquote]

Organized Retail Creates Jobs, Spurs Growth

Indian retail contributes 11% of our country’s GDP. In the last few years, organized retail stores have come up in cities and towns in a big way. The trend has been triggered by the change in the Indian consumer in terms of purchasing power, choice preferences, demand for quality control, and value for money. Organized retail creates better opportunities and profit for the end-suppliers such as farmers, spinners, rural craftsmen, etc. It also creates price competition that works for the consumers’ good.

Growth of indian retail

The growth of organized retail stores like Big Bazaar, Shopper’s Stop, Lifestyle Retail and Spencer’s Retail is already derailing small mom-and-pop stores, with or without FDI. On the other hand, organized retail employs 40 million Indians, offers organized shifts and salaries, fair work policies and generates $450 million revenue. Most importantly, organized retail creates direct relationships with suppliers, cutting out the middle man’s cut which can be exorbitant. While the sale of a kilogram of potatoes will get a farmer only Rs.3-4, it is sold in the market for Rs.25. Organized retail ensures farmers get a better deal.

Organized retail also supports agricultural workers with infrastructure to reduce food spoilage – cold storage for perishables like fruits and vegetables, hygienic transport, etc. Currently, food wastage leads to 30% losses that contribute to our current inflation rate. The sad state of backend infrastructure in India may get addressed with FDI support as the government needs both funds and expertise in this area.

In September 2012, the government sanctioned FDI in single-brand retail – allowing 100% ownership on the condition that 30 percent of goods be sourced from Indian small and medium suppliers. FDI in multi-brand retail was also allowed subject to state government sanctions, with 51% ownership and a minimum of $100 million initial investment spread over 3 years. The government has also advised foreign parties to invest 50 percent in backend infrastructure development.

Though many heated arguments have prevailed in the political arena over FDI, it isStatewise FDI Retail breakout supported by organized retailers in India and rural farmer associations such as Consortium of Indian Farmers Associations (CIFA). However, the restrictive regulations, state-level uncertainties, bad infrastructure, and high investment stake will limit the entry of foreign investors. Walmart, Tesco, and Carrefour are still testing the waters in wholesale markets though they were expected to launch retail stores soon.

Organized retail in India faces other challenges too such as:

  • Wide geographical spread
  • Varying customer preferences across states and regions
  • Limited access to retail markets because of FDI opposition in some states
  • Complex distribution network
  • Taxation laws that favor small retailers
  • Cumbersome real estate procurement and local laws
  • Resistance in some local areas (political and coercive)
  • Limited use of IT systems for analysis, supply chain management, etc.
  • Small ticket size
  • Lack of retail management education
  • Lack of retail workforce trainings

Organized retail (with FDI support) has helped economies like China, Japan, and Malaysia increase local employment, competition and product quality. There is no reason why the same can’t happen in India over time. Joint ventures with foreign players, multi-format and single-brand stores will bring down prices, create wider choice of quality goods, and drive more profits to the supplier’s end. However, political tussles and unfavorable conditions may deter many foreign retailers from investing in India.

[stockquote]PANTALOONR[/stockquote] [stockquote]TRENT[/stockquote] [stockquote]SHOPERSTOP[/stockquote] [stockquote]FUTUREVENT[/stockquote]

New RBI Regulations for NBFCs and MFIs – Whats in store?

Non-banking Financial Companies (NBFC) and Microfinance Institutions (MFI) are often the only source of banking services in rural India. In October 2010, the sector took a hard hit after the Andhra Pradesh (AP) government passed an ordinance to check MFIs owing to multiple farmer suicides over coercive collection tactics. As AP was, and still remains, a big market for MFIs, those with high exposure in the state suffered losses amounting to ₹7,800 crore.

Microfinance loan portfolio

Since then, MFIs like SKS Microfinance have rebuilt their net worth and resumed operations in AP with the court’s consent; on the condition that they adhere to rules pertaining to loan interest rates and collection practices.

Post the AP incident, the RBI became the sole regulator of the microfinance function in India. A central bill was also tabled for Parliament approval to override state Acts on MFI regulation. The goal is to protect borrowers’ interests and clarify rules mandating the operations of MFIs and NBFCs across the country. According to RBI norms, all NBFC-MFIs must:

  • register as an NBFC-MFI with RBI
  • become the member of at least one Self-Regulatory Organization (SRO) recognized by the RBI
  • make 100% provisions for their entire exposure to AP
  • maintain 15% capital adequacy ratio (ratio of capital to risk-weighted assets)
  • maintain a cap on margins though the 26% cap on interest rates has been removed
  • not exceed 4% difference in minimum and maximum rates for individual loans
  • maintain 85% or more of net assets as qualifying assets
  • allocate 70% of loans to income generating activities and 30% to purposes such as housing repairs, education, medical and other emergencies

New NBFC MFI formations must have minimum net owned funds of ₹3 crore by March 2013 and ₹5 crore by March 2014.

While NBFC-MFIs appreciate the clear guidelines, they have reservations on the cap on margins. MFIs that have suffered heavy losses in AP could get wiped out if they cannot maintain the capital adequacy ratio expected. They are already struggling with high operational costs and hefty provisions.


In February, the RBI invited NBFCs to apply for bank licenses by July 1, 2013. Applying entities must have a minimum track record of 10 years as well as clearance from sector regulators, enforcement, and investigative agencies such as IT Department, CBI and ED. Companies must have ₹500 crore as minimum paid-up capital to set up a bank with not more than 49% foreign investment. They must also open least 25 per cent of branches in unbanked rural areas.

While the increased competition is expected to benefit borrowers in terms of interest rates and loan terms, the entry of corporate in NBFC could be disruptive. Established companies like Aditya Birla Money Ltd. will gain from launching a bank but the business volume and profitability of existing MFIs and independent NBFCs will be affected, at least till the time they can match their deposit franchise with existing borrowings. Furthermore, corporate business models could conflict with the social objective of MFI leading to its dilution.