What are corporate bonds?

Corporate bonds are debt instruments issued by a corporation(both public and private companies can issue corporate bonds), the holder of which receives interest from the corporation periodically for a fixed period of time and gets back the principal along with the interest due at the end of the maturity period. In India, the terms ‘corporate bonds’ and ‘debentures’ are interchangeably used. Though different countries have different interpretations of both the terms ‘corporate bonds’ and ‘debentures’, India’s Companies Act (Section 2(12)) identifies both as same.

How to invest in corporate bonds?

The company which is planning to raise funds through corporate bonds will offer a public issue or a private placement. A public issue means an offer will be made to the public in general to subscribe to the bonds. In a public issue, the company has to issue a prospectus before issuing the bonds. After the public issue, these bonds are listed on a recognized stock exchange in India. Hence such types of bonds are called listed bonds. A private placement is usually made to institutional investors and not to retail investors.

Benefits of investing in corporate bonds

Investment in corporate bonds generates fixed income periodically; corporate bonds may be an ideal investment for the people who want a fixed income. It normally offers a higher rate of interest as compared to fixed deposits or postal savings or similar investments. If bonds are listed, it can be sold in the secondary market before its maturity. While a bond is usually not designed for capital appreciation; a listed bond may also earn capital appreciation i.e.  Bond can be sold at a price higher than the cost price in the market.

Risks involved in investing in corporate bonds

Credit Risk: Credit risk is the risk, an investor face when company in which investment is done defaults on the interest payment or does not pay back principal. This risk could be mitigated if you will analyze the capacity of the company to meet its financial obligations. If the company is in good financial position then chance to default is also less.

Prepayment Risk: when the bonds contain the clause that allows the issuer to redeem the bonds before the due date, then the prepayment risk could be faced by investor in the future. You could mitigate this risk only by carefully reading the prospectus whether such an option is attached to your bond. If such an option exists, you can invest only if you are ready to deal with the prepayment risk.

Interest rate risk: When you invest in a listed bond, you have to face the risk of interest rates go up and down and the resultant change in the market price of the bonds. In case the interest rates go up, the market price of your bond will go down and if you plan to sell your bonds at that time, you may end up with less money than what you paid when you bought it. You may hedge this risk by investing in derivative instruments such as interest rate future or swaps.

Liquidity risk: If you want to sell your bonds before its maturity date, you may face the risk of not finding a buyer easily for your bonds. This is called liquidity risk. You could mitigate this risk by checking whether there are enough volumes in the market to reduce the liquidity risk. Higher the volume less is the liquidity risk attached with the bonds.

Investment of Money

What do you mean by investment of money?

Any source where we put our money to get a better return in the future is called investment of money. These investments give value to our money as if we keep our money in home, we do not get any return.

We invest our money in the following sources

·         Land- According to me, investment in the land is the most profitable option specially in the emerging and developing markets because we would take a good return from it in the future if, the area surrounding of that land will become developed.

·         Share market – Investment in this market would be beneficial when we will do that investment for the long term .This market is very uncertain and it is very risky for short term investors specially the intraday traders.

·         Bonds & Debenture – Bonds & Debenture of governments and good companies are safer investment options. Investors get a fixed return from this.

·         Life insurance: - It is also a good investment to secure the future of our loved one in the case when we will not present with them.

·         Mutual Fund: - Mutual Fund companies hire professionals for the investment of their client’s money in the market.

·         Other options are deposits in banks, deposits in post offices, Jewelry and so on.

Investment is very required for all people because it gives us a good return to fulfill our needs & requirements.

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Difference between futures and options and connected risk factor

Present market condition of the world is not good. So, Traders prefer options than the futures because in the case of future, there is an unlimited upside and downside for both buyers and sellers.

Example of nifty

Activity in index futures has hit a near six-year low in August as fewer derivatives traders are using Nifty futures to bet on the benchmark these days.

 You can understand it  better from the difference between futures and options

ü  In case of future contract there is an agreement to buy or sell a specified quantity of an underlying asst on a price agreed upon by the buyer and seller on or before a specified time and obligation to buy or sell a specified quantity of underlying asset does exist where as in the case of option the buyer of an option enjoys the right but not the obligation to buy and sell the underlying asset.

ü  In case of future contract there is unlimited upside & downside for both buyer and seller where as there is a limited downside and unlimited upside for the buyer. For the seller the profits are limited where as losses are unlimited

ü  In case of futures contract prices are affected primarily on the basis of the price of underlying asset whereas in the case of options the price is affected by

·         Price of underlying asset

·         Time remaining for expiry of the contract

·         Volatility of underlying asset

              As the price of option is affected by more factors so, the risk is also low in this.

Advance Pricing Arrangements (APA) & its benefits

Government of India is planning to come with the APAs rules.

APA is Advance Pricing Arrangements, an agreement between taxpayer & tax authorities to compute transfer prices in advance for transaction within a group company. To reach this agreement, Company submits its detailed information about costs and margins to the tax authorities’ .Based on the comparison of the submitted information with the similar arms length transaction, tax authorities give their decision.

Benefits of APAs for taxpayers

·         APAs give taxpayers certainty about their prices for their related party transactions.

·         It reduces the litigation and trouble for the taxpayer.

How corporate raises funds from the Market?

When any company needs fund, it raises it through the issuance of shares, debentures, by public placement, bonds etc.

Share :- When any company issue its share first time in the market for the public ,it is said to be Initial Public Offering(IPO).First time companies issue its share through the primary market and after that these share are traded in the secondary markets. To trade its share in any of the stock exchange, company must have to register it to these exchanges. Second time, when companies issue fresh share to raise fund, it is said to be the follow- on Public offering (FPO).

Another method to raise fund through share is private placement in which companies directly deal with the institutional investors, It is a cost effective method to raise fund.

Issue of Bond and Debenture: - Companies also issue Bonds and Debenture to finance its needs. Bond and debenture holders are treated as the Creditors and Companies must have to pay their fixed interest even when the company is in loss.

As an idle debt equity ratio is said to be 2:1 and if the ratio of debt is greater then this then, it is said to be dangerous for the company & its shareholders.

Risk and Return Relationship for the Investors

Companies hire underwriters and these underwriters take the remaining shares in case of under subscription.

Good companies get a very good response from the market during its public offering and its share also goes for oversubscription. Companies with good business get better response in secondary market also because of the confidence of public and stakeholders.

Real Estate Sector in India

Indian Real estate sector is on the boom. As India is a developing country, development of infrastructure is the first priority for the Government to attract more and more foreign companies in the country,on other hand, higher income or middle class population want to shift itself in the metro cities or in the industrially developed towns.

Now the availability of land in the big metro cities is very less and it is also very expensive. These expensive lands made the flats unaffordable for the middle class.

So, now companies in real estate sector started to target industrially developed towns to develop colony and societies. Flats in these societies are affordable for the middle class and in this way they also get a good environment for the development of their children.

Main reasons behind the lower price of these flats are as follows:-
1. Land is available at lower price
2. Labor cost is also very low.

So, we can say that, India is trying to going in the right direction to become a developed nation. Any country becomes developed only when all parts of the nation are developed. It is a very good trial for the development of the whole country.

Current Position of World’s Manufacturing Sector

Worlds manufacturing sector dips down because of lower demand from the market and poor economic condition of countries. Manufacturing of euro zone fell to a 37 month low of 44 from 45.1 in June. Position of manufacturing sector is also not good in China, India’s manufacturing grows slowest pace since November.

Position of euro-zone nations is the worst. Now the investors who want to keep their money in safer place going to the emerging market as these markets are safer than the market of the developed nations.

I want to give the example of India. FIIs invest Rs.10.2K cr in July despite of High inflation, lack of policy initiative and weak Monsoon. As investors see India as one of the safest place for the long term investment as most of the problems of the market is coming because of the local policies.

I think strong policy reform and a big bailout amount will be required to take out the European nations from the crisis, where as emerging markets have to improve their economic policy & have to solve their local problem to increase the growth rate.

Joint Venture: a less risky way to enter into a new market.

When any company wants to enter into a new market (country) for the expansion of its business, at that time, management of that company do not know much more about that particular market.
Before entering into the new market, Company has required to know a lot of thing about that market such as: choice and preference of the citizens, geographical and political conditions, different rules and tax policies of that country. It is not easy for any company to know these things from itself.
To know about the different conditions present in that particular market, companies often hire local research agency to get a broader report based on conditions given by them to get success in their business expansion. But many times, these reports are not proven good for the company to start its business in that particular new market.
So, According to me Joint venture is less risky way to enter into the new market. Joint Venture is an arrangement in which two or more companies called joint venture partners contribute to the equity capital of a new company called joint venture in pre-decided proportion.
From the following reasons Join Venture is less risky way to enter into a new market

• Risk is shared between the partners
• Managing Cultural Bridge because, of the name of home country’s company.
• Dealing with Government becomes easy because home company easily handles the legal requirement of the local Government.
• It gives competitive advantage.

As it gives a lot of advantage, it also gives some disadvantages.
Example: As both of the companies shared their expertise with each other, it might  happens that the local company after taking a precious expertise from the foreign one, break the Joint venture and starts  its own company with its own brand name. And in this game, local company become the winner as the emotions of local people is with the local company.
Some of the successful examples of Joint venture are

• Maruti Suzuki in India, a joint venture among Maruti ,India and Suzuki, Japan.
• Japan Nuclear Fuel  Ltd. (JNF), a joint venture among General Electric Company, Toshiba Corporation and Hitachi Limited.

Derivatives and Its Use

Section 2(ac) of Securities Contract Regulation Act (SCRA) 1956 defines Derivative as “a contract which derives its value from the prices, or index of prices, of underlying securities”

The underlying asset may assume many forms:
• Commodities including grain, coffee beans, orange juice.
• Precious metals like gold and silver.
• Foreign exchange rates or currencies.
• Bonds of different types, including medium to long term negotiable debt securities issued by Governments, companies, etc.
• Shares and share warrants of companies traded on recognized stock exchanges and Stock Index
• Short term securities such as T-bills and
• Over- the Counter money market products such as loans or deposits.

Participants in Derivatives Market
• Hedgers: They use derivatives markets to reduce or eliminate the risk associated with price of an asset. Majority of the participants in derivatives market belongs to this category.
• Speculators: They transact futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture.
• Arbitrageurs: Their behavior is guided by the desire to take advantage of a discrepancy between prices of more or less the same assets or competing assets in different markets.

Benefits from the use of derivatives are:
• Management of risk: Effective use of derivatives can save cost, and it can increase returns for the organizations.
• Efficiency in trading: financial derivatives to be a more attractive instrument than the underlying security. This is mainly because of the lower transaction costs associated with trading a financial derivative as compared to the costs of trading the underlying instrument in cash market.
• Price discover: It is used for the price discovery which means revealing information about future cash market prices through the futures market.
• Price stabilization function: derivative reduces both peak and depths and leads to price stabilization effect in the cash market for underlying asset.
• For tax avoidance
• To reduce the cost of debt and increase the debt capacity

Monetary Policy of RBI

As India is suffering  from stagflation, a situation of the economy when the rate of inflation is greater that the growth rate. So, the central bankof the country i.e. Reserve bank of India governer Duvvuri Subbarao left interest rate unchanged. Repo rate, the rate at which RBI lends money to the banks, is unchanged at 8% and Reverse repo rate, the rate RBI pays banks for their deposited money, remains unchanged at 7%.
But, for increasing the money supply in the market, Reserve bank of India lowered Statutory Liquidity Ratio (SLR), the proportion of deposits banks have to hold in government bonds to 23% from 24%. Through this action, banks can lend more to the institutions and manufacturing houses.

RBI has also lowered the growth forecast for the India as the economic condition of the world is not good and the inflation rate is also high in comparison to the growth rate of the country. One of the reasons behind the higher inflation is the lower monsoon in the country as the agriculture of India, mostly dependent on it.
So, the decision of governor is good according to domestic and foreign condition.

I think , government should have to take action to control the trade deficit of the economy, to control the devaluation of Rupee and to increase the growth prospect for India.