Introduction
The financial system of an economy does not depend only on banks for raising funds. Corporates also raise money directly from the market. Two important non-bank funding sources widely used in India are the Corporate Bond Market and Inter-Corporate Deposits (ICDs). These instruments play a major role in meeting long-term and short-term funding requirements of companies and also provide investment opportunities to banks, financial institutions and other investors.
Students must understand the structure, functioning, importance, risks and regulatory framework of these instruments.
Corporate Bond Market
Meaning of Corporate Bond Market
The Corporate Bond Market is the segment of the debt market where companies issue bonds or debentures to raise long-term funds from investors. These bonds represent a loan taken by the company from investors and carry a fixed or floating rate of interest.
Unlike equity, corporate bonds do not give ownership rights to investors. Instead, investors receive regular interest income and repayment of principal at maturity.
Need for Corporate Bond Market
The corporate bond market is essential because it:
- Reduces excessive dependence of corporates on bank loans
- Provides long-term funds for infrastructure and capital-intensive projects
- Helps in better risk distribution in the financial system
- Improves depth and efficiency of financial markets
In India, banks have limitations on long-term lending due to asset-liability mismatch. A developed corporate bond market helps overcome this problem.
Participants in Corporate Bond Market
The corporate bond market involves multiple participants:
- Issuers: Public sector companies, private companies, financial institutions
- Investors: Banks, insurance companies, mutual funds, pension funds, FIIs
- Intermediaries: Investment banks, credit rating agencies, stock exchanges
- Regulators: SEBI, RBI, Ministry of Finance
Types of Corporate Bonds
Corporate bonds can be classified in several ways.
Based on security:
- Secured bonds, backed by company assets
- Unsecured bonds, not backed by specific assets
Based on coupon:
- Fixed rate bonds
- Floating rate bonds
- Zero coupon bonds
Based on convertibility:
- Convertible debentures
- Non-convertible debentures (NCDs)
Role of Credit Rating in Corporate Bonds
Credit rating plays a very important role in the corporate bond market. It indicates the creditworthiness of the issuer and the probability of default.
Higher-rated bonds:
- Carry lower interest rates
- Are safer for investors
- Are preferred by banks and institutional investors
Lower-rated bonds:
- Offer higher returns
- Carry higher credit risk
For banks, investing in low-rated corporate bonds increases credit risk and capital requirement.
Advantages of Corporate Bond Market
Corporate bond market benefits both issuers and investors.
For corporates:
- Lower cost of funds compared to bank loans
- Longer repayment period
- Diversification of funding sources
For investors:
- Regular and predictable income
- Better returns than government securities
- Portfolio diversification
Risks Associated with Corporate Bonds
Corporate bonds are not risk-free.
Major risks include:
- Credit risk: Risk of default by issuer
- Interest rate risk: Bond prices fall when interest rates rise
- Liquidity risk: Difficulty in selling bonds in secondary market
- Reinvestment risk: Coupons may be reinvested at lower rates
Corporate Bond Market in India – Present Status
In India, the corporate bond market is still underdeveloped compared to advanced economies.
Key characteristics:
- Dominated by private placements rather than public issues
- Mostly subscribed by institutional investors
- Limited retail participation
- Low secondary market liquidity
Regulatory reforms by SEBI and RBI aim to improve transparency, trading and settlement systems.
Inter-Corporate Deposits (ICDs)
Meaning of Inter-Corporate Deposits
Inter-Corporate Deposits (ICDs) refer to short-term unsecured deposits placed by one company with another company. These deposits are usually for 3 to 6 months, but can extend up to one year.
ICDs are mainly used by corporates to meet temporary liquidity needs.
Nature and Features of ICDs
Inter-Corporate Deposits have some distinct characteristics.
- They are unsecured in nature
- They are short-term instruments
- Interest rates are market-driven
- Transactions are usually bilateral
- They are not regulated like bank deposits
Because ICDs are unsecured, they carry higher risk compared to bank deposits or money market instruments.
Types of Inter-Corporate Deposits
Based on maturity, ICDs are generally classified into:
- Call ICDs: Repayable on demand
- Short-notice ICDs: Repayable within a short notice period
- Term ICDs: Fixed maturity period
Purpose of Inter-Corporate Deposits
Companies use ICDs for various reasons.
- To meet short-term working capital requirements
- To park surplus funds temporarily
- To avoid procedural delays of bank loans
- To earn higher returns compared to bank deposits
Interest Rates on ICDs
Interest rates on ICDs are usually:
- Higher than bank deposit rates
- Lower than unsecured market borrowings
The rate depends on:
- Creditworthiness of borrowing company
- Market liquidity conditions
- Tenure of deposit
Risks in Inter-Corporate Deposits
ICDs carry significant risk.
- Credit risk is high because ICDs are unsecured
- Liquidity risk exists as early withdrawal may not be possible
- Concentration risk if large exposure is taken on one company
Due to these risks, banks are generally cautious in exposure to ICD-related entities.
ICDs vs Corporate Bonds
Though both are corporate funding sources, they differ significantly.
Corporate bonds:
- Long-term instruments
- Regulated by SEBI
- Tradable in secondary market
- Require credit rating
Inter-Corporate Deposits:
- Short-term instruments
- Privately negotiated
- Not tradable
- No mandatory credit rating
Role of Banks in ICD Market
Banks are generally not direct participants in ICD transactions. However, ICDs affect banks indirectly because:
- Companies reduce dependence on bank credit
- Banks invest in corporate bonds instead of ICDs
- ICD defaults can affect corporate cash flows and bank exposure
Conclusion
The Corporate Bond Market and Inter-Corporate Deposits are crucial components of the Indian financial system. While corporate bonds provide a structured and regulated mechanism for long-term financing, ICDs offer flexible short-term liquidity solutions. For bankers, understanding these instruments is important for credit appraisal, treasury management and risk control.