While understanding
the behavior of institutional investors, one will have to appreciate the
very fundamental point that in most cases debt market is a market of
compulsion as against the equity market which is a market of choice.
Many institutional investors have no choice but to invest in specific
debt instruments by virtue of their constitution or due to the
regulations which govern their functioning or by their orientation as to
whom they represent.
We have classified institutional investors operating in the Indian debt
market in the following main categories:
- Banks
- Insurance companies
- Provident funds
- Mutual funds
- Trusts
- Corporate treasuries
- Foreign investors (FIIs)
While banks, corporate treasuries,
mutual funds and some FIIs can and do invest in other kinds of
securities like equities, provident funds, insurance companies and
trusts almost exclusively invest in various debt instruments.
Banks
Collectively, all the banks put together are the largest investors in
the debt market. They invest in all instruments ranging from T-Bills,
CPs and CDs to GOISECs, private sector debentures etc. By regulation, a
bank has to invest 25% of its total deposits in GOISECs or other
approved securities. This percentage figure (25%) is called the
Statutory Liquidity Ratio (SLR) and these eligible securities are called
SLR securities. These securities are the ones, which are supposed to be
extremely safe and carry minimal risk weightage. GOISECs used to carry
zero risk weightage till very recently, which has now been changed to
5%.
The SLR regulation makes the banks the largest investors in the market
for Government of India securities. In reality most banks have exposure
to Government of India securities much higher than the minimum 25%
stipulated by regulation. This is because of the prevailing recessionary
environment wherein many industrial and commercial borrowers have been
performing poorly and have been unable to meet their repayment
obligations on time. In such an environment, investing in GOISECs
represents a sure fire way of avoiding non performing assets (NPAs).
Similarly, investment in bonds and CDs of DFIs is another safe
investment in the present environment. Banks would be amongst the
largest investors in DFI bonds.
Banks lend to corporate sector directly by way of loans and advances
and also invest in debentures issued by the private corporate sector and
in PSU bonds. A few years ago, the total ceiling for investment by banks
in corporate debentures, shares and other securities was fixed at 5% of
the incremental deposits of the previous year. This regulation has since
been changed. Banks can now invest 5% of the incremental deposits of the
previous year in shares of private sector while there is no ceiling for
debentures. Banks’ investment in private sector investment has
grown manifold due to this relaxation.
Banks also keep on investing in CDs and CPs - but that is more as a way
of managing their liquidity on a day to day basis. By and large bank
treasuries are not very active. In most cases, banks just buy and hold
the investments, which they make and not trade too much on them. Things
have been changing in recent times with some of the more aggressive
banks churning over part of their portfolio and having a more active
treasury.
Insurance companies
The second largest category of investors in the debt market are the
insurance companies which have aggregate outstanding investments of
Rs1250bn and gross annual incremental investments of Rs250bn. By
regulation, LIC has to allocate 60% of its annual incremental
investments to GOISECs while the GIC and its 4 subsidiaries (New India
Assurance, Oriental Insurance, United India Insurance and National
Insurance) are supposed to allocate 40% of their annual incremental
investments in GOISECs. LIC is allowed to invest up to a maximum of 15%
of its incremental investments in private sector debentures and shares
while GIC and it subsidiaries are allowed to invest up to a maximum of
25% of their incremental investments in private sector shares and
debentures. Hence, collectively, the insurance companies are one of the
largest investors in GOISEC’s. Of their annual incremental
investments of Rs250bn, not less than Rs150bn would be in GOISECs.
Provident funds
Provident funds are estimated to have a total corpus of Rs800bn. The
total incremental investment by provident funds every year is
approximately Rs150bn which makes them the third largest investors in
the debt market. Again by virtue of regulation, provident funds are
supposed to invest a minimum of 25% of their incremental accretions each
year in GOISECs, 15% in state government securities, 40% in PSU bonds
etc with a maximum of 10% in rated private sector debentures. Investment
guidelines for provident funds are being progressively liberalized and
investment in private sector debentures is one step in this direction.
Most of the provident funds are very safety oriented and tend to give
much more weightage to investment in government securities although they
have been considerable investors in PSU bonds as well as state
government backed issues like SSNL, MSRDC, etc The largest provident
fund is the one managed by the State Bank of India on behalf of the
Central Provident Fund Commissioner. This has an estimated corpus of
Rs400bn and fresh annual investments of Rs70bn. This Provident fund has
taken a policy decision not to invest in private sector debentures
although recent regulation allows it to do so.
By their very orientation as well as by regulation, provident funds are
buy and hold investors and almost never trade on their investments.
Mutual funds
Mutual funds represent an extremely important category of investors.
World over, they have almost surpassed banks as the largest direct
collector of primary savings from retail investors and therefore as
investors in the wholesale debt market.
Mutual funds include the Unit Trust of India, the mutual funds set up
by nationalized banks and insurance companies like the SBI Mutual Fund,
the GIC Mutual Fund, the LIC Mutual Fund etc. as well as the new private
sector mutual funds set up by corporates and overseas mutual fund
companies. Of these, the largest is the Unit Trust of India which has
almost 85% of the market share of the mutual fund business and a total
corpus of about Rs700bn. The total corpus of all the mutual funds put
together is about Rs850bn while the annual gross incremental investments
are in the range of around Rs150bn.
While all mutual funds including the Unit Trust of India invest in
GOISECs in a big way, they are collectively one of the largest investors
in PSU bonds and private sector corporate debentures. Private sector
mutual funds like Birla, Prudential ICICI etc have emerged as major
investors in the debentures issued by top rated private sector
companies. Short term debentures are a favorite of mutual funds. This
has resulted in a scenario where the yield on some of the top quality
private sector corporates is at a very low differential compared to risk
free sovereign instruments and bonds of financial institutions.
Most mutual funds trade at least 30-40% of their portfolio with the
exception of UTI, which does very little trading.
Trusts
Trusts include religious and charitable trusts as well as statutory
trusts formed by the government and quasi government bodies. The largest
trusts in India are the port trusts, which have been constituted under
the Major Port Trust Act. These include the Bombay Port Trust, Madras
Port Trust, Calcutta Port Trust, Cochin Port Trust etc. The aggregate
corpus of the Port Trusts is estimated at Rs80bn while their annual
investments would be about Rs20bn of that amount.
Religious trusts and Charitable trusts range from the very small ones
to large ones like Tirupati Devasthanam, Mata Amritanandmayi, Ramkrishna
Mission etc. Other trusts include hospital trusts like Jaslok, Bombay
Hospital etc, armed forces trusts like Army Wives Welfare Association,
Air Force Officers Association and many other general trusts like the
Rajiv Gandhi Foundation, Birla Science Foundation etc.
There are very few instruments in which trusts are allowed to invest.
Most of the trusts invest in CDs of banks and bonds of financial
institutions and units of Unit Trust of India. The total aggregate
corpus of all trusts is estimated at Rs250bn while the total incremental
investment would be approximately Rs40bn per annum.
Corporate treasuries
Corporate treasuries have become prominent investors only in the last
few years. Treasuries could be either those of the public sector units
or private sector companies or any other government bodies or agencies.
The treasuries of PSUs as well as the governmental bodies are heavily
regulated in the instruments they can invest in. These regulations were
put in place by the administrative ministries as a reaction to the
Harshad Mehta scam. These treasuries are allowed to invest in papers
issued by DFIs and banks as well as GOISECs of various maturities.
However the orientation of the investments is mostly in short term
instruments or sometimes in extremely liquid long term instruments which
can be sold immediately in the markets. Some have been investing in
preference shares issued by DFIs.
In complete contrast to public sector treasuries, those in the private
sector are very adventurous, fleet footed and savvy. They invest in CDs
of banks and CPs of other private sector companies, GOISECs as well as
debentures of other private sector companies. Of late, preference shares
of DFIs and open ended mutual funds have also become popular with these
treasuries. Some of the savvier treasuries have also been investing in
badla financing which gives much superior returns as compared to any
other security albeit with higher risk perception. Another favorite is
the inter-corporate deposit (ICD), which is also non tradable like badla
financing. The big private sector treasuries are those belonging to the
Birla companies, Reliance group, Gujarat Ambuja, Bajaj Auto, Parle
Products etc.
Foreign Institutional Investors
India does not allow capital account convertibility either to overseas
investors or to domestic residents. Registered FIIs are an exception to
this rule. More than 300 FIIs invest in Indian equities while the number
of FIIs investing in Indian domestic debt is less than 20.
FIIs have to be specifically and separately approved by SEBI for equity
and debt. Each debt FII is allocated a limit every year up to which it
can invest in Indian debt securities. It can do so without asking for
any permission from anyone. They are also free to disinvest any of their
holdings, at any point of time, without asking for any permission from
anyone.
The total aggregate limit or ceiling of investments by debt FIIs is US$
1.5bn. As on date, the aggregate investments are less than US$100mn.
Most of the debt FIIs are extremely quick traders. They invest wherever
they can make a quick buck. They are unlikely to invest in Indian debt
at a time when the currency risk is high and the expected gains from
price appreciation in Indian debt paper are not very high.
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