Project on Investment and bound by :- inamdar.b.pawar from :- B.V.I.M.E.D ( navi mumbai)

1. SR. INDEX PG.
NO. NO.
Executive Summery
1 Introduction
1.1 Objectives Of The Study
1.2 Research Methodology
2 Conceptual framework
2.1 Meaning and Definition
2.2 Features of Bond
2.3 Advantages and Disadvantages
2.4 International bond market
2.5 The development of International bond market
2.6 Types of International bond market
2.7 Eurobond Markets
2.8 Eurocurrency Markets
2.9 Credit Rating Agencies in the World
2.10 Benefits to the investment in International Bond Market
2.11 Valuation And Risk of the International bond market
3 Collection and Analysis of Data
4 Interpretation of Data
5 Conclusion
6 Suggestion and Recommendation
Appendices
Bibliography

2. EXECUTIVE SUMMERY
Investment is a commitment of money or capital to purchase financial instrument or other
assets in order to get profitable returns in the form of interest, income and appreciation of
value of an instrument. Investment is related for savings or differing consumption. An
investment involves a choice by an individual or an organization such as pension fund.
Investment divided in 2 types i.e. in financial assets means Equities, Mutual fund, Bonds,
Deposits, Cash equivalents etc… and the non financial assets i.e. Real estate and Gold. There
is a various kinds of bonds are available to the investment in the market.
A bond is a security which is debt instrument where the investors get their guaranteed
return without any risk. Bond market is that where the bonds are traded. Trading of bonds are
done through stock exchange Stock exchange is regulated under SEBI. The vast majority of
investors are invested their money in municipal bonds. Mutual funds have a number of
advantage s over the individual bond portfolios. Individual bonds are providing certain
benefit which compared with bond mutual fund.
Prices of Bonds are crossly related for making change in interest rates. When interest rates
are increased, Price of bonds decreases. This is mostly happens because the prices of bonds
fixed to the issuance. Most companies issue bonds in order to raise funds to fund projects that
require capital. The advantage to issuing bonds over stock is that the company doesn't have
to give up any partial control of the company or give up a portion of profits. The downside is
that they have to pay back the money, with interest. Having to make debt payments each
month will lower the profits of the company as long as they have debt outstanding as well as
possibly raise the risk that the company may fail due the higher expenses.
This topic would help to get the knowledge about investment in bonds and bond
market. In this topic I have given introduction about credit rating process which is used in
various kinds of agencies and valuation of bonds. The project also includes primary data and
secondary data.

3. CHAPTER NO.1
INRODUCTION
A bond is a loan in the form of a security where the bond buyer lends money to the
bond issuer. Interest payments are made at fixed intervals for a predetermined amount of
time and then the principal (the original money borrowed) is paid back at maturity. The term
"bond" is technically reserved for debt issues where the repayment term is more than 10
years. If the repayment term is more than 1 year but not more than 10 years then the debt is
called a "note". If the repayment term is 1 year or less then the debt is called a "bill".
Bonds are among the safest investments in the world. But no investment is entirely risk free.
In fact, fixed-income investing has its own particular forms of risk: inflation, reinvestment,
default, and downgrade.
A bond price is inversely related to the change in interest rates. When interest rate
will raise, a bond price become falls. This is because bond coupon payments are fixed at
issuance. When interest rates change, the price of each bond shifts, so that comparable bond
introduced with different coupon rates & provide to the investors with same yield to
maturity. Government bonds are less liquid than taxable bonds &have higher transaction
costs.
A yield curve is simple representation of the relationship between the interest rate that
a bond pays and when that bond matures. Learning how to read a yield curve -- and knowing
the significance of a flattening or inverted yield curve as well as how to calculate the spread -
- is a crucial skill for fixed-income investors. Inflation can eat away at your investments. But
there's a very safe investment from the U.S. Treasury Department that protects investors from
inflation risk.
The principal invested in TIPS, or Treasury Inflation-Protected Securities, is adjusted
semiannually to reflect rises in the Consumer Price Index. Zero-Coupon Bonds are sold at a
deep discount to their face value. In many cases, interest is compounded and paid at maturity
rather than during the life of the bond. In other cases, a financial institution "strips" the
interest payment from a fixed-income investment and resells it as a zero coupon.

4. Most companies issue bonds in order to raise funds to fund projects that require
capital. The advantage to issuing bonds over stock is that the company doesn't have to give
up any partial control of the company or give up a portion of profits. The downside is that
they have to pay back the money, with interest. Having to make debt payments each month
will lower the profits of the company as long as they have debt outstanding as well as
possibly raise the risk that the company may fail due the higher expenses. Bonds are issue
through federal government which is treasury bonds, state and municipal government issues
municipal bond and corporations issue corporate bonds.
The latest on the municipal marketplace including our exclusive real-time price
information and ticker, in-depth market data, a variety of municipal bond indices, and
relevant economic indicators are available. Invaluable tools for the municipal bond investor.
Comprehensive data on government and federal agency bonds including our real-time agency
price information and ticker, key indices and important economic indicators. Check out
descriptions of the most significant issuers and their bond issuance programs. Use this data to
guide your government and agency investment strategy.
Timely data on corporate bonds including our real-time price information and ticker,
in-depth market data, key corporate indices, and relevant economic indicators.

5. 1.2 OBJECTIVES OF THE STUDY
To understand the bond & International bond market.
To study the different avenues of International bond market.
To understand the benefits of investment in International bonds.
To study the valuation and risks available of investment in International bonds.
To study the worlds credit rating agencies of the International bond market.

6. 1.3 RESEARCH METHDOLOGY
Primary data
Primary data is a term for data collected on source which has not been subjected
to processing or any other manipulation, it is known as raw data.
Primary data have been collected on the basis of questionnaire on this relevant
topic.
Secondary data
Secondary data is the data collected by someone other than the user. Secondary
data includes newspapers, books, etc.
Research methodology
Primary data Secondary data
Surveys Books:-
Debt market (Vipul Prakashan)
1. Sandeep Gupta
2. Sachin Bhandarkar
Global Capital Market (Vipul Prakashan)

7. CHAPTER NO.2
PROFILE
L&T Infrastructure Finance Company
Limited
Larsen & Toubro

8. 2.1 OVERVIEW OF THE COMPANY
L&T Infrastructure Finance Company Limited (L&T Infra) is promoted by the engineering
and construction conglomerate Larsen & Toubro Limited (L&T) and L&T Finance Holdings
Limited (a subsidiary of L&T).
L&T Infra, incorporated in 2006, is registered as a Non Banking Financial Company
(NBFC) under the Reserve Bank of India (RBI) Act 1934, and is among the select few
financial institutions classified as an Infrastructure Finance Company (IFC). It was set up
with an initial capital of 500 crore (US$111 million) and has expanded at a rapid rate since
inception.
L&T Infra provides a wide range of customized debt & equity products as well as Financial
Advisory Services for the development of infrastructure facilities in the country with a focus
on power, roads, and telecom, oil & gas and port sectors.
L&T Infra functions with high Corporate Governance standards and Independent Directors
constituting 50% of its Board and the key committees. As a testimony to its strong
credentials and sound operating performance, L&T infra enjoys AA+ credit ratings by both
CARE and ICRA.
L&T Infra operates from is Mumbai, Delhi, Chennai and Hyderabad centers - and is
managed by a team of experienced banking professionals, under the guidance of an eminent
Board drawn from both L&T and banking industry.
 Mission:
a. Aim: To be a strategic business partner and a solution provider.

9. b. Purpose: To nurture human capital and develop leadership for professional
excellence through meritocracy and continuous learning environment.
Values: Customer orientation, teamwork, trust and transparency.
 Vision:
"To be a dominant player in financial services, committed to constant
innovation and sustained customer service to enhance shareholder's wealth. LTF will
foster trust, uphold integrity and radiate positive energy."
 About L&T Group:
Larsen & Toubro Ltd is a USD 9.8 billion technology, engineering and
construction group with operations spread across the globe. It was ranked as 14th by
the Economic Times in their survey of the Top 500 Companies in India. Another
feather in its cap was added when L&T was ranked 47th in the world in the June 2009
issue of Forbes-Reputation Institute‘s ―World‘s Most Reputable Companies‖ survey.
In this survey, L&T was the only engineering and construction company in the world
to have made it to the top 200.
Having established its foothold in engineering and construction, electrical and
electronics, industrial products and information technology, L&T forayed into the
financial services space. Financial Services has been identified as a strategically
important business for L&T Group. It has been L&T‘s vision to become a
‗wholesome‘ player in this area of business. With an entire range of products and
service offerings, L&T‘s ‗Financial Services‘ initiative will cater to an entire
spectrum of customers, and their various financial needs.
 About the Industry:
INDUSTRY

10. The information in this section has not been independently verified by us, the
Lead Managers or any of our or their respective affiliates or advisors. The
information may not be consistent with other information compiled by third parties
within or outside India. Industry sources and publications generally state that the
information contained therein has been obtained from sources it believes to be
reliable, but their accuracy, completeness and underlying assumptions are not
guaranteed and their reliability cannot be assured. Industry and Government
publications are also prepared based on information as of specific dates and may no
longer be current or reflect current trends. Industry and Government sources and
publications may also base their information on estimates, forecasts and assumptions
which may prove to be incorrect. Accordingly, investment decisions should not be
based on such information.
 CRISIL DISCLAIMER:
CRISIL Limited has used due care and caution in preparing this report.
Information has been obtained by CRISIL from sources which it considers reliable.
However, CRISIL does not guarantee the accuracy, adequacy or completeness of any
information and is not responsible for any errors or omissions or for the results
obtained from the use of such information. No part of this report may be published /
reproduced in any form without CRISIL's prior written approval. CRISIL is not liable
for investment decisions which may be based on the views expressed in this report.
CRISIL Research operates independently of, and does not have access to information
obtained by CRISIL's Rating Division, which may, in its regular operations, obtain
information of a confidential nature that is not available to CRISIL Research.
Larsen & Toubro Limited (L&T) (NSE: LT, BSE: 500510) is an Indian
multinational conglomerate company headquartered in Mumbai, India. The company
has four main business sectors: technology, engineering, construction and
manufacturing.

11. L&T has an international presence, with a global spread of offices and
factories, further supplemented by a comprehensive marketing and distribution
network. The firm has more than 60 units in some 25 countries. Domestic business
within India dominates, but the company is steadily growing its global operations
with a focus on China and the Middle East.
2.2 HISTORY OF THE COMPANY
 Pre Independence
The company was founded in Mumbai in 1938 by two Danish engineers, Henning
Holck-Larsen and Soren Kristian Toubro. The first office was reportedly so small that
only one of the partners could use it at a time. The company started off as a
representative of Danish manufacturers of dairy equipment. However, with the start

12. of the Second World War in 1939 and the resulting restriction on imports, the
partners started a small workshop to undertake jobs and provide service facilities.
Germany's invasion of Denmark in 1940 stopped supplies of Danish products.
This crisis forced the partners to start manufacturing dairy equipment indigenously.
These products proved to be a success, and L&T came to be recognized as a reliable
manufacturer with high standards. The war-time need to repair and refit ships offered
L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to
handle these operations. L&T also started two repair and fabrication shops signaling
the expansion of the company. The sudden internment of German engineers in India
(due to suspicions caused by the War), who were to put up a soda ash plant for the
TATA‘s, gave L&T a chance to enter the field of installation.
In 1944, ECC was incorporated by the partners; the company at this time was
focused on construction projects (Presently, ECC is the construction division of
L&T). Around then, L&T decided to build a portfolio of foreign collaborations. By
1945, the Company represented British manufacturers of equipment used to
manufacture products such as hydrogenated oils, biscuits, soaps and glass.
In 1945, the company signed an agreement with Caterpillar Tractor Company,
USA, for marketing earth moving equipment. At the end of the war, large numbers of
war-surplus Caterpillar equipment were available at attractive prices, but the finances
required were beyond the capacity of the partners. This prompted them to raise
additional equity capital, and on 7th February 1946, Larsen & Toubro Private Limited
was born.
 Post Independence

13. Independence and the subsequent demand for technology and expertise
offered L&T the opportunity to consolidate and expand. Offices were set up in
Kolkata (Calcutta), Chennai (Madras) and New Delhi. In 1948, fifty-five acres of
undeveloped marsh and jungle was acquired in Powai, Mumbai. That uninhabitable
swamp is presently a manufacturing landmark.
In December 1950, L&T became a Public Company with a paid-up capital of
Rs.2 million. The sales turnover in that year was Rs.10.9 million. Notable orders
executed by the Company during this period included the Amul Dairy at Anand and
Blast Furnaces at Rourkela Steel Plant. With the successful completion of these jobs,
L&T emerged as the largest erection contractor in the country.
In 1956, a major part of the company's Mumbai office moved to ICI House in
Ballard Estate, Mumbai; which would later be purchased by the company and
renamed as L&T House, its present Corporate Office. The sixties were also a decade
of rapid growth for the company, and witnessed the formation of many new ventures:
UTMAL (set up in 1960), Audco India Limited (1961), Eutectic Welding Alloys
(1962) and TENGL (1963). In 1976, Holck-Larsen was awarded the Magsaysay
Award for International Understanding in recognition of his contribution to India's
industrial development. He retired as Chairman in 1978.
2.3 OPERATING DIVISIONS
 Engineering and Construction Projects
L&T‘s engineering and construction track record consists of implementation of
turnkey projects in major core and infrastructure sectors of the Indian industry.
L&T has formed a joint venture with Sapura Crest Petroleum Berhad, Malaysia
for providing services to offshore construction industry worldwide. The joint venture
will own and operate the LTS 3000, a Heavy Lift cum Pipe lay Vessel. L&T has more
than 38000 employees in India.

14.  L&T Power
L&T has set up an organization focused on opportunities in coal-based, gas-based
and nuclear power projects. This business provides turnkey solutions for setting up
utility power plants as well as co-generation and captive power plants on an EPC
basis. It also provides power plant engineering services through L&T Sargent &
Lundy, a joint venture of L&T and Sargent & Lundy, USA. L&T has formed two
joint ventures with Mitsubishi Heavy Industries, Japan to manufacture super critical
boilers and steam turbine generators. In 2008-09, significant progress was made in
setting up manufacturing facilities for super critical boilers and turbines at Hazira, on
India's west coast. L&T has also signed a technical collaboration with Clyde
Bergemann for electrostatic precipitators, a crucial BOP item in coal based thermal
power plants. L&T Power offers turnkey solutions for large i.e. up to 1000 MW coal-
based power plant projects based on supercritical standards and also offers the same
capability in gas-based power plants. Similarly, the firm has the capability
ofexecuting balance of plant packages for both subcritical and supercritical thermal
projects on an EPC basis.
 Heavy engineering
L&T is claimed to be among the top five fabrication companies in the world.
The Heavy engineering division manufactures and supplies custom designed and
engineered critical equipment and systems to the needs of core-sector industries and
the defense sector. It is the preferred supplier of equipment for a select range of
products, globally.
L&T has a shipyard capable of constructing vessels of up to 150 meters long
and displacement of 20000 tones at its heavy engineering complex at Hazira. The
shipyard is geared up to take up construction of niche vessels such as specialized
Heavy lift Cargo Vessels, CNG carriers, Chemical tankers, defense & Para military
vessels and other role specific vessels.

15. Construction of specialized mid size vessels is being undertaken and capacity
is being augmented by additional infrastructure such as ship lift system and additional
outfitting workshops to extend the activities to ship repairs.
The focus will be on construction of commercial vessels, warships for the navy and
the coast guard.
 Construction
ECC – Engineering, Construction & Contracts Division of L&T – is the major
contributor of L&T's share market. Currently, it is also listed as India‘s largest
construction organization. L&T cover varied disciplines of construction – civil,
mechanical, and electrical & instrumentation. The design wing of L&T ECC is called
EDRC (Engineering Design and Research Centre). EDRC provides consultancy,
design and total engineering solutions to customers. It carries out basic and detailed
design for both residential and commercial projects.
L&T has expanded its focus to the Middle East, South East Asia, Russia, CIS,
Mauritius, African and SAARC countries. It also has keen interest in the markets of
Indian Ocean rim countries, Africa and Latin America.
 Electrical and electronics
L&T is an international manufacturer of a wide range of electrical and
electronic products and systems. L&T also manufactures custom-engineered
switchboards for industrial sectors like power, refineries, petrochemicals and cement.
In the electronic segment, L&T offers a range of meters and provides control and
automation systems for industries. Medical equipment and systems manufactured by
L&T include advanced ultrasound scanners and patient monitoring systems, ESUs,
Syringe pumps, Defibrillators, Ventilators, Anesthesia machines.
 Information technology
Larsen & Toubro InfoTech Limited, a 100 per cent subsidiary of the L&T,
offers software and services with a focus on Manufacturing, BFSI and

16. Communications and Embedded Systems. It also provides services in the embedded
intelligence and e Engineering space. L&T InfoTech focuses on information
technology and software services. Its clients include industry leaders like Marsh &
McLennan, Standard Life, Travelers, Chevron, Free scale, Hitachi, Ingram Micro,
Infineon, Sanyo, Lafarge, ABSA, P&G, Johnson and Johnson, City Group, Barclays,
CORPUS, Marathon, Texas Instruments, Qualcomm, LG and Samsung among others.
It offers services and solutions for the following industries: banking and financial
services, insurance, energy and petrochemicals, manufacturing.
 L&T Machinery & Industrial Products
L&T manufactures markets and provides service support for critical
construction and mining machinery – surface miners, hydraulic excavators, aggregate
crushers, loader backhoes and vibratory compactors; supplies a wide range of rubber
processing machinery and injection molding machines; and manufactures and
markets industrial valves and allied products and a range of sophisticated application-
engineered welding alloys.
This division provides solutions to:
1. Construction & Mining Equipment
2. Material Handling
3. Crushing Systems & Equipment
4. Hydraulic Equipment
5. Valves
6. Rubber Processing Machinery
7. Plastics Processing Machinery
8. Paper Machinery
9. Welding Products

17. 10. Castings
11. Wind-mill Components
12. Cutting Tools
2.4 MAIN OBJECT OF THE COMPANY
1. To carry on the business of developing and providing wide range of financial products
and services for the purpose of and in relation to the development and establishment of
infrastructure projects and facilities, including without limitation, providing of various
kinds of guarantees and credit enhancements and refinancing assurance including market
making or providing of liquidity support of various kinds, development, encouragement
and participation in securities market for infrastructure financing, development and
implementation of various opportunities and schemes for domestic savers to participate in
infrastructure development.
2. To carry on the business of arranging or providing financial assistance in the form of
lending or advancing money by way of a loan (including long-term loan), working capital
finance, overdraft, cash credit, refinance or in any other form, independently or in
association with any person, Government or any other agencies, whether incorporated or
not, whether with or without security to institutions, banks, bodies corporate (whether or
not incorporated), firms, associations authorities, bodies, trusts, agencies, societies or any
other persons engaged in or in connection with either directly or indirectly or whether
wholly or in part, for the purposes of infrastructure development work or providing
infrastructure facilities or engaged in infrastructure activities, which shall include work or
facility or providing of services in relation to or in connection with setting up,

18. development, construction, operation, maintenance, modernization, expansion and
improvement of any infrastructure project or facility including roads, highways, railways,
airports, airways, waterways, ports, transport systems, bridges, telecommunication and
other communication systems, systems for generation or storage or transmission or
distribution of power, irrigation and irrigation system, sewerage, water supply, sanitation,
health, housing, development of commercial properties, tourism, education, oil and gas,
food and agriculture infrastructure and setting up of industrial areas.
3. To carry on the business of providing both in India and abroad, guarantees and counter
guarantees, letters of credits, indemnities, loans and advances of all nature, underwriting,
factoring, consultancy, formulating schemes for the purpose of mobilization of resources
and other form of credit enhancement to companies engaged in development or financing
of infrastructure work or activity, whether by way of personal covenant or by mortgaging
or charging all or any part of the undertaking, property or asset of the company, both
present and future, wheresoever‘s situate or in any other manner and in particular to
guarantee the payment of any principal money, interests or other monies secured by or
payable under contracts, obligations, debentures, bonds, debenture stock, mortgages,
charges, repayment of capital monies and the payments of dividends in respect of stocks
and shares or the performance of any other obligations by such companies.
4. To carry on the business of consultancy services of all kinds and description, including
syndication of loans, counseling and tie-up for project and working capital finance,
syndication of financial arrangements whether in domestic or international markets,
assisting in setting up of joint ventures, foreign currency lending and without prejudice to
the generality of the foregoing to act as advisors for any Infrastructure development
project of activity.

20. 2.5 ORGANISATION STRUCTURE OF COMPANY
2.6 TERMS OF THE ISSUE OF THE BONDS

21. The following are the terms and conditions of the Bonds being offered, which will be
incorporated into the company.
Debenture Trust cum Hypothecation Deed and are subject to the provisions of the
Companies Act, 1956
Application Form and other terms and conditions as may be incorporated in the
Debenture Trust.
Hypothecation Deed, Letter(s) of Allotment and/or Consolidated Bond certificate(s).
The Bonds are classified as ―Long Term Infrastructure Bonds‖ and are being issued
in terms of Section 80CCF of the Income Tax Act and the Notification.
In accordance with Section 80CCF of the Income Tax Act, the amount, not exceeding
` 20,000 per annum, paid or deposited as subscription to long-term infrastructure
bonds during the previous year relevant to the assessment year beginning April 01,
2011 shall be deducted in computing the taxable income of a resident individual or
HUF.
In the event that any Applicant applies for and is allotted long term infrastructure bonds in
excess of ` 20,000 per annum (including long term infrastructure bonds issued by another
entity), the foretasted tax benefit shall be available to such Applicant only to the extent of `
20,000 per annum.
Words and expressions defined in the Debenture Trust cum Hypothecation
Deed and the Tripartite Agreements shall have the same meanings where used in
these terms and conditions unless the context otherwise requires or unless otherwise
stated. Any reference to ―Bondholders‖ or ―holders‖ in relation to any Bond held in
dematerialized form shall mean the persons whose name appears on the beneficial
owners list as provided by the Depositary and in relation to any Bond in physical
form, such holder of the Bond, whose interest shall be as set out in a Consolidated
Bonds Certificate and whose name is appearing in the Register of Bondholders.
 ISSUE PROCEDURE
This section applies to all Applicants. Please note that all Applicants are required to
make payment of the full Application Amount along with the Application Form.

22. The Prospectus and the Application Forms together with the Abridged Prospectus
may be obtained from their Corporate Office or from the Lead Managers. In addition,
Application Forms would also be made available to
NSE where listing of the Bonds is sought, and to brokers, being members of NSE,
upon their request.
Application Form:
Applicants are required to submit their applications through the Bankers to the Issue.
Such Applicants shall only use the specified Application Form bearing the stamp of
the Banker to the Issue or the Lead Managers for the purpose of making an
application in terms of the Prospectus. While submitting the Application Form the
investors should ensure that the date stamp on their counter foil matches with the date
stamp on the part of the Application Form being retained by the Banker to the Issue.
Who can Apply:
The following categories of persons are eligible to apply in the Issue:
• Indian nationals resident in India who are not minors in single or joint names (not
more than three); and
• Hindu Undivided Families or HUFs, in the individual name of the Karta. The
Applicant should specify that the application is being made in the name of the HUF in
the Application Form as follows: ―Name of Sole or First Applicant: XYZ Hindu
Undivided Family applying through XYZ, where XYZ is the name of the Karta”.
Applications by HUFs would be considered at par with those from individuals.
Application Size:
Applications are required to be for a minimum of 5 Bonds and multiple of 1 Bond
thereafter.

23. For the purpose of fulfilling the requirement of minimum subscription of 5 Bonds, an
Applicant may choose to apply for 5 Bonds of the same series or 5 Bonds across
different series.
Instructions for applying form:
Applications must be:
1. Made only in the prescribed Application Form.
2. Completed in block letters in English as per the instructions contained herein and in
the Application Form, and are liable to be rejected if not so completed.
3. Applicants should note that the Bankers to the Issue will not be liable for errors in
data entry due to incomplete or illegible Application Forms. In single name or in joint
names (not more than three, and in the same order as their Depository Participant
details).
4. Applications are required to be for a minimum of 5 Bonds and in multiples of 1 Bond
thereafter. For the purpose of fulfilling the requirement of minimum subscription of 5
Bonds, an Applicant may choose to apply for 5 Bonds of the same series or 5 Bonds
across different series.
5. Thumb impressions and signatures other than in English/ Hindi/ Marathi or any of the
other languages specified in the Eighth Schedule to the Constitution of India must be
attested by a Magistrate or Notarym Public or a Special Executive Magistrate under
his official seal.
6. No receipt would be issued by our Company for the Application money. However,
the Bankers to the Issue, on receiving the applications will acknowledge receipt by
stamping and returning the acknowledgment slip to the Applicant. While submitting
the Application Form the investors should ensure that the date stamp on their counter
foil matches with the date stamp on the part of the Application Form being retained
by the Banker to the Issue.

24.  Issue structure
The following is a summary of the issue structure of the Issue, aggregating up to ` 1,000
million with an option to retain an oversubscription of up to ` 3,000 million for allotment
of additional Bonds.
Issue Particulars
Particulars Resident Individuals HUFs Minimum number of Bonds perapplication5
Bonds and in multiples of 1 Bond thereafter. For the purpose of fulfilling the requirement
of minimum subscription of 5 Bonds, an Applicant may choose to apply for 5 Bonds of
the same series or 5 Bonds across different series. 5 Bonds and in multiples of 1 Bond
thereafter. For the purpose of fulfilling the requirement of minimum subscription of 5
Bonds, an Applicant may choose to apply for 5 Bonds of the same series or 5 Bonds
across different series.
Terms of Payment: Full amount with the Application Form Full amount with the
Application Form
Mode of Allotment: Dematerialized ** Dematerialized **
Trading Lot One (1) Bond One (1) Bond
The Bonds are classified as ―Long Term Infrastructure Bonds‖ and are being issued
in terms of Section 80CCF of the Income Tax Act and the Notification. In accordance
with Section 80CCF of the Income Tax Act, the amount, not exceeding ` 20,000, paid or
deposited as subscription to long-term infrastructure bonds during the previous year
relevant to the assessment year beginning April 01, 2011 shall be deducted in computing
the taxable income of a resident individual or HUF.
In terms of Regulation 4(2) (b) of the Debt Regulations the Company will make
public issue of the Bonds in the dematerialized form. However, in terms of Section 8 (1)

25. of the Depositories Act, the Company, at the request of the Investors who wish to hold
the Bonds in physical form will fulfill such request.
Nature of the Bonds being issued
Our Company is offering the Bonds which shall have a fixed rate of interest. The Bonds
will be issued with a face value of ` 1,000 each. Interest on the Bonds shall be payable on
annual or cumulative basis depending on the series selected by the Bondholders as
provided below:
Bond Particulars
Frequency of Interest: Annual, i.e. yearly payment of interest Cumulative, i.e.
cumulative interest payment at the end of maturity or buyback, as applicable
Buyback Facility: Yes
Buyback Date: First Working Day after 5 years from the Date of Allotment and first
Working Day after 7 years from the Date of Allotment First Working Day after 5 years
from the Date of Allotment and first Working Day after 7 years from the Date of
Allotment.
Interest Rate: 8.20 % p.a. 8.30% p.a. compounded 81
Maturity Date: 10 years from the Date of Allotment
Maturity Amount: 1,000 2,220
Buyback Amount: 1,000 at the end of 5 years /
1,000 at the end of 7 years
1,490 at the end of 5 years /
1,748 at the end of 7 years

26. Buyback Intimation Period: The period commencing from 6 months preceding the
Corresponding Buyback Date and ending 3 months prior to the corresponding Buyback
Date
Yield of the Bond on Maturity: 8.20 % p.a.
8.30% p.a. compounded annually
Yield of the Bond on Buyback: 8.20 % p.a.
8.30% p.a. compounded annually
The yield on the Bonds(to be paid by the Issuer) shall not exceed the yield on
government securities of corresponding residual maturity, as reported by FIMMDA, as
on the last working day of the month immediately preceding the month of the issue of the
Bonds.
2.7 SPECIMEN OF BOND NOTE

27. 2.8 TRENDS OF BONDS IN L&T INFRASTUCTURE
FINANCE COMPANY
CURRENT ISSUES OF BONDS

28. The L&T Infrastructure Bond opens in 7th February, 2011 and the issue will
be closed on 07th March, 2011. The total issue of Rs 100-crore non-convertible
debentures, offering a coupon of 8.20% per annum in the first series (series I) which
can be redeemed after 5 years and 8.3% in the second series or (series II) can be
redeemed after 7 years.
This infrastructure bond is also almost same with other infrastructure bonds
and the investor can claim tax benefit under section 80 CCF, which is allowed and
additional deduction of Rs. 20000 from the total income of the tax payer and the
highest tax bracket can save Rs. 6180 including education cases. Others also can get
benefit as per their tax brackets and this last time issue also may be welcomed by the
investors.
TAX SAVINGS INFRASTRUCTURE BONDS
These are classified as infrastructure bonds under Section 80 CCF which
means that investing in them will reduce your taxable income by Rs. 20,000.
This increases your effective yield because along with the interest you earn on these
infrastructure bonds, you save on tax as well.
These bonds are good for a maximum of Rs. 20,000 as far as the tax saving aspect is
concerned, so if you buy bonds worth Rs. 30,000 and nothing else, even then the
maximum you can reduce from your taxable income is Rs. 20,000 because that is the
cap on tax benefits on infrastructure bonds.
L&T Infrastructure Bonds Features
There are 4 series of L&T Bonds, and though these bonds have a term of 10
years, there is an option of a buyback after 5 years or 7 years.
The interest rates and effective yields of different plans are shown below:
Series Tax 1 2 3 4
Bracket

29. Face —- Rs. 1,000 Rs. 1,000 Rs. 1,000 Rs. 1,000
Value
Interest —- Annual Cumulative Annual Cumulative
Payment
Interest —- 7.75% 7.75% 7.50% 7.50%
Rate
Maturity —- 10 years 10 years 10 years 10 years
Buyback —- 7 years 7 years 5 years 5 years
in years
Yield on 30.9% 15.23% 13.59% 17.20% 15.75%
Buyback 20.6% 12.31% 11.36% 13.42% 12.58%
10.3% 9.86% 9.44% 10.23% 9.86%
L&T Bonds Minimum Investment
The minimum investment needed for you to invest in these bonds is Rs. 5,000
because you have to apply for a minimum of 5 bonds, and the face value of each bond
is Rs. 1,000.
Open and Close Date
Subscription opened on October 15th, and will close on November 2nd 2010.
Credit Rating
The L&T bonds have been rated CARE AA+ by CARE and LAA+ by ICRA
which indicate high credit quality and that the rated instruments carry low credit risk.
How can you invest in the L&T Infrastructure bonds?
You can invest in these bonds either in the physical form or electronically
through brokers like ICICI Direct. You can buy a form through one of the several
agents across the country and invest in it through them as well.
Here is a list of banks listed on their website that can give you more information as
well:

30. Axis Bank
DBS Bank
HDFC Bank
HSBC Bank
ICICI Bank
IDBI Bank
ING Bank
SBI Bank
They also have this cool link on their special website for this bond where you
can enter in your contact details and they will contact you and help you.
If any of you do decide to contact them then I am really interested to know your
feedback because I tried to get in touch with the numbers given in the IDFC website,
and tried at least 10 times to no avail. I‘d like to know if this is any better.
Tax on interest earned from the L&T Infrastructure bond
The interest itself is not tax free. It‘s only the Rs. 20,000 you get reduced from
your taxable salary that helps save tax.
L&T Infrastructure bonds to list on NSE after 5 years
The Bonds are proposed to be listed on NSE, and can be traded after the initial
5 years lock-in period. After this lock-in period, the holders can also pledge the
Bonds with banks for availing financial assistance.
A demat account to invest in these bonds

31. L&T will offer you the option to hold the Bonds either in Dematerialized or
Physical Certificate form.
NRIs can’t apply in the L&T Bonds
Non-resident investors including NRIs, FIIs and OCBs are not eligible to
participate in the Issue.
CHAPTER NO. 3
CONCEPTUAL FRAMEWORK
3.1 MEANING AND DEFINITION
A bond is known as a fixed income security which is a debt instrument created for a
purpose of raising capital. They are essentially loan agreements between the bond issuer and
an investor, in which bond issuer is obligated to pay a specified amount of money at
specified in future dates.
A bond is like loan where the holder of the bond is lender, issuer of the bond is
borrower. Bond provides the borrower with external funds to finance long term investment.
Some bonds do not pay interest, but all bonds require a repayment of principal. The buyer

32. does not gain any kind of ownership rights to the issuer, unlike in case of equities. On the
other hand the bond holder has a greater claim on an issuer income than share holder in case
of financial distress.
A debt instrument issued for a period of more than one year with the purpose of
raising capital by borrowing. The Federal government, states, cities, corporations, and many
other type of institutions sells bond. Some bonds do not pay interest, but all bonds require a
repayment of principal when an investor buys a bond, he/she becomes a creditor of
the issuer. However, the buyer does not gain any kind of ownership rights to the issuer,
unlike in the case of equities.
On the hand, a bond holder has a greater claim on an issuer's income than
a shareholder in the case of financial distress (this is true for all creditors). Bonds are often
divided into different categories based on tax status, credit quality, issuer type, maturity and
secured/unsecured and there are several other ways to classify bonds as well. U.S. Treasury
bonds are generally considered the safest unsecured bonds, since the possibility of
the Treasury defaulting on payments is almost zero.
The yield from a bond is made up of three components: coupon interest, capital
gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital
gains).
Bonds are divided into different categories based on tax status, credit quality, issuer
type, maturity and unsecured or secured.

33. Zero
Mortgage Coupon Easy Exit
Bond Bond Bond
Floating
Disaster
Rate
Bond
Bond
Capital Stepped
Indexed Coupon
Bond Bond
Dual
Commod
Convertib
ity Bond
le Bond
Industrial
Converti
Revenue
ble Bond:
Bond
Types of
Bonds
Deep
Premium
Discount
Bond
Bond
Subordin
Discount
ated
Bond
Bond
Investme Guarante
nt Grade ed Bond
Bond
High
Yield Indexed
Bond Bond
Fixed Option
Income Callable Tender
Bond Bond Bond

34. 3.2 TYPES OF BOND
Zero Coupon Bond:
This bond is issued at a discount and repaid at face value. No periodic interest
s paid at the time of maturity difference between the issue price and the redemption
price presents the return of the holder.
Deep Discount Bond:
This bond is issued at a very high discount on its face value and a face value is
paid at the time of maturity. IDBI and SIDBI had issued this instrument. IDBI had
issued deep discount bond of face value of Rs. 1 lack at price of Rs. 2,700/- with a
maturity period of 25 years. The bond appreciates to its face value over the maturity
period of 25 years. Alternatively, the investor can withdraw their money from the
investment periodically after 5 years.
Convertible Bond:
This bond gives option to the investor to convert the bond into equity at fixed
determined prices.
Dual Convertible Bond:
The dual convertible bond is convertible into either equity shares or
debentures at the option of the investor.
Stepped Coupon Bond:
Under stepped coupon bonds the interest rates are stepped up or down during
the tenure of bond. The main advantage to the investor is the attraction of the higher
rate of interest in case of general rise in interest.
Disaster Bond:

35. These are the issued by the companies and the institutions to share the risk and
expand the capital to link of investors return with size of investor‘s losses, the smaller
returns and vice-versa.
Easy Exit Bond:
Easy Exit bonds are bonds which provide liquidity and easy to exit rout to the
investor by the way of redemption where investor can get ready encashment in case
of need to withdraw before maturity.
Floating Rate Bond:
In this case interest is not fixed and allowed to float depending upon market
conditions. This instrument is used by the issuer to hedge themselves against the
volatility in interest rates.
Capital Indexed Bond:
These bonds are inflation protection securities. Such bonds therefore provide
good hedge against inflation risk. The return to the investors in these bonds is
connected with the wholesale price index.
Commodity Bond:
Commodity bonds are bonds issued to the share the risk and profitability of
future commodity prices with the investors. For example, Petro bonds, Gold bonds,
Silver bonds etc…
Industrial Revenue Bond:
These are the issued by financial institutions in connection with the
development of the industrial facilities. These may become attractive if certain
income tax and wealth tax concessions are offered.
Premium Bond:

36. A bond is traded above its par value. A bond will trade at a premium when it
offers a coupon rate that is higher than prevailing interest rates. This is because
investors want a higher yield, and will pay more for it.
Discount Bond:
A bond that is issued for less than its par (face) value, or a bond currently
trading for less than its par value. The "discount" in a discount bond doesn't
necessarily mean that investors get a better yield than the market is offering, just a
price below par. Depending on the length of time until maturity, zero-coupon bonds
can be issued at very large discount to par, sometimes more than 50%.
Mortgage Bond:
Mortgage bonds offer the investor a great deal of protection in that the
principal is secured by a valuable asset that could theoretically be sold off to cover
the debt. However, because of this inherent safety, the average mortgage bond tends
to yield a lower rate of return than traditional corporate bonds that are backed only by
the corporation promise and ability to pay.
Investment Grade Bond:
A bond which is relatively safe, having a high bond rating such as BBB or
above.
High Yield Bond:
A high paying bond with a lower credit rating than investment-grade
corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of

37. default, these bonds pay a higher yield than investment grade bonds. Based on the
two main credit rating agencies, high-yield bonds carry a rating below 'BBB' or from
S&P, and below 'Baa' from Moody's. Bonds with ratings at or above these levels are
considered investment grade. Credit ratings can be as low as 'D' (currently in default),
and most bonds with 'C' ratings or lower carry a high risk of default; to compensate
for this risk, yield will typically very high.
Fixed Income Bond:
Fixed income refers to any type of investment that is not equity, which
obligates the borrower/issuer to make payments on a fixed schedule, even if the
number of the payments may be variable. The term fixed income is also applied to a
person's income that does not vary with each period. This can include income derived
from fixed-income investments such as bonds and preferred stocks or pensions that
guarantee a fixed income. When pensioners or retirees are dependent on their pension
as their dominant source of income, the term "fixed income" can also carry the
implication that they have relatively limited discretionary income or have little
financial freedom to make large expenditures.
Callable Bond:
A callable bond (also called redeemable bond) is a type
of bond (debt security) that allows the issuer of the bond to retain the privilege of
redeeming the bond at some point before the bond reaches the date of maturity. In
other words, on the call date(s), the issuer has the right, but not the obligation, to buy
back the bonds from the bond holders at a defined call price. Technically speaking,
the bonds are not really bought and held by the issuer but are instead cancelled
immediately.
Option Tender Bond:
When this occurs, the issuer must pay par to the holder, and the holder loses
any future coupon payments that he/she might otherwise have been due. An
advantage to a variable-rate demand note from the holder's standpoint is the fact that

38. the holder may reinvest the par value in a new bond in a time of rising interest rates.
This protects the holder from certain type of interest.
Indexed Bond:
A bond or other fixed-rate security with an interest rate that varies according
to inflation. An inflation-indexed bond, for example, may pay a fixed coupon plus an
additional coupon with the amount adjusted every so often according to some
inflation indicator, such as the Consumer Price Index. If these securities are held
to maturity, then the investor guarantees that the return will exceed the rate of
inflation. Inflation-indexed securities exist to provide a low-risk investment vehicle in
which the return is guaranteed not to fall below the rate of inflation.
Guaranteed Bond:
A type of bond in which the interest and principal on the bond are guaranteed
to be paid by a firm other than the issuer of the bond. This guarantee limits the impact
on bondholders if the issuer of bond goes in default. For example, in Canada, bonds
issued by crown corporations are guaranteed by the federal government. If the issuer
defaults on the debt obligation, the government is on the hook for the interest and
principal payments.
Subordinated Bond:
A class of bond that, in the event of liquidation, is prioritized lower than other
classes of bonds. For example, a subordinate bond may be an unsecured bond, which
has no collateral. Should the issuer be liquidated, all secured bonds and
similar debts must be repaid before the subordinated bond is repaid.
3.3 FEATURES OF BOND
Nominal, principal or face amount:
It is the amount which the issuer pays interest and which has to be repaid at
the end of maturity.

39. Issue price:
It is the price at which investors buy bonds when they are first issued,
typically $1, 00,000. The net proceeds that the issuer receives are calculated as the
issue price, less issuance fees, times the nominal amount.
Maturity date:
It is the date on which the issuer has to repay the nominal amount. As a long
as all payment have been made, the issuer has no more obligations to bond holders
after the maturity date.
Coupon is the interest rate:
This is the rate which the issuer pays to the bond holder; usually this rate is
fixed throughout the life of the bond. It can also vary with the money market index.
Coupon dates:
This are dates which the issuer pays on coupon to the bond holders. In U.S,
most bonds are semi-annual, which means that they pay the coupon every six months.
Indenture:
It is the document where specifying the rights of the bond holder. In U.S. most
bonds are semi-annual, which means they pay a coupon in every six months. In
Europe, most bonds are annual and pay only one coupon a year.
Optionality:
In optionality the bond may contain embedded potion i.e., it‘s grant option like
features the buyer or issuer:
1. Call ability:
Some bonds give the issuer the right to repay the bond before the
maturity date on the call dates; see call option. These bonds are referred to as
callable bonds. Most callable bonds allow the issuer to repay the bond at par.
With some bonds, the issuer has to pay a premium, the so called call premium.

40. This is mainly the case for high- yield bonds. These have very strict
covenants, restricting the issuer in its operations. To be free from these
covenants, the issuer can repay the bonds early, but only at a high cost.
2. Putt ability:
Some bonds give the bond holder the right to force the issuer to
repay the bond before the maturity date on the put dates; see put
option.
3. Call dates and put dates:
The dates on which callable and putt able bonds can be redeemed
early. There are four main categories.
A Bermudan callable has several call dates, usually coinciding with
coupon dates.
A European callable has only one call date. This is a special case of a
Bermudan callable.
An American callable can be called at any time until the maturity date.
A death put is an optional redemption feature on a debt instrument
allowing the beneficiary of the estate of the deceased to put (sell) the
bond (back to the issuer) in the event of the beneficiary's death or legal
incapacitation also known as a "survivor's option".
Maturity date:
Sinking the fund provision of the corporate bond indenture requires a certain
portion of issue to be retired periodically. The entire bond issue can be liquidated by
the maturity date. If that is not the case, then reminder called balloon maturity issuer
may either to pay trustees, which is turn call randomly selected bonds in the issue or
alternatively purchase bonds in the open market, then return them to trustees.
Convertible bond:
Here a bondholder exchanges a bond to a number of shares of the issuer's
common stock.

41. Exchangeable bond:
It allows for exchange to shares of a corporation other than the issuer.
3.4 ADVANTAGES OF BONDS
Bonds pay higher interest rates than savings accounts.
Bonds usually offer a relatively safe return of principal.
Bonds often have less volatility (price fluctuations) than stocks, especially short-term
bonds.
Bonds offer regular income.
Bonds are sold in small dollar amounts (U.S. Savings Bonds—$25, $50).
Bonds need less careful attention in management than other alternative investments.
Bond interest from municipal bonds can be exempt from federal income taxes and
possibly from state and local income taxes.

42. DISADVANTAGES OF BONDS
Bonds offer no hedge against inflation because inflation causes interest rates to rise
which then cause bond prices to fall.
Bond prices can be quite volatile because market interest rates vary after a bond is
issued.
Bonds over the long term have lower returns than stocks.
Bond prices may swing 20% or more if selling bonds before maturity. Speculators
might see this as an opportunity but conservative investors will need to ignore price
changes if planning to hold to maturity.
Individual bonds do not compound their interest. However, this is possible with bond
mutual funds.
Taxes will be owed on capital gains/losses (selling before maturity) and interest
unless the bonds are tax-exempt.
3.5 BOND MARKET IN INDIA
The Indian financial system is not well developed and diversified. One major missing
element is an active, liquid and large debt market. In terms of outstanding issued amount,
Indian debt market ranks as the third largest in Asia, next only to that of Japan and South
Korea. Further in terms of the primary issues of debt instruments, Indian debt market is a quit
large. The government continues to be larger borrower unlike South Korea where the private
sector is main borrower. If we compare with the size of Indian GDP with the outstanding size
of the debt inflation, Indian debt market is not very much underdeveloped.
The gross domestic savings rate in the Indian economy is reasonably satisfactory
around 23%. According to RBI‘s annual studies on savings, about 78% of the aggregate
financial savings of the household sector were invested in fixed income assets. The average
Indian household has great appetite for debt instrument provided they are packaged properly.
The main financial instruments popular with the households are bank deposits, provident

43. funds, insurance, income oriented mutual funds, and postal saving schemes. However, the
share of fixed income instruments that could be traded on secondary market which is
negligible. The main reason for this is an active secondary market in debt instruments.
Investors are not willing to invest in tradable instruments as they lack required liquidity. It is
thus a typical case of ―chicken and egg problem‖.
Since there is not enough number of issues and the floating stock in the secondary
market is very small there is hardly any trading in them? Currently almost 98% of the
secondary market transactions in debt instruments relate to government securities, treasury
bills and bonds of public sector companies. The quality of secondary market debt trading is
very poor if we compare it with the quality of the secondary market in equities. Debt markets
lack the required transparency, liquidity, and depth. With reference to the usual standards or
yardsticks of market efficiency the Indian debt markets would not score more than 30% of
the marks that the Indian equity markets would score.
The US has one of the most active secondary markets in both government and
corporate bonds. The trading volume in the US debt market is said to be on an average ten
times the size of the equity trading.
In India the average daily trading in debt during the last year was about one tenth of
the average daily trading in equities. These comparisons bring out the underdeveloped nature
of the Indian debt markets. The secondary debt market suffers from several infirmities It is
highly non-transparent compared to the equity market. It is highly fragmented since the
ownership titles of government securities are fragmented in 714 offices of the RBI, which
acts as a depository for the government debt including the treasury bills. A seller from New
Delhi cannot trade in Mumbai market since security held in RBI office in New Delhi cannot
be easily transferred to Mumbai office of RBI and vice-versa. Since the current small order
book stands fragmented city-wise the price Discovery process does not throw up the best
possible prices. Bond markets link issuers having long-term financing needs with investors
willing to place funds in long-term, interest-bearing securities.

44. A mature Domestic bond market offers a wide range of opportunities for funding the
Government and the private sector, with the government bond market typically creating
opportunities for other issuers. The market for government securities is defined as the market
for tradable securities issued by the central government. The primary focus is on the market
for Bonds, which are tradable securities of longer maturity (usually one year or More). These
bonds typically carry coupons (interest payments) for specified (for example, quarterly)
periods of the maturity of the bond. The market for Treasury bills (securities with a maturity
of less than a year) and other special securities is considered here in the context of
developing a long-term bond market.
INDIA’s BOND MARKET NEEDS TO BULK UP
According to Andrew Mac Askill and Anurag Joshi ―The government's ambitious $1 trillion
infrastructure program won't succeed without a more robust corporate bond market.‖
The Infidelity Economy
Previous Issue
Next Issue

45. Infrastructure Development Finance, a company formed by the Indian government to
lend to energy and road projects, just sold 29.3 billion rupees ($640 million) in 10-year tax-
exempt bonds the sale closely follows Indian Overseas Bank's successful issuance of 15-year
debt. That's pretty routine in most countries. For India, though, the deals were encouraging to
investors, who can't find enough Indian corporate bonds to buy, according to bankers who
did not want to be quoted.
"India really needs to develop a bond market for long-term funding," says Michael Queen,
chief executive officer of 3i Group, Europe's biggest publicly traded private equity firm,
which plans a $1.5 billion fund to invest in India's infrastructure in the next six months. "My
biggest concern when investing in India is the availability of debt capital."
India's corporate bond market, about 30 percent the size of China's, is failing to expand at the
rate analysts say is needed for the government to meet its target of building infrastructure.
India has about $200 billion of corporate bonds outstanding, Bloomberg data show,
compared with China's corporate bond market of $614 billion, according to Asian
Development Bank figures.

46. Prime Minister Manmohan Singh has proposed about $1 trillion of investment in the
five years through 2017 to upgrade the country's crumbling road and power networks, whose
defects the Finance Ministry says shave 2 percentage points from growth. Singh plans to
raise about 50 percent of the spending from private capital.
The best way to tap private capital for infrastructure is through long-term bonds,
which offer fixed, predictable costs. "The success of the government's very ambitious
infrastructure program hinges on developing an adequate bond market," says D.H. Pai
Panandiker, president of RPG Foundation, an economic policy group in New Delhi. Though
bank loans are more available than bonds in India, they're generally more expensive than
bond offerings. Besides, bankers in India are reluctant to fund infrastructure projects since
they take so long to pay off.
The government shoulders part of the blame for the corporate bond market's dwarfish
status. Regulations raise the cost of issuing bonds and rules limit foreign investment. Pension
funds and insurance companies—typically among the biggest buyers of corporate debt in
other countries—are restricted in how much they can invest in bonds. That shrinks the
potential market for the bonds and forces companies to offer higher rates to attract buyers.
Policymakers are trying to make amends. They've introduced credit default swaps so
investors can gauge more accurately the risk of buying corporate bonds. Singh's government
has also allowed foreign funds to buy more corporate debt and has introduced a 20,000-rupee
tax exemption for investors buying bonds to support infrastructure projects.
Allowing banks to guarantee bonds would lower companies' funding costs and
increase investor confidence in the bond market. Lifting caps on foreign insurance and
pension companies operating in India would broaden the investor base.
Even with these additional reforms, India would have a long way to go. Its
outstanding corporate debt is only 3.3 percent of its gross domestic product, vs. 10.6 percent
in China. Therefore, India needs to develop a more robust corporate bond market if the
government's $1 trillion infrastructure program is to succeed.

47. 3.6 CREDIT RATING OF BONDS IN CREDIT RATING
AGENCIES
 Introduction:
Credit ratings provide a measure of the creditworthiness of debt securities to
investors. Each of the RAs considers a number of factors to determine ratings, including
firm‐ and security‐specific factors, market factors, regulatory and legal factors, and
macroeconomic trends. Their ratings intend to provide a means of comparison of credit
risk across asset classes and time.
The ratings from different agencies measure slightly different credit risk
characteristics.
S&P and Fitch, for example, base their ratings on the probability of default. Moody‘s, in
contrast, bases its ratings on expected loss, which is equal to the product of (1) the
probability of default and (2) the proportion of the investment that investors on average
lose in the event of default. However, investors and regulators tend to view the ratings of
the major RAs as roughly equivalent.
The ratings are divided into two categories: bonds rated BBB‐ and above are
considered investment grade; bonds rated below BBB‐ are speculative grade (sometimes

48. also called junk). When rating a structured product like an RMBS or CDO, the RAs
estimate the probability of default or expected loss of the bond and compare it to
benchmarks for each of their ratings.
 Credit Rating Agencies in India:
In India, at present, there are four credit Rating Agencies:
i) Credit Rating and Information Services of India Limited (CRISIL).
ii) Investment Information and Credit Rating Agency of India Limited
(ICRA).
iii) Credit Analysis and Research Limited (CARE).
iv) Duff and Phelps Credit Rating of India (Pvt.) Ltd.
 CRISIL:
This was set-up by ICICI and UTI in 1988, and rates debt instruments. Nearly
half of its ratings on the instruments are being used. CRISIL's market share is around
75%. It has launched innovative products for credit risks assessment viz., counter
party ratings and bank loan ratings. CRISIL rates debentures, fixed deposits,
commercial papers, preference shares and structure obligations. Of the total value of
instruments rated, debentures' accounted for 3 1.196, fixed deposits for 42.3%and
commercial paper 6.6%. CRISIL publishes CRISIL rating in SCAN that is a quarterly
publication in Hindi and Gujarati, besides English.
CRISIL evaluation is carried out by professionally qualified persons and
includes data collection, analysis and meeting with key personnel in the company to
discuss strategies, plans and other issues that may effect ,evaluation of the company.
The rating, process ensures confidentiality. Once, the company decides to use rating;
CRISIL is obligated to monitor the rating over the life of the debt instrument.

49.  ICRA:
ICRA was promoted by IFCI in 1991. During the year 1996-97, ICRA rated
261 debt instruments of manufacturing companies, finance companies and financial
institutions equivalent to Rs. 12,850 crore as compared to293 instruments covering
debt volumeofRs.75,742 crore in 1995-96. This showed a decline of 83.0% over the
year in the volume of rated debt instruments. Of the total amount rated cumulatively
until March-end 1997, the share in terms of number of instruments was 28.5% for
debentures (including long term instruments), 49.4% for Fixed Deposit programmed
(including medium- term instruments), and and22.1% for Commercial Paper
Programmed (including short term instruments). The corresponding figures of amount
involved for these three broad rafted categories were 23.8%for debentures, 52.2% for
fixed deposits, and24.0% for Commercial Paper.
The factors that ICRA takes into consideration for rating depend on the nature
of borrowing entity. The inherent protective factors, marketing strategies, competitive
edge, competence and effectiveness of management, human resource development
policies and practices, hedging of risks, trends in cash flows and potential liquidity,
financial flexibility, asset quality and past record of servicing of debt as well as
government policies affecting the industry are examined. Besides determining the
credit risk associated with a debt instrument, ICRA has also formed a group under
Earnings Prospects and Risk Analysis (EPRA). Its goal is to provide authentic
information on the relative quality of the equity. This requires examination of almost
all parameters pertaining to the fundamentals of the company including relevant
sectoral perspectives. This qualitative analysis is reinforced and completed by way of
the unbiased opinion and informed perspective of one analyst and wealth of judgment
of committee members. ICRA opinions help the issuing company to broaden the

50. market for their equity. As the name recognition is replaced by objective opinion, the
lesser know companies are also able to access the equity market.
 CARE:
CARE is a credit rating and information services company promoted by IDBI
jointly with investment institutions, banks and finance companies. The company
commenced its operations in October 1993. 'In January1994, CARE commenced
publication of CAREVIEW, a quarterly journal of CARE ratings. In addition to the
rationale of all accepted ratings, CAREVIEW often carries special features of interest
to issuers of debt instruments, investors and other market players.
 Bond / Credit Rating Agencies:
Currently, there are three credit agencies that set the standards for bond
quality ratings: Moody's, Standard and Poor's, and Fitch Ratings. To make matters a
little more complicated, each agency has a slightly different bond rating system.
Fortunately, these differences also work to the investor's advantage because all three
bond rating agencies issue an alert when they are considering a change in a
company's bond rating.
That means the investor has access to a lot of information about a company's
credit risk from several points of view. For Moody's, this alert system is termed
Under Review. For S&P it's called CreditWatch, and Fitch simply calls it Rating
Watch. These terms are used to alert investors to a possible, or pending, change in a
company's bond rating ―Bond Rating Credit Code‖. There are roughly ten different
credit ratings, or grades, that each agency publishes. The ratings range from
Investment Grade to In Default. In addition, each company offers refinements, or
additional granularity, to these codes such as a plus or minus sign to indicate direction
or relative standing within a particular rating category. The following bond rating
table shows the relative rating system for all three bond rating agencies.
 Bond Rating Grades:

51. Credit Risk Moody's Standard and Poor's Fitch Ratings
Investment Grade
Highest Quality Aaa AAA AAA
High Quality Aa AA AA
Upper Medium A A A
Medium Baa BBB BBB
Not Investment Grade
Lower Medium Ba BB BB
Lower Grade B B B
Poor Grade Caa CCC CCC
Speculative Ca CC CC
No Payments /
C D C
Bankruptcy
In Default C D D
Note to Bond Rating Table: Moody's uses a modifier of 1, 2, or 3 to show relative standing
in a category. Standard and Poor's and Fitch Ratings use a modifier of plus or minus.
 Bond Ratings Affect Profits:
The impact of credit ratings on a company's ability to raise capital can be
enormous. Some of these changes might sound like subtle differences, but to

52. companies looking to borrow money on the market, each little movement adds to, or
lowers, their cost of borrowing in terms of interest rates and interest expense.
When a company's credit rating is lowered, it is more expensive for that
company to borrow money due to higher interest expense payable on the bonds. In
turn, these higher expenses result in lower earnings per share, or a lowering of the
company's overall profitability.
 Investment grade:
A bond is considered investment grade or IG if its credit rating is BBB- or
higher by Standard & Poor's or Baa3 or higher by Moody's or BBB (low) or higher
by DBRS. Generally they are bonds that are judged by the rating agency as likely
enough to meet payment obligations that banks are allowed to invest in them.
Ratings play a critical role in determining how many companies and other
entities that issue debt, including sovereign governments; have to pay to access credit
markets, i.e., the amount of interest they pay on their issued debt. The threshold
between investment-grade and speculative-grade ratings has important market
implications for issuers' borrowing costs.
Bonds that are not rated as investment-grade bonds are known as high
yield bonds or more derisively as junk bonds.
The risks associated with investment-grade bonds (or investment-
grade corporate debt) are considered noticeably higher than in the case of first-class
government bonds. The difference between rates for first-class government bonds and
investment-grade bonds is called investment-grade spread. It is an indicator for the
market's belief in the stability of the economy. The higher these investment-grade
spreads (or risk premiums) are, the weaker the economy is considered.
2.8 VALUATION OF BONDS
Bond valuation is the determination of the fair price of a bond. As with any security
or capital investment, the theoretical fair value of a bond is the present value of the stream of
cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting

53. the bond's expected cash flows to the present using an appropriate discount rate. In practice,
this discount rate is often determined by reference to similar instruments, provided that such
instruments exist.
If the bond includes embedded options, the valuation is more difficult and
combines option pricing with discounting. Depending on the type of option, the option
price as calculated is either added to or subtracted from the price of the "straight" portion.
This total is then the value of the bond; the various yields can then be calculated for the total
price.
1. A technique for determining the fair value of a particular bond. Bond valuation
includes calculating the present value of the bond's future interest payments, also
known as its cash flow, and the bond's value upon maturity, also known as its face
value or par value.
2. Bond valuation is only one of the factors investors consider in determining whether to
invest in a particular bond. Other important considerations are: the issuing company's
creditworthiness, which determines whether a bond is investment-grade or junk; the
bond's price appreciation potential, as determined by the issuing company's growth
prospects; and prevailing market interest rates and whether they are projected to go
up or down in the future.
As above, the fair price of a straight bond is usually determined by discounting its
expected cash flows at the appropriate discount rate. The formula commonly applied is
discussed initially. Although this present value relationship reflects the theoretical approach
to determining the value of a bond, in practice its price is (usually) determined with reference
to other, more liquid instruments. The two main approaches, Relative pricing and Arbitrage-
free pricing, are discussed next.
 Concepts of Time Value of Money

54. The value of money received today is different from the value of money
received after some time in future. An important financial principle is that the value
of money is time dependent. This principle is based on the following reasons:
1. Inflation: Under the inflationary conditions the value of money, expressed in terms
of its purchasing power over goods and services, declines.
2. Risk: Analysis of risk plays a significant role in investment appraisal Re.1 now is
certain Re.1 tomorrow is less certain.
3. Personal Consumption Preference: Money, like any other desirable commodity,
has value because many investors have strong preference for immediate rather than
delayed consumption.
4. Investment opportunities: Money, like any other desirable commodity, has value.
Given choice of Rs.100 now or same amount in one year‘s time, it always preferable
to take Rs.100 now because it could be invested over the next year say, at 18%
interest rate to produce Rs.118 at the end of 1 year. In other words present value of
Rs.118 receivable one year hence is Rs.100.
 Basic methods relating to Time Value of Money
1. Present value approach:
Below is the formula for calculating a bond's price, which uses the basic present value
(PV) formula for a given discount rate (This formula assumes that a coupon payment has
just been made;
F = face value
iF = contractual interest rate
C = F * iF = coupon payment (periodic interest payment)

55. N = number of payments
i = market interest rate, or required yield, or observed / appropriate yield to maturity
M = value at maturity, usually equals face value
P = market price of bond
If the market price of bond is less than its face value (par value), the bond is selling at
a discount. Conversely, if the market price of bond is greater than its face value, the
bond is selling at a premium.
2. Relative price approach:
Under this approach, the bond will be priced relative to a benchmark, usually
a government security; see Relative valuation. Here, the yield to maturity on the bond is
determined based on the bond's Credit rating relative to a government security with
similar maturity or duration; see Credit. The better the quality of the bond, the smaller the
spread between its required return and the YTM of the benchmark. This required
return, i in the formula, is then used to discount the bond cash flows as above to obtain
the price.
3. Arbitrage-free pricing approach:

56. Under this approach, the bond price will reflect its arbitrage-free price. Here, each cash
flow (coupon or face) is separately discounted at the same rate as a zero-coupon
bond corresponding to the coupon date, and of equivalent credit worthiness (if possible,
from the same issuer as the bond being valued, or if not, with the appropriate credit
spread). Here, in general, we apply the rational pricing logic relating to "Assets with
identical cash flows". In detail: (1) the bond's coupon dates and coupon amounts are
known with certainty. Therefore (2) some multiple (or fraction) of zero-coupon bonds,
each corresponding to the bond's coupon dates, can be specified so as to produce identical
cash flows to the bond. Thus (3) the bond price today must be equal to the sum of each of
its cash flows discounted at the discount rate implied by the value of the corresponding
ZCB. Were this not the case, (4) the arbitrageur could finance his purchase of whichever
of the bond or the sum of the various ZCBs was cheaper, by short selling the other, and
meeting his cash flow commitments using the coupons or maturing zeroes as appropriate.
Then (5) his "risk free", arbitrage profit would be the difference between the two values.
4. Stochastic calculus approach:
The following is a partial differential equation (PDE) in stochastic
calculus which is satisfied by any zero-coupon bond. This methodology recognizes that
since future interest rates are uncertain, the discount rate referred to above is not
adequately represented by a single fixed number.
The solution to the PDE is given in [4]

57. Where is the expectation with respect to risk-neutral probabilities,
and R(t,T) is a random variable representing the discount rate; see also Martingale
pricing.
Practically, to determine the bond price, specific short rate models are employed here.
However, when using these models, it is often the case that no closed form solution
exists, and a lattice-or simulation-based implementation of the model in question is
employed. The approaches commonly used are:
a. the CIR model
b. the Black-Derman-Toy model
c. the Hull-White model
d. the HJM framework
e. the Chen model
 Clean and dirty price:
When the bond is not valued precisely on a coupon date, the calculated price,
using the methods above, will incorporate accrued interest: i.e. any interest due to the
owner of the bond since the previous coupon date; see day count convention. The
price of a bond which includes this accrued interest is known as the "dirty price" (or
"full price" or "all in price" or "Cash price"). The "clean price" is the price excluding
any interest that has accrued. Clean prices are generally more stable over time than
dirty prices. This is because the dirty price will drop suddenly when the bond goes
"ex interest" and the purchaser is no longer entitled to receive the next coupon
payment. In many markets, it is market practice to quote bonds on a clean-price basis.
When a purchase is settled, the accrued interest is added to the quoted clean price to
arrive at the actual amount to be paid.
 Yield and price relations:
Once the price or value has been calculated, various yields - which relate the
price of the bond to its coupons - can then be determined.

58.  Yield to Maturity:
The yield to maturity is the discount rate which returns the market price of the
bond; it is identical to r (required return) in the above equation. YTM is thus
the internal rate of return of an investment in the bond made at the observed price.
Since YTM can be used to price a bond, bond prices are often quoted in terms of
YTM. To achieve a return equal to YTM, i.e. where it is the required return on the
bond, the bond owner must:
I. Buy the bond at price P0,
II. Hold the bond until maturity, and
III. Redeem the bond at par.
 Coupon yield:
a. The coupon yield is simply the coupon payment (C) as a percentage of the
face
Value (F).
b. Coupon yield = C / F
c. Coupon yield is also called nominal yield.
 Current yield:
The current yield is simply the coupon payment (C) as a percentage of the
(current) bond price (P). Current yield = C / P0.
 Relationship:
The concept of current yield is closely related to other bond concepts, including
yield to maturity, and coupon yield. The relationship between yield to maturity and
the coupon rate is as follows:
I. When a bond sells at a discount, YTM > current yield > coupon yield.
II. When a bond sells at a premium, coupon yield > current yield > YTM.
III. When a bond sells at par, YTM = current yield = coupon yield amt

59.  Price sensitivity:
The sensitivity of a bond's market price to interest rate (i.e. yield) movements is
measured by its duration, and, additionally, by its convexity.
Duration is a linear measure of how the price of a bond changes in response to
interest rate changes. It is approximately equal to the percentage change in price for a
given change in yield, and may be thought of as the elasticity of the bond's price with
respect to discount rates.
For example, for small interest rate changes, the duration is the approximate
percentage by which the value of the bond will fall for a 1% per annum increases in
market interest rate. So the market price of a 17-year bond with a duration of 7 would
fall about 7% if the market interest rate (or more precisely the corresponding force of
interest) increased by 1% per annum.
Convexity is a measure of the "curvature" of price changes. It is needed
because the price is not a linear function of the discount rate, but rather a convex
function of the discount rate. Specifically, duration can be formulated as the first
derivative of the price with respect to the interest rate, and convexity as the second
derivative (see: Bond duration closed-form formula; Bond convexity closed-form
formula).
Continuing the above example, for a more accurate estimate of sensitivity, the
convexity score would be multiplied by the square of the change in interest rate, and
the result added to the value derived by the above linear formula.
 ACCOUNTING TREATMENT:
In accounting for liabilities, any bond discount or premium must
be amortized over the life of bond. Amount of each period is calculated through the
formula.

60. an + 1 = amortization amount in period number "n+1"
an + 1 = | iP − C | (1 + i)n
Bond Discount or Bond Premium = | F − P | = a1 + a2 + ... + aN
Bond Discount or Bond Premium = .
2.9 REGULATIONS OF SEBI FOR DEBT SECURITIES AND
ISSUERS
ISSUE REQUIREMENTS FOR PUBLIC ISSUES:
(1) No issuer shall make any public issue of debt securities if as on the date of filing of
draft offer document and final offer document as provided in these regulations, the
issuer or the person in control of the issuer, or its promoter, has been restrained or
prohibited or debarred by the Board from accessing the securities market or dealing in
securities and such direction or order is in force.
(2) No issuer shall make a public issue of debt securities unless following conditions are
satisfied, as on the date of filing of draft offer document and final offer document as
provided in these regulations,
(a) It has made an application to one or more recognized stock exchanges for
listing of such securities therein: Provided that where the application is made to
more than one recognized stock exchanges, the issuer shall choose one of them
as the designated stock exchange provided further that where any of such stock
exchanges have nationwide trading terminals, the issuer shall choose one of
them as the designated stock exchange.
(b) It has obtained in-principle approval for listing of its debt securities on the
recognized stock exchanges where the application for listing has been made.

61. (c) Credit rating has been obtained from at least one credit rating agency
registered with the Board and is disclosed in the offer document: Provided
that where credit ratings are obtained from more than one credit rating
agencies, all the ratings, including the unaccepted ratings, shall be disclosed in
the offer document.
(d) It has entered into an arrangement with a depository registered with the
Board for dematerialization of the debt securities that are proposed to be issued
to the public, in accordance with the Depositories Act, 1996 and regulations
made there under.
(3) The issuer shall appoint one or more merchant bankers registered with the Board at
least one of whom shall be a lead merchant banker.
(4) The issuer shall appoint one or more debenture trustees in accordance with the
provisions of Section 117B of the Companies Act, 1956 (1 of 1956) and Securities and
Exchange Board of India (Debenture Trustees) Regulations, 1993.
(5) The issuer shall not issue debt securities for providing loan to or acquisition of
shares of any person who is part of the same group or who is under the same
management.
(6) For the purposes of sub-regulation (5):-
(a) two persons shall be deemed to be ―part of the same group‖ if they belong to the
same group within the meaning of clause (ef) of section 2 of the Monopolies and
Restrictive Trade Practices Act, 1969 (54 of 1969) or if they own ―inter-connected
undertakings‖ within the meaning of clause (g) of section 2 of that Act;
(b) The expression ―under the same management‖ shall have the meaning derived
from sub-section (1B) of section 370 of the Companies Act, 1956 (1 of 1956).
DISCLOSURES IN THE OFFER DOCUMENT

62. (1) The offer document shall contain all material disclosures which are necessary for the
subscribers of the debt securities to take an informed investment decision.
(2) Without prejudice to the generality of sub-regulation (1), the issuer and the lead
merchant banker shall ensure that the offer document contains the following:
The disclosures specified in Schedule II of the Companies Act, 1956;
FILLING FOR DRAFT DOCUMENT
(1) No issuer shall make a public issue of debt securities unless a draft offer document
has been filed with the designated stock exchange through the lead merchant banker.
(2) The draft offer document filed with the designated stock exchange shall be made
public by posting the same on the website of the designated stock exchange for seeking
public comments for a period of seven working days from the date of filing the draft
offer document with such exchange.
(3) The draft offer document may also be displayed on the website of the issuer,
merchant bankers and the stock exchanges where the debt securities are proposed to be
listed.
(4) The lead merchant banker shall ensure that the draft offer document clearly specifies
the names and contact particulars of the compliance officer of the lead merchant banker
and the issuer including the postal and email address, telephone and fax numbers.
(5) The Lead Merchant Banker shall ensure that all comments received on the draft
offer document are suitably addressed prior to the filing of the offer document with the
Registrar of Companies.
(6) A copy of draft and final offer document shall also be forwarded to the Board for its
records, simultaneously with filing of these documents with designated stock exchange.

63. (7) The lead merchant banker shall, prior to filing of the offer document with the
Registrar of Companies, furnish to the Board a due diligence certificate as per Schedule
II of these regulations.
(8) The debenture trustee shall, prior to the opening of the public issue, furnish to the
Board a due diligence certificate as per Schedule III of these regulations.
MODE OF DISCLOSURE OF OFFER DOUCUMENT
(1) The draft and final offer document shall be displayed on the websites of stock
exchanges and shall be available for download in PDF / HTML formats.
(2) The offer document shall be filed with the designated stock exchange, simultaneously
with filing thereof with the Registrar of Companies, for dissemination on its website prior
to the opening of the issue.
(3) Where any person makes a request for a physical copy of the offer document, the
same shall be provided to him by the issuer or lead merchant banker.
ADVERTISEMENT FOR PUBLIC ISSUES
(1) The issuer shall make an advertisement in a national daily with wide circulation, on
or before the issue opening date and such advertisement shall, amongst other things,
contain the disclosures as per Schedule IV.
(2) No issuer shall issue an advertisement which is misleading in material particular or
which contains any information in a distorted manner or which is manipulative or
deceptive.
(3) The advertisement shall be truthful, fair and clear and shall not contain a statement,
promise or forecast which is untrue or misleading.
(4) Any advertisement issued by the issuer shall not contain any matters which are
extraneous to the contents of the offer document.

64. (5) Any corporate or product advertisement issued by the issuer during the subscription
period shall not make any solicitation.
ARBRIDGE PROSPECTUS AND APPLICATION FORMS
(1) The issuer and lead merchant banker shall ensure that:
(a) Every application form issued by the issuer is accompanied by a copy of the
abridged prospectus;
(b) The abridged prospectus shall not contain matters which are extraneous to the
contents of the prospectus;
(c) Adequate space shall be provided in the application form to enable the investors
to fill in various details like name, address, etc.
ELECTRONIC ISSUENCE
An issuer proposing to issue debt securities to the public through the on-line system of
the designated stock exchange shall comply with the relevant applicable requirements as
may be specified by the Board.
UNDERWRITING
A public issue of debt securities may be underwritten by an underwriter registered with
the Board and in such a case adequate disclosures regarding underwriting arrangements
shall be disclosed in the offer document.
REDEMPTION AND ROLE OVER
(1) The issuer shall redeem the debt securities in terms of the offer document.

65. (2) Where the issuer desires to roll-over the debt securities issued by it, it shall do so
only upon passing of a special resolution of holders of such securities and give twenty
one days notice of the proposed roll over to them.
(3) The notice referred to in sub- regulation (2) shall contain disclosures with regard to
credit rating and rationale for roll-over.
(4) The issuer shall, prior to sending the notice to holders of debt securities, file a copy
of the notice and proposed 7resolution with the stock exchanges where such securities
are listed, for dissemination of the same to public on its website.
(5)The debt securities issued can be rolled over subject to the following conditions:-
(a) The roll-over is approved by a special resolution passed by the holders of debt
securities through postal ballot having the consent of not less than 75% of the holders
by value of such debt securities;
(b) At least one rating is obtained from a credit rating agency within a period of six
months prior to the due date of redemption and is disclosed in the notice referred to in
sub-regulation (2);
(c) Fresh trust deed shall be executed at the time of such roll –over or the existing trust
deed may be continued if the trust deed provides for such continuation;
(d) Adequate security shall be created or maintained in respect of such debt securities to
be rolled over.
(6) The issuer shall redeem the debt securities of all the debt securities holders, who
have not given their positive consent to the roll-over.
CONDITIONS FOR LISTING AND TRADING OF DEBT SECURITIES
FOR LISTING OF SECURITIES