It has been close to six months since State Bank of India issued 1.71 lakh 10-year bonds with coupon rate of 9.3 per cent to the public.
Initial investors in the instrument seeking an early exit through the secondary market would have had a problem. These bonds have traded only on 26 of the 116 trading days that have elapsed since its listing. .
The last time they were traded in the market (5 September 2011), the volumes were a mere four bonds.
Similarly, two of the options of the Shriram Transport's newly listed NCDs have traded only on four days each out of 36 days since its listing in July 2011. A total of 480 and 221 bonds of Shriram Transport's NP and NQ series' (listed on NSE) were traded over the last 36 days.
This is the case with many publicly listed non-convertible debentures.
Non Convertible Debentures (NCD) are making a comeback as an option for retail investors and the exit route through the stock exchanges is one of their key selling points. However, investors looking to sell these bonds before maturity need to know that the trading volumes of these NCDs in the secondary market tend to be quite erratic.
For quite a few of the already listed NCDs, investors have not been able to sell their bonds at the time or price of their choice.
Banking major SBI and non-banking finance companies such as India Infoline Investment Services (IIIS), Muthoot Finance, Mannapuram Finance and Shriram City Union have mopped up about Rs 13,000 crore through the retail NCD offers over the last two years.
Low volumes
All the bonds which were listed on the NSE a year ago (Tata Capital, L& T Finance and Shriram Transport) have seen their combined trading volumes decline by 12.5 per cent year-on-year in August 2011.
Shriram Transport's daily average volumes for listed debentures was 4,911 bonds in August 2010 which fell to 3,312 during August 2011 (newly listed Shriram Transport's debentures were excluded).
Similarly, Tata Capital's average volumes fell from 2,924 bonds in August 2010 to 2,729 bonds in August 2011. L&T Finance's debentures, however, have witnessed an improvement in volumes from 3,064 to 3,485 bonds.
Trading volumes being healthy in the initial days after listing but gradually dwindling as time goes by poses a problem. SBI's 9.95 per cent 15-year bond saw as many as 2.17 lakh bonds change hands daily on an average, in first 10 days post listing in March 2011. But by August, the average daily trading volumes had fallen to 610 bonds.
Newly listed bonds of Shriram Transport Finance, Shriram City Union and IIIS are also currently seeing brisk trading. The recently listed IIIS bond saw 91,000 contracts traded in NSE exchanges during the first four days.
Similarly, on an average 6.6 lakh debentures of Shriram City Union changed hands during the first four days post-listing.
Why do retail NCDs' volumes fall after the initial activity?
Mr Gautam Kaul, Fund Manager, Fixed Income-IDBI AMC says that it could be because of the passive nature of investors who buy such bonds.
“One reason could be that the primary investors in these issues are retail investors who invest after getting attracted by the relatively high coupon rate and would generally hold these instruments till maturity and not trade in it.”
He explains that volumes in each bond also depend on the investor profile and distribution of the issue. Top rated PSU issuers are the most traded in the wholesale market.
It is noteworthy that the recently listed bonds of IIIS and Shriram City Union despite having attractive rate of interest have been trading at a discount to issue price (par value). Lower price makes it less remunerative to exit in the secondary market.
For instance, the 11.7 per cent three-year option of IIIS with a face value of Rs 1,000 is currently trading at Rs 980.