Private firms turn Nelson’s eye to NCDs, data show

If you were an investor in corporate debt this fiscal, you’re more likely to have heard of a bond issue from the National Highways Authority of India or Indian Railway Finance Corporation than from ICICI Home Finance, Adani Ports or L&T Infrastructure Finance. That’s because even in a year when public issues of non-convertible debentures amounted to over ₹52,000 crore, only about 5 per cent of that came from private companies.

Private companies issued drastically lower levels of bonds to the public in FY16. According to data from capital markets regulator SEBI, public issues of non-convertible debentures (NCDs) by private companies totalled just ₹2,714 crore in 2015-16, which is 65 per cent lower than the ₹7,741 crore figure for FY15.

Issuing non-convertible debentures is one of the most popular ways for companies to raise long-term debt capital. NCDs are unsecured debentures, usually with higher interest rates and for longer tenures, which cannot be converted into equity.

Through FY16, the total value of public issues of NCDs stood at ₹52,089.60 crore, SEBI data showed. However, the bulk of this — ₹49,375 crore — came from 11 public sector companies, including NHAI and Rural Electrification Corporation, which regularly issue tax-free infrastructure bonds that attract retail investors. Private companies have historically chosen to raise debt capital through private placements.

According to Mahavir Lunawat, Managing Director, Pantomath Capital Advisors, total private placement of debt in FY16 amounted to ₹4.15 lakh crore, mopped up by 2,709 companies, compared to the year-ago figure of ₹4.05 lakh crore by 2,611 companies.

The chief reason that private companies continue to abandon the public issue route is cost — the marketing and distribution costs for a public issue amount to twice as much as the total cost of privately-sold corporate bonds, Lunawat said. In addition, even privately placed bonds of unlisted companies can be listed on exchanges, “achieving the essential elements of transferability and market platform” as with a public issue, he added.

Investors too, it seems, like PSU bond issues, which are relatively more liquid and are also tax-free. SR Sivakumar, Head — Fixed Income, Axis Mutual Fund, said very little retail investor money directly goes into corporate bonds, mainly because of the shallow and illiquid bond market in the country.

This makes it very difficult for a non-institutional investor to exit at will. “The liquidity that you see in Indian equities isn’t there on the bonds’ side. There are many investors now who look for fixed income opportunities and would rather invest in a mutual fund where liquidity is managed at the fund level than take on the liquidity risk of directly investing in a corporate bond.”