Non-convertible debentures issued to middlemen agencies and listed on bourses before reaching end-investor.
In October, Kolkata-based micro lender Bandhan Financial Services, which lends to poor women, raised Rs 28 crore by issuing non-convertible debentures (NCDs). A US-based specialised micro finance investor, the ResponsAbility Fund, was the major investor.
Due to strict regulatory guidelines, micro finance companies such as Bandhan are taking an indirect route to tap investments from such specialised foreign institutional investors (FIIs). Specialised investors based in the US and Europe, usually in the form of micro-finance investment vehicles, lap up these NCDs, which carry coupon rates of 12-14 per cent.
| MICRO OASIS Listed NCDs of microlenders | ||
| Company Name | Rate of interest* | Date of Allotment |
| Grameen Financial Services Pvt. Ltd | 11.25 | February |
| Janalakshmi Financial Services Pvt Ltd | 11.75 | March |
| Satin Creditcare Network Limited | 12.1 | March |
| Sahayata Microfinance Pvt. Ltd | 12.25 | April |
| Equitas Micro Finance India Pvt Ltd | 14.04 | June |
| Ujjivan Financial Services Private Limited | 12.86 | June |
| Ujjivan Financial Services Private Limited | 12.8 | July |
| Bandhan Financial Services Pvt Ltd | 12.6 | October |
| * in per cent; Source: BSE Compiled by: BS Research Bureau | ||
| How they do it? | ||
| * Microlender, FII agree on terms | ||
| * Microlender issues NCDs to warehouse | ||
| * Applies for listing to exchange | ||
| * Securities listed | ||
| * FII buys from warehouse on exchange | ||
This route is emerging as a major source for the fund-starved sector, with Rs 200-250 crore raised over recent months. According to data from the Bombay Stock Exchange, nine microlenders have listed their NCDs, with face values ranging from Rs 10 lakh to Rs 1 crore.
The Reserve Bank of India’s Foreign Exchange Management Act (Fema) rules do not allow investments by FIIs in primary debt issuances. There is no such restriction on FII investments in listed securities, subject to overall limits allowed by the government. However, for the instruments to be listed on the exchanges, they must be first issued. This is where some institutions play a key role, of warehouses.
In the Bandhan fund raising, Standard Chartered Bank acted as the warehouse, according to the Bandhan founder and CEO, Chandra Shekar Ghosh. NCDs were first issued to Stanchart, which later offloaded these to the ResponsAbility Fund.
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Ujjivan Financial Services, Janalakshmi Financial Services and Grameen Koota are some lenders who have raised money through the warehousing route.
Abhijit Ray, co-founder and director, Unitus Capital, said: “Warehousing is usually done by local NBFCs, banks or advisory firms. These entities hold the papers till the time they get listed. FIIs come forward and buy the instruments once these are listed.”
Though Sebi has allowed FIIs to invest in NCDs, RBI’s Fema guidelines still do not permit FII investments in primary debt issuances, Ray said. Unitus itself has helped five micro lenders raise around Rs 100 crore through such instruments.
Last month, the government increased the limit of FII investment in corporate bonds by $5 billion, raising the cap to $20 bn. The incremental limit of $5 bn can be invested in listed corporate bonds.
Ray of Unitus said this enhancement would give room for more deals in the space. “We are currently doing a few more deals. With the debt window opening, we are looking forward to more interest,” he added.
Bandhan’s Ghosh said his company alone was planning to raise Rs 100 crore from such NCD issuances this year. Royston Braganza, CEO of Grameen Capital, said companies have to take such routes since there are a number of constraints for fundraising. “You need to open sub-accounts and the process is quite elongated,” he explained. According to him, many of the larger MFIs have mastered the route themselves, while others still rely on advisors and arrangers.
According industry estimates, by 2012, the Indian MFIs are estimated to have an active borrower base of 48.7 million and a portfolio of Rs 25,100 crore. “To support this growth, both large and small MFIs will require a cumulative equity capital of Rs 2,170 crore and debt capital of Rs 22,100 crore. This demand makes the sector attractive for investment,” a recent report by IFMR said.
The industry has been facing issues in bank funding since recoveries were affected by the Andhra Pradesh money lending law. “With the ECB (external commercial borrowing) route closed and equity markets choppy, indirect NCDs are one of the few options still open for the industry to meet the huge funding needs,” Braganza said.