In their quest to raise inexpensive, short-term resources, corporations are casting their net wide. Investors with short-term surpluses are a dime-a-dozen but good investment opportunities are few and far between. So, companies have devised an innovation: Mumbai Inter-Bank Offered Rate (Mibor)-linked non-convertible debentures (NCDs) with a daily put and call option.
With this instrument, companies now have three avenues to meet their working capital requirements: working capital loans (WCL) sanctioned by banks, commercial papers (CPs) and NCDs with daily put/call option. The short-term NCD with daily put and call option has caught the fancy of investors; and companies with the wherewithal to refinance the borrowings at call are capitalising on this.
Liquid schemes of mutual funds are predominantly investing in these papers since they face redemption pressures daily. With call money hovering around the repo level of 5.75 per cent, banks are investing in these schemes, which give returns of around 6.00 per cent to 6.25 per cent. Unlike CPs, which typically have tenures of either 90, 180 or 360 days, the short-term NCD has a tenure of 89 days. The idea behind having a debt instrument with a tenure of 89 days is to skirt the 0.2 per cent stamp duty that applies to debt instruments with tenures of 90 days and above. So the overall cost to the issuer comes down.
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In the last year or so, average monthly issuance of these instruments by companies has been of the order of Rs 500 crore. Coupon rates on short-term NCDs are pegged at a mark-up over Mibor, which is currently around 5.75 per cent. The mark-up on the NCD is typically 25 to 50 basis points over Mibor. This translates into an effective coupon rate of 6.00 to 6.25 per cent for the issuer.
Contrast this with CP issuances. A top-rated company can raise 90-day money through a CP at 6.10 per cent. But it needs to factor in stamp duty, issuing and paying agent service charges and credit rating agency costs. All these costs add up to 0.3 per cent and the cost to the top-rated issuer will work out to 6.40 per cent. The size of CPs are limited by the corporation