Retail non-convertible debentures (NCDs) are back in fashion and are getting a huge thumbs up from investors.
Consider the Rs 500-crore NCD issue by Shriram Transport Finance. The company was planning to raise Rs 500 crore through retail NCDs with an option to retain oversubscription up to Rs 500 crore. The issue became a runaway hit with the company mopping up Rs 4,500 crore on the first day itself. More money is pouring in and the issue is slated to close on August 14.
The success has prompted many others such as L&T Finance and Dewan Housing to jump on the retail NCD bandwagon. L&T Finance, the finance subsidiary of construction major L&T, is planning to raise Rs 1,000 crore through NCDs to meet the company’s capital expenditure and working capital needs. The NCDs will be listed on the National Stock Exchange (NSE).
Dewan Housing is also looking to follow suit with a Rs 1,000-crore NCD issue and so is Punj Lloyd. And, experts are saying that more such issues could follow. NCDs are basically unsecured loans with high interest rates. Unlike convertible debentures, they can’t be converted into company stocks.
Paritosh Kashyap, executive vice president (debt capital markets) at Kotak Mahindra Bank, said: “It is quite evident from the kind of response Shriram Transport has received that the market for retail bond issues is reviving. Non-banking finance companies (NBFCs), which had been largely relying on institutional money, are now looking to retail investors as a major source of funding. Very soon, we will see more companies tapping this source. And, it would not be limited to NBFCs,” he said.
In India, mainly private placement of bonds or NCDs with institutional investors has been in vogue. However, Tata Capital broke the ice in February this year by launching a hugely-successful NCD issue. Tata Capital’s $100-million issue was subscribed six times in a weak market, reaffirming the faith among corporate India that there is enough appetite among retail investors for companies with less leverage and a good brand name.
“Retail investors are facing real problems on where to invest with fixed deposit rates at a low. People are concerned about the sharp run-up in the equity market and there is still a lot of uncertainty. In such a scenario, NCDs are offering attractive yields in a low-inflation environment. It is also a question of getting a stable source of capital. Retail NCDs fit the bill perfectly,” said Sanjay Sakhuja, managing director, Ambit Corporate Finance.
Sriram Venkatasubramnian, MD, FCH Centrum Wealth Management, said: “Retail investors have lesser covenants than institutions which insist on put/call option etc.”
With interest rates on the verge of bottoming out, experts said that this was the best time for companies to launch bond issues. A retail NCD is comparatively cheaper than other fund-raising modes such as securitisation, where NBFCs are required to pay 13-14 per cent, depending on the underlying portfolio.
“With the new Companies Bill proposing to scrap company fixed deposits for manufacturing companies, one will see a lot of them coming to the bond market for funds,” said Rajivdeep Bajaj, vice- chairman & MD, Bajaj Capital.
