Retail investors warm up to NCDs

Taking a cue from a couple of successful non-convertible debenture (NCD) issues for retail investors, quite a few corporate houses are planning to take this route.

Investment banking sources said Mahindra & Mahindra Financial Services, Future Capital Holdings and some Aditya Birla group companies were looking to raise funds via retail NCD issues.

South India-based non-banking financial institution (NBFC) Sundaram Finance is also planning to tap this route.

Tata Capital's Rs 500-crore NCD issue with a pre-tax coupon of 12 per cent had a greenshoe option of Rs 1,000 crore. The issue, which closed on Tuesday, was oversubscribed six times.
 

PROS AND CONS

ADVANTAGES

* Investors looking for safety, liquidity and reasonable returns

* For companies, it’s another source of funds other than banks

* Suits NBFCs or banks, who have repeated needs of capital

HURDLES

* This source is available only for companies with good rating

* Creation of debenture-redemption reserve as a hedge against default

* Banks will not be too keen on giving NoCs, unless it is for refinancing

Last month, the first tax-free bonds offering by IIFCL was oversubscribed about three times. The five-year bonds offered a coupon of 6.85 per cent and were also open to retail investors with a minimum ticket size of Rs 1 crore.

IIFCL is again in the market to raise around Rs 2,500 crore and has brought down the ticket size for retail investors to Rs 10 lakh. Experts said given that other investible instruments were looking quite uncertain because of the fall in the stock market and the high volatility in gold, retail investors were looking at assured returns products now.

Seshagiri Rao, chief financial officer, JSW Steel, said instead of crowding banks or raising money from the Life Insurance Corporation of India, NCDs provided companies another window. However, this funding source was only available to companies which could muster a good rating, he said.

Ramesh Iyer, managing director, Mahindra & Mahindra Financial Services said, "Though we are not planning any bond issue immediately, we will review our requirements and launch a programme at an appropriate time.”

Sources indicated that some public sector companies were also looking to come up with NCD issues for retail investors. “Though Tata Capital’s 12 per cent is a benchmark, going forward, companies may not be able to offer such attractive rates. The rates would be mostly in the region of 10.5-11 per cent,” said an investment banker, who is working on some of these bond issues.

NBFCs and banks will naturally want to tap this avenue since they deal in money and need a regular source of funds. For manufacturing firms, wholesale debt will be a better and cheaper option,’’ said Chetan Savla, executive director, Kotak Investment Banking

However, some felt despite opening a large liquidity pool in the form of retail investors, NCDs had their own sets of challenges. The route is viable only for companies with a low leverage or low debt- equity ratio, because companies have to create pari-passu charges on existing assets, which includes getting no-objection certificate (NoC) from bankers.

In case of a company with high debt, bankers are unwilling to give NoC for incremental debt, unless there is a case for refinancing. The other challenges are the cost of floating the issue and creation of a debenture-redemption reserve (DRR). A DRR is intended to protect investors against default.