Private placements a rage on Bond St

Sovereign debt and private placements dominated record bond issuances in the debt market during the nine months of the current fiscal.

Of the Rs 5 lakh crore of fresh issuances during 2016-17, about 79.02% was raised by the government and the remaining 27.88% by the companies through the corporate debt market and the commercial paper market, according to a study by rating agency Icra.

The majority of the corporate bond issuances are skewed towards private placements, the report said.

C Venkat Nageswar, deputy managing director in charge of global markets, State Bank of India, told DNA Money that private placements are the preferred route for many companies as it helps them raise money faster.

"The 85% of the investments are into AAA-rated companies. Government debt, however, dominates the market. Retail participation is minuscule."

Icra said the financial sector dominates with highest bond issuance volumes at 65% of the amount. The rise in the public issuance of bonds suggests increasing awareness Greater presence of retail investors will diversify investor base in long-term.

Ashutosh Khajuria, executive director, Federal Bank, said, "Private placements are easier. In a public issuance, there are cumbersome disclosures keeping the retail investor in mind. So if a company has to raise money in a private placement, it needs to approach one big investor like LIC and a small group of investors who agree to a price for the investments."

Declining interest rates in the money market have encouraged increased bond issuances. Slower transmission of policy rates to cheaper lending rates has also propelled companies into the bond market where banks, mutual funds insurance companies and pension funds are the major investors.

"While banks invest with a 3 to 3.5-year horizon, the mutual funds invest for a 1.5 to 2-year horizon while the insurance and pension funds have a long-term horizon," Venkat said.

The Icra report said, "There is a sharp rise in MF inflows and investments into bonds with investments in bonds growing at 40% compounded annual growth rate(CAGR) over last five years, Insurance companies with 45% CAGR are the largest investors in bond markets and investments in bonds growing at about 15% CAGR over the last five years."

The Reserve Bank of India (RBI) is also pushing large companies to borrow from the market rather than depend on bank funding. By 2020, banks have to bring down their credit limits to Rs 10,000 crore to a single entity irrespective of the size of the bank. Banks will have to make additional 3% provision and 75% higher risk weights for incremental exposure above the prescribed limit.