Fundraising Via Bonds on Private Placement Basis Climbs 14%

Listed firms mopped up Rs 7.72 lakh crore through issuance of bonds on a private placement basis in 2020-21, an increase of 14 per cent from the preceding fiscal, supported by low interest rate and surplus liquidity in the system.

This also marks the highest level of fund raising through such a route in a financial year.

Going forward, sustainability of growth trend mainly depends upon the trajectory of the cost of funds and incremental liquidity in the system, Binod Modi, head - strategy at Reliance Securities said.

According to data available with markets regulator Sebi, companies listed on BSE and NSE garnered a total of Rs 7.72 lakh crore through issuance of bonds in the just concluded financial year, much higher than Rs 6.75 lakh crore raised in 2019-20.

In 2018-19, listed entities raised Rs 6.1 lakh crore, Rs 5.99 lakh crore in 2017-18, and Rs 6.4 lakh crore in 2016-17.

However, debt raised through such a route stood as low as Rs 1.18 lakh crore in 2007-08. The funds were mopped up to strengthen balance sheets, retire existing debt, and support working capital requirements.

Harsh Jain Co-founder and COO Groww said that one reason behind companies choosing this route is that the interest cost on bond issuance is relatively low.

Besides, banks and NBFCs have also been hesitant to issue large loans to corporates on account of rising NPAs (Non-Performing Assets), he added.

"Considering low interest rates, and high appetite from institutional investors and capital expansion plans of many companies, there is an additional interest in raising money from issuance of a private placement of bonds," said Divam Sharma, Co-Founder of Green Portfolio. 

Reliance Securities' Modi said that a persistently low-interest rate cycle and surplus liquidity in the system aided growth in bond issuance through private placements.

Additionally, the introduction of a special liquidity window by the RBI for select sectors during the year also supported growth, he added.

According to Kaushlendra Singh Sengar, Founder of Invest19 Technologies, companies raised funds via private placement due to its structural advantage to meet the needs of entrepreneurs and investors. It is a cost and time-effective method of raising funds.

Above all, it does not require detailed compliance of formalities as required with a public issue, he added.

In terms of numbers, 1,995 issues took place in the period under review, as compared to 1,787 in 2019-20.

In private placements, firms issue securities or bonds to institutional investors.

Green Portfolio's Sharma said that many banks have raised money through private placement of Basel-III compliant bonds as there is an increasing appetite from some domestic financial institutions including LIC to participate in such offerings.

Invest19 Technologies' Sengar believes that fund raising through the route is most likely to see a surge in private placements of bonds in the ongoing fiscal as the economy is suffering from the Covid-19 crisis.

As the country is battling the resurging of Covid cases, so going forward, the central bank may reduce the interest rate to maintain sufficient liquidity in the economy. With the low interest rates and regulatory advantage, the companies can garner more funds on a private placement basis, he added.

The trend of higher fund raising through debt raised on the private placement basis should continue in 2021-22 considering high liquidity, the high appetite of institutional investors, and upcoming capex plans from many corporates, Sharma said.

However, Reliance Securities' Modi is of the view that the cost of funds is unlikely to remain as low as witnessed in the last two years and therefore any noticeable growth in fund raising through debt private placement does not look to be on the cards in 2021-22.