The amount of funds raised by companies through unlisted corporate bonds was reduced by more than 60 percent in the first half of the current financial year over the corresponding period last year due to low demand from investors, money market dealers said. On the other hand, activity in the listed bonds space picked up marginally.
Unlisted bonds are the ones that trade over the counter (OTC) instead of on an exchange or other listing facility.
“The appetite of issuers for unlisted bonds has decreased and it is experiencing saturation. Issuers are shifting to listed bonds leading to an increase in the amount of listed bonds,” said Ankit Gupta, founder, of BondsIndia.com, an online platform.
He added that last fiscal, due to changes in regulations brought about by the Reserve Bank of India (RBI), non-banking financial companies (NBFCs), housing finance companies, and other RBI-regulated entities came out with issues of lower face value to bridge their funding gap. This, among other things, led to a higher amount of unlisted bonds in the previous fiscal year.
What do the numbers say?
According to Prime Database data, the amount raised by way of unlisted bonds between April and September this year was Rs 20,413 crore, compared to Rs 53,176 crore over the same period last year. This is despite the number of issues rising to 495 this year over last year’s 458.
The amount raised by listed bonds rose to Rs 2.67 lakh crore in H1FY23, compared to Rs 2.59 lakh crore in the year-ago period.
“The two halves are strictly not comparable given last year’s issuances were aided by historically low rates wherein this year’s issuances are to do with growth and capital requirement,” said Ajay Manglunia, managing director and head of the investment group at JM Financial. “However, listed bonds have increased marginally in H1FY23, and majorly in 2QFY23 as the rates started to cool off a bit post the rapid increase in rates seen in 1QFY23. This helped Issuers to price their issues at competitive rates while making up for the issuance deficits of Q1,” he added.
Typically, the major investors in unlisted bonds are wealth managers for high net-worth individuals, private credit, family offices, and NBFCs, among others—in short, all forms of private capital. Public capital entities like mutual funds, insurance companies, and the like always prefer listed bonds as liquidity is better given all segments of investors can invest in such bonds.
Will listed bonds demand increases?
Money market dealers said that demand for listed bonds is likely to rise given the lower face value, which will allow more investors to invest in these bonds.
The Securities and Exchange Board of India (SEBI) on October 28 reduced the face value of debt securities, including non-convertible debentures, issued on a private placement basis to Rs 1 lakh from Rs 10 lakhs earlier.
SEBI has received representations from various market participants, including issuers, requesting a review of the said denominations. In particular, non-institutional investors consider the high ticket size as a deterrent that restricts their ability to access the market for corporate bonds.
“If the face value and a trading lot is reduced, more investors can participate, which in turn will enhance the liquidity in the corporate bond market,” SEBI said in a note.
Manglunia said that of late, some institutional category investors have completely exited the unlisted bond segment given the regulations and are now heavily in favour of listed ones. Additionally, unlisted bonds didn’t have any face value/bond restrictions, making it easier for some of the bond platforms to sell them to wealth/ HNI/retail clients.
Will new regulations help unlisted bonds?
Experts say SEBI’s November 11 regulations on online bonds platforms will in fact be detrimental because they actually prohibit platforms from offering unlisted bonds.
According to the rules, no person shall act as an online bond platform provider without a certificate of registration as a stockbroker under the Securities and Exchange Board of India (Stock Brokers) Regulations, 1992.
“This means the offloading of unlisted bonds to retail investors by OBPPs (online bond platform providers) will not take place and, thereby, the demand for unlisted bonds will get reduced,” Gupta said.“The new regulations actually prohibit OBPPs from offering unlisted bonds and to that effect the number of such bonds shall eventually phase out from such platforms,” Manglunia said.