Retail investors may stay cold to private placement of bonds despite cut in lot size

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Retail investors of debt securities, or bonds, are likely to prefer public issues of bonds despite the reduction in the face value of debt securities issued on a private placement basis, experts said.

The Securities and Exchange Board of India (SEBI) on October 28 announced the reduction in the face value of debt security and non-convertible redeemable preference shares issued on a private placement basis to Rs 1 lakh from the current Rs 10 lakh with effect from January 1, 2023.

The public issue of bonds may remain popular because the majority of retail investors look for smaller lot sizes and private placement does not offer such lots. Apart from this, the coupons offered on public issues are also attractive compared to a private placement.

"Most of the retail investors always prefer small lot size of Rs 10,000 and multiples, which is available only in public issue of bonds. Further, the liquidity of the instrument is better in public issues compared to private placement when it comes specifically to retail lots," said Venkatakrishnan Srinivasan, founder, and managing partner of Rockfort Fincorp, a Mumbai-based debt advisory firm.

He said non-qualified institutional buyers will be permitted to bid in the private placement of bonds only by invitation. Investment through a primary issue of a private placement of bonds by retail investors will always remain difficult.

"The reduction of lot size is just to encourage retail investors to buy bonds in the secondary market and hence retail investors may miss the opportunity to get the cut-off coupon and the offer of bonds in the secondary market always tends to change for retail lots even in a normal market. Hence, retail investors may prefer the public issue of bonds compared to a private placement," Srinivasan said.

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 What is the public issue of bonds?

The public issue of bonds is similar to an IPO. Here the issuer lists the bond units on the respective exchanges, and then the investors can apply to subscribe to the bonds.

Such an issue allows investors to directly apply for the bonds in the primary market and then they can sell it in the secondary market on the exchanges.

Ajay Manglunia, managing director and head of investment group at JM Financial said public issues are meant for retail investors and it’s possible to invest in smaller lot sizes like in multiple of Rs 10,000, plus it can reach a wider spectrum of investors. "It’s also priced attractively to bring in retail in the issue, while private placements are meant for a select set of investors and liquidity is also a bit lesser in smaller lots."

According to the SEBI data, public issues of non-convertible debentures worth Rs 6,614.28 crore have taken place so far in 2022-23.

Also read: Corporate bond issuances jump in November as borrowing costs ease

What does the SEBI circular say?

SEBI, in its October 28 circular, announced the reduction in the face value of debt security and non-convertible redeemable preference share issued on a private placement basis to Rs 1 lakh from the current Rs 10 lakh with effect from January 1, 2023.

The move came after the regulator received representations from various market participants, including issuers, requesting a review of the denominations.

"In particular, non-institutional investors consider the high ticket size as a deterrent which restricts their ability to access the market for corporate bonds. If the face value and the trading lot are reduced, more investors can participate, which, in turn, will enhance the liquidity in the corporate bond market," the SEBI circular said.

The provisions of this circular would be applicable to all issues of debt securities and non-convertible redeemable preference shares on a private placement basis, through new ISINs, on or after January 1, 2023, it added.

Subordinated and perpetual debts, Srinivasan said, are not considered pure debt securities and also have a face value of Rs 1 crore. Unlike redeemable preference shares, SEBI did not specifically mention them and hence these instruments should be considered out of the purview of the circular, he said.