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Jayanta Mallick

Kolkata, Aug. 18 Why relatively costly non-convertible debentures (NCDs) compared with other routes to raise funds have recently become popular among large and small companies?

According to market players, merchant bankers and issuers, a number of factors have, of late, contributed to this popularity.

Tata Capital, which came up with its Rs 500 crore issue in February, was the first to test the NCD route this year.

Shriram Transport Finance (Rs 500 crore) and Tata Motors (Rs 4,200 crore to retire part of the debt taken to finance JLR acquisition) have also raised funds through NCD route successfully.

L&T Finance is also looking to raise Rs 1,000 crore.

Recent equity market volatility and uncertainty over earnings outlook has turned a large section of retail investors to debt instruments for relatively decent but assured return.

The over-subscription of a recent issue was an eye opener, admits another issuer.

Though the secondary market of debt instruments have not taken off, the recent experience suggested that there was a huge pent up demand among investors, particularly the retail ones for NCDs, said Mr Kapil Wadhwan, Managing Director of Dewan Housing, which is issuing NCDs worth Rs 1,000 crore, which would be listed on the NSE.

“It’s true that NCDs are relatively costly. But the cost factor may be smoothened with weighted average of the outgo on a mix of different types of borrowings or fund raising instruments. We opted for it to tap yet another strongly potent source of liquidity as our surveys suggested that a section of investors are ready to lap this instrument up; so it provided a ready liquidity for a housing finance company, which required raising of funds frequently to be in business,” he said.

“Our studies also revealed that given the demand among the retail segment, more supply of quality papers (NCDs) would create a virtuous cycle leading to more demand. There is a likelihood that more listed NCDs would increase traded volumes in the secondary market,” Mr Wadhwan said.

According to a merchant banker, the cost of debt financing is not the only criterion for the issuer and the impact varies from industry to industry.

Finance companies, which cannot access cheaper ECBs, have certain inherent limitations such as thin net margin.

Market observers feel that the current spate of NCD issues may eventually help evolving a healthier debt market.

More Stories on : Investments | Corporate Bonds

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