There appears to be rush among Indian companies to raise funds through non-convertible debentures (NCD), a loan to a company that cannot be converted into equity. The NCDs can be issued to both retail and institutional investors.
A number of firms have already gone ahead with NCD issues since January starting with Tata Capital which came up with its Rs 500 crore issue in February this year, besides Shriram Transport Finance (Rs 500 crore) and Tata Motors (Rs 4,200 crore to retire part of the debt taken to finance JLR acquisition).
These issues were well received by investors. For instance, Tata Capital issue was oversubscribed five times and the company decided to retain Rs 1,500 crore from the issue, three times the original amount.
The Rs 500 crore issue of Shriram Transport Finance also received subscription worth Rs 5,000 crore on the first day of opening and as a result the company decided to exercise the option of retaining a further Rs 500 crore. This for a company which lends to a sector which is hardest hit by the economic slowdown.
Tata Motors raised Rs 4,200 crore through NCDs, which will be used for paying the $3 billion bridge loan taken for acquiring Jaguar Land Rover (JLR) last year.
Many others are in the process of floating such issues including L&T Finance and HDFC. L&T Finance is looking to raise Rs 1,000 crore while HDFC is floating an even bigger issue of over Rs 4,000 crore. IT major HCL Technologies is reportedly looking to raise around Rs 500 crore to part refinance the debt the company raised to acquire Axon Group, the UK-based IT services provider.
Besides large firms, small microfinance institutions are also tapping on to the NCD route. Tamil Nadu-based Grama Vidiyal Micro Finance Limited (GVMFL) plans to raise Rs 100 crore through NCDs in the next three months. It is following in the footsteps of Hyderabad-based SKS Microfinance which took to the NCD route to raise funds last year.
The prime attraction of such NCDs for investors would be the return as the companies are offering returns of upto 12% per annum on such issues which is much higher than other fixed debt instruments which offer around 8-9% return per year.
The volatility in the stock market and sudden change in fortunes of retail equity investors last year could also be factors behind companies offering such NCDs to retail investors. With fixed returns from a reasonably well known company or corporate brand which investors trust, the NCD issues have seen wide interest and oversubscription from risk averse investors.
Although retail investors also participated in some of the issues given the high returns on offer, the major players in the these debentures are the institutional investors including mutual funds, banks, insurance companies and financial institutions. For instance, Tata Motors is said to have secured Rs 1,250 crore of the Rs 4,200-crore issue through LIC alone.