Will NCDs remain in vogue for fund raising next year too?

Corporates may continue to opt for NCDs next year as well, but a lot will depend on how bonds retain their advantage in comparison to bank lending rates


Graphic: Prajakta Patil/Mint
Graphic: Prajakta Patil/Mint

Mumbai: Many corporates took the non-convertible debentures (NCDs) route to garner funds in 2016. Indian companies raised Rs7.11 trillion using various options such as initial public offers (IPOs), follow-on public offers (FPOs), qualified institutional placements (QIPs), preferential issues and non-convertible debentures (NCDs), among others.

According to Prime Database data, from the beginning of the year until 19 December 2016, of the total funds raised, Rs5.40 trillion was via NCDs (on a private placement basis). In percentage terms, this comes to nearly 76% of the total funds raised.

NCDs are loan-linked bonds that cannot be converted into stocks. This instrument offers a higher rate of interest than convertible debentures. Private debt placement is a less cumbersome process with assured participation and it’s accordingly preferred over a public issuance. Downward trend in bond yields has made NCDs quite popular among corporates. As bond yields declined in-line with policy rate changes, raising funds via NCDs became a cheaper source especially for financial services companies, who require funds more frequently to meet their working capital needs.

Recently companies like Vedanta, Jubilant Life Sciences, JK Lakshmi Cement and Prism Cement have announced plans to raise funds via NCDs on a private placement basis, the latest one being Reliance Home Finance which is looking to raise Rs3,500 crore using this instrument. Other companies that mobilized funds through this route during the course of the year included Muthoot Finance, Mahindra & Mahindra Financial Services and Edelweiss Housing Finance.

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In the current year, companies could raise money through the bond market nearly 100-120 basis points cheaper compared to bank loans.

“Interest rates on NCDs are liked to market rates, which react faster in case of an interest rate cut by Reserve Bank of India compared with bank lending rates. Currently, the gap between government bond yields and corporate bonds is 80-100 bps, even if this gap sustains, NCDs would still be a cheaper source of raising funds for companies,” said Madan Sabnavis, chief economist, CARE Ratings.

Corporate bond yields are expected to fall further next year as the Reserve Bank of India is likely to cut interest rates, attracting more takers for NCDs. However, the quantum of decline may not been as steep as seen in 2016. Thus, corporates would continue to opt for NCDs next year as well, but a lot depends on how bonds retain their advantage in comparison to bank lending rates.

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