Fundraising via bonds jumped 14% in FY21

#GS3 #ECONOMY #RUPEE RISE 

Context

  •  Listed firms mopped up ₹7.72 lakh crore through issuance of bonds on private placement basis in 2020-21, an increase of 14% from the preceding fiscal, supported by low interest rate and surplus liquidity in the system.

This also marks the highest level of fund raising through such a route in a financial year.

Fundraising through debt private placement

  • Going forward, sustainability of growth trend mainly depends on the trajectory of cost of funds and incremental liquidity in the system.
  • According to data available with markets regulator SEBI, companies listed on the BSE and NSE garnered a total of ₹7.72 lakh crore through issuance of bonds in the just concluded financial year, much higher than ₹6.75 lakh crore raised in 2019-20.
  • Cost of funds is unlikely to remain as low as witnessed in the last two years and therefore, any noticeable growth in fund raising through debt private placement does not look to be on the cards in FY22.

Private Placement

  •  When most bonds are issued, they're made available to the public, registered with the Securities and Exchange Commission, and traded on a public exchange.
  •  When a bond isn't listed on a public exchange, it's called private placement.
  •  When bonds are placed privately, they're typically offered to a limited number of investors.
  •  Investors in privately placed bonds usually include large banks, mutual funds, or insurance companies.

Advantages of private placement

  •  One major advantage of private placement is that the issuer isn't subject to the SEC's strict regulations for a typical public offering.
  • With a private placement, the issuing company isn't subject to the same disclosure and reporting requirements as a publicly offered bond.
  • Furthermore, privately placed bonds don't require credit-agency ratings.
  • Another advantage of private placement is the cost and time-related savings involved.
  • Issuing bonds publicly means incurring significant underwriter fees, while issuing them privately can save money.
  • Similarly, the process can be expedited when done in a private manner.
  • Furthermore, private placement deals can be custom-built to meet the financial needs of both the issuer and investors.

Disadvantages of private placement

  •  One major disadvantage of private placement is that bond issuers will frequently have to pay higher interest rates to entice investors.
  • Because privately placed bonds aren't assigned ratings, it can be trickier for investors to determine their risk.
  • Issuers must therefore be prepared to pay investors a premium in exchange for taking on added risk.
  • In addition, private placement limits the number and variety of investors the issuing party can reach, so selling bonds privately could be more challenging than doing so publicly.
  • In some situations, private placement may cause an issuer to spend more time and money finding and attracting investors than a public offering would require, thus negating one of the primary benefits of avoiding a public listing.
  •  Finally, private-placement issuers could be forced to take extra steps to cater to their investors.
  •  For example, potential investors might demand additional equity from issuers or impose other such stipulations in exchange for their investment dollars.
  •  Even if a company chooses to sell its bonds privately, it must still comply with certain SEC rules for private placement.
  • These rules apply to aspects such as the number and monetary value of bonds being offered and the methods used to advertise them.

SOURCE: THE HINDU 

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