A bond is a fixed-income investment in which an investor lends money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. The borrower typically promises to make regular interest payments and at maturity, repays the principal amount back. Investors often buy bonds as part of a diversification strategy to hedge against the ups and downs of stocks and other investments.
Every organization requires capital to operate and expand. This allows companies to generate funds from the general public in various ways. One such way is the Bond public issue wherein the organization raises funds by issuing bonds to the public at large. In this article, we discuss the basics of Bond Public Issues and how to invest in Non-Convertible Debentures.
What constitutes a Bond Public Issue?
Bond Public Issue means an offer or invitation by an issuer to the public to subscribe to its debt securities which are not in the nature of a private placement. The procedure through which an entity issues bonds to the general public is known as a Bond Public Issue. This is often done to raise money for the entity to finance a variety of operations including expansion, debt repayment, or working capital.
The debt market’s public offering can be comparable to an equity IPO. Investors can submit an application to subscribe to the bonds when the issuer lists the bond units on the market for public subscription. The investors may apply for these bonds directly on the primary market and thereafter these bonds can be traded much like other NCDs by submitting a simple buy-sell order on the exchange.
In India, there are regulatory guidelines given by the Securities and Exchange Board of India for Public issues and the listing of Non-convertible Debentures. The issuer shall comply with all the regulations and disclosure requirements that may be specified by the Board from time to time.
How does a Bond Public Issue Work in India?
Since the investor base is significant in a public offering, an issuer shall submit a draft offer document after the issuance has been approved by the board of directors to stock exchanges and the Board. The offer document shall contain all material true, fair, and adequate disclosures which are necessary for the subscribers to take an informed investment decision. The issuer shall also appoint one or more merchant bankers registered with the Board, as lead manager(s) to the issue.
The issuer shall file an offer document containing detailed terms and conditions, a Memorandum of Association and Articles of Association, the issuer’s financial performance in the last 3 years, the intended use of the bond proceeds, etc. to the designated stock exchange. The issuer shall provide all required information/ documents to the lead managers for conducting the due diligence, in the form and manner as may be specified by the Board.
Following the bond issuance, the issuer will periodically pay bondholders the agreed-upon interest (Coupon) and return the principal sum when the bond matures.
It’s important to note that the amount of money raised through public issuances of corporate bonds was just about 2% of the amount of money raised through a private placement. As per RBI data, Indian companies raised around ₹11,589 crores through private placements of Bonds in FY 2021-22 whereas the public issue of Bonds was only to the tune of around ₹5.88 lakh crore. In order for public issuances to increase, there is a need to make the bond market more liquid. Moreover, retail investors will have to be brought into the market through awareness, education, and incentives.
The stages involved in subscribing to a bond public issue in India are as follows:
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Select the kind of bond you wish to buy:
There are many organizations that raise capital by a public offering of bonds. One must choose the bond that best aligns with your investment objectives and risk tolerance.
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Establish the sum you wish to invest:
Choose how much money you wish to put into the bond offering based on your investment plans.
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Study the specifics of the bond issue:
One must review the offer document issued by the entity to learn the specifics of the bond issue, such as the face value, coupon rate, security, the rating assigned, and maturity length of the Bond.
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Apply:
To apply for the Bond Public Issue, visit TheFixedIncome.com and place your order. The minimum investment is Rs.10,000 and one can apply easily through UPI.
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Allotment:
The allotment of bonds will be based on a first come first serve after the issuance closes. The bond will be credited to your Demat account post-issue, subject to allocation.
The finest techniques and approaches to take into account while investing in NCDs:
- Assess the issuer’s creditworthiness: At the time of investing in NCDs, it’s crucial to take the issuer’s credit quality into account. Various rating agencies like CRISIL, ICRA, CARE ratings, etc. evaluate the creditworthiness of companies and government entities, especially their potential to meet the principal and interest payments on their debts. One should review the financial statements and credit rating assigned to the company before investing.
- Take into account the terms and conditions: Prior to investing in any bond public issue, it is important to thoroughly read the Term Sheet and Information Memorandum wherein all the terms and conditions pertaining to the issue are mentioned. This covers the interest rate, duration (the length of time until maturity), security (if any), and all other limitations or covenants that could be related to the NCDs.
- Diversify your portfolio: To reduce your overall risk, like with any investment, portfolio diversification is very important. Bonds carry very low volatility as compared with other asset classes which makes them a great tool for diversification and thus assists in portfolio risk mitigation.
- Seek professional advice: If you are unsure about the best course of action or are unfamiliar with Bond Public Issue, it may be beneficial to consult a financial advisor or our team of experts who can assist you with any questions you may have.
Despite the higher costs involved in the public issue of bonds due to strict regulatory guidelines and marketing costs, factors like fund diversification and brand building are likely to prompt interest, and bond IPOs may be attractive to issuers as a means of raising funds.
