New Delhi: Non-convertible debentures seem to have become the preferred option for companies to raise funds as well as for investors eyeing good returns, with issues worth Rs 1,500 crore hitting the market this month and another Rs 650 crore worth of offers in the pipeline.
It is mostly the non-banking finance companies (NBFCs) that are tapping non-convertible debentures (NCDs) route to raise funds to support their financing activities.
An NCD is a type of loan-linked security issued by a company that cannot be converted into stock and usually carries a higher interest rate than a convertible debenture.
Investors are being offered returns of over 12 percent per annum through these NCDs, as against an average equity market return of around 9 percent. Bank fixed deposits also offer similar rates of return. The mutual funds seem to offer much lower returns.
In the last two weeks, three companies -- India Infoline Finance, Shriram City Union Finance and Religare Finvest -- have launched NCDs worth a total of Rs 1,500 crore. Further, NCDs worth another Rs 650 crore are in the pipeline by two firms -- Muthoot Finance and Srei Infrastructure Finance.
Gold financing company Muthoot is planning to garner up to Rs 500 crore from NCD issue and it would hit the market on September 17. Srei's NCD issue is also looking to tap the market with an issuance size of Rs 150 crore and has received market regulator Sebi's approval.
Experts believe companies are flocking with their NCD issues as equity markets have been very volatile for quite some time and fund raising through equity route is becoming extremely difficult.
"Debt instruments, especially NCDs, seemed to be the preferred route for retail investors to park their funds as these are offering higher returns compared to most of the banks providing on fixed deposits," CNI Research Head Kishor Ostwal said.
"In addition, India Infoline Finance's NCD, which has received overwhelming response all category of investors would help many companies to look for this instrument," he added.
These NCDs with a tenure of there to six years are offering a return between 11.5 percent and 12.75 percent. In comparison, banks are offering a return of 8.75-10 percent for a lock-in period of up to five years.
However, in the last one year , Sensex has given a return of just 9.41 percent.
Three firms -- Muthoot Finance, Religare Finvest and Shriram City Union Finance -- would be raising Rs 250 crore each. With greenshoe option to raise another Rs 250 crore, they will be aggregating a total issuance of Rs 500 crore each.
Srei Infrastructure Finance is planning to garner up to Rs 75 crore through NCDs, with an option to raise an equal amount in case of over-subscription, aggregating to a total of up to Rs 150 crore.
India Infoline Finance's Rs 500 crore NCD issue, meanwhile, had received overwhelming response across the investor class as the issue get oversubscribed and closed ahead of its schedule.