DEBT ISSUE

DEBT ISSUE DECIDING FACTORS

 Investors appetite at a given point of time
 Existing and target capital structure of the firm
 Business model
 Cost of capital
 Life cycle
 Current debt, interest coverage ratios and cash flow ratios,
 Bond rating and cost of debt
 Inflation
DEBT VS EQUITY DECISION
 Flotation cost
 Interest Rate
 Tax Rate
 Firms earnings volatility
 Business Growth
 % of Debt in capital structure
 % of Equity in capital structure
DEBT ISSUE
 Debt securities : Fixed maturity, Asset backed, regular interest.
 Comply with the SEBI (Issue and Listing of Debt Securities, ILDS)
Regulations, 2008, in addition to Companies Act, 2013.
 Fixed and Floating Interest Rates bonds, Zero coupon bonds
 Debt service obligations
PROCESS FOR ISSUE OF DEBT SECURITIES UNDER SEBI (ILDS) REGULATIONS, 2008

 Step 1 – file an application to one or more stock exchanges for listing of the debt securities
and obtain approval
 Step 2 – disclose the credit ratings, including the unaccepted credit rating from one or
more credit rating agencies in the offer document made with regard to the debt securities.
 Step 3 – enter into an agreement with a depository for dematerialisation of debt securities
(just like shares are dematerialised for public trading) in accordance with Depositaries Act,
1996 and the relevant regulations made thereunder.
 Step 4 – appoint one or more merchant bankers for letting them create debenture
redemption accounts (which comes into operation when there is a default in payment) under
Companies Act, 2013.
 Step 5 – the draft and Final offer documents are displayed online on concerned stock
exchange websites and made available for download in PDF/HTML formats
 Make an advertisement in one English daily newspaper and one Hindi daily newspaper,
both with wide circulation, on or before issue opening date.
KEY ASPECTS OF SEBI DEBT REGULATIONS
 Minimum base issue size should be rupees 100cr
 Minimum subscription – 75%, otherwise refund within 12 days
 Option to retain over subscription money on base issue price is upto
100% or any lower limit as specified in the offer document.
 The issuers of tax free bonds, who have not filed shelf prospectus, the
limit for retaining the over subscription shall be the amount, which they
are authorised by CBDT to raise in a year.
 Discloser on object of the issue - 'General Corporate Purposes' would
not exceed 25%of the amount raised by the issuer in the proposed issue.
 Permitted to issue unsecured debt in case of NCD of more than 5 years
PUBLIC ISSUE OF CORPORATE BONDS / NON-CONVERTIBLE DEBENTURES (NCDS)

 NCD is an instrument of debt executed by the company acknowledging its

obligation to repay the sum at a specified date, carrying an interest and is
not convertible into equity. It includes debenture, bonds, and such other
securities and is secured / unsecured in nature.
 A Public issue of Bonds/NCDs is a means of raising funds by ‘borrowing’
money from public markets against an issue of marketable securities to meet
certain business objectives.
 Public issue of bond is a convenient and cost-effective way of fund raising.
 Bonds are less risky and volatile as compared to equities. Bonds also have a
definite period term or maturity after which the bonds may be redeemed.
 Transaction of issuing bonds by the organization to the lender takes place in the
primary market, while the bonds that are issued earlier are traded in the
secondary market.
INDIAN CORPORATE BOND MARKET
 The Debt Market in India comprises of broadly two segments, viz.
 Government Securities Market
 Corporate Debt Market
 At present, any company incorporated in India, can issue corporate bonds.
 Corporate Debt can be raised through public issues or private placement routes

 Private Placement is defined as ‘any offer of securities or invitation to subscribe

securities to a select group of persons (less than 200) by a company (other than by
way of public offer) through issue of private placement offer letter.’
 While a Public Issue is an offer made to the public in general to subscribe the bonds.
INDIAN CORPORATE BOND MARKET: ISSUES
 Debt Capital mkt dominated by G-Secs which account for 95% thus
crowding out corp bonds
 95% of debt capital raised by pvt. companies is through private
placement route from institutional investors
 Majority of issuances of 2-5 yrs
 Lack of liquidity in markets
 No investor appetite for corporate bonds rated below AA ratings
 Only prime corporates or bonds with credit enhancements can raise
funds from bond markets rest all tap bank financing
 As such smaller pvt. cos would be crowded out from even banking
systems for funding
INDIAN CORPORATE BOND MARKET

Debt Issued by
Debt Issued by Non-Financial Private Bodies,
Local Authorities
FI PSUs Corporate
• Banks • Municipalities • NHAI • Tata Motors
• NBFCs • State • NTPC • IRCTC
Governments
WHY PUBLIC ISSUE OF CORPORATE BONDS/ NCDS
1. Flexibility in Structuring the Instrument
 Corporates are always on the look out for new avenues of fund raising.
Listed Corporate Bonds provides several structuring benefits in this respect.
 Companies have an opportunity to structure their corporate bond issuance
with flexibility in the rate of interest, interest payment options – monthly,
quarterly, annually and cumulative, tenure security
 The Issue period can be kept open for more number of days as compared
to Equity Public Issues.
 Mahindra & Mahindra was the first Indian company to issue 50-year
plain-vanilla rupee-denominated instrument. This is indicative of the
increasing confidence of investors in corporate India’s long-term
prospects.
WHY PUBLIC ISSUE OF CORPORATE BONDS/ NCDS
2. Potential for large retail participation
 In comparison to interest rates available on Fixed Deposits of Commercial Banks,
Corporate Bonds provide better returns with varying risk profiles of instruments.
At present, close to INR 81,358.4 billion of retail investments are in FDs of
Commercial Banks which may be channelized into Corporate Bonds by
creating the right awareness on the structure and form of Corporate Bond
Instruments.
3. Strong appetite of FII to invest in Corporate Bonds in India
 Foreign institutional investors (FIIs) have shown a greater interest in investing
into India on account of the favourable investment scenario being created by
the government. The Corporate Bond instruments are an attractive investment
which earns slightly better yields in comparison to Government Securities.
SEBI ISSUES FRAMEWORK ON 25% BORROWING VIA CORPORATE
BONDS FOR LARGE COS
 To deepen the corporate bonds market, Sebi has come out with a
framework that will require a large corporate to raise 25% of borrowings
through this route from next fiscal.

 Defining a large corporate, Sebi said such firms need to have an

outstanding long-term borrowing of at least Rs 100 crore; a credit rating of
'AA’ and above and target to finance themselves with long-term
borrowings (above 1 year).

 The guidelines come after such a proposal was made in Budget 2018-19
SEBI'S CAP ON FRESH ISSUANCE OF CORPORATE BONDS TO
DEEPEN MARKET
 Recent announcement by the SEBI to restrict the number of different bond issuances by a
company to 12 could become a catalyst for deepening the corporate bond market, as well as
help improve the repo in corporate bonds, even as issuers would have to maintain
considerable discipline in their financial planning.This essentially means that in any year, a
maximum of 12 fresh debt securities can be issued.

 Typically, non-banking finance companies (NBFCs) issue bonds practically every alternate
day to capture any rate change, and also based on weekly requirements. 

 For example, if in the course of a month, fund demand totalling Rs 1,000 crore comes up, a
company will have to go for an issuance of Rs 1,000 crore at one go. Earlier, the fund
would have been raised over the course of the month in multiple batches.
PROBLEM OF FRAGMENTED YIELD CURVE IN INDIA
 Primary issuances and trading are majorly concentrated in 10-year and 3-5-year
buckets.
 The longer end of the yield curve is predominantly dominated by debt papers of PSUs
(public sector undertakings), financial institutions and select housing finance
companies, while shorter end is dominated by non-banking finance companies
(NBFCs).
 As regards rating buckets, approximately 90 per cent of papers are AA and above
rated.
 For healthy liquid market its important to have a continuous government bond
 A corporate bond is generally priced on the basis of G-sec of comparable tenure. G-
sec is the base on which the spread of a corporate bond gets determined.
MASALA BONDS

• Masala Bonds are rupee-denominated borrowings issued by Indian entities in

overseas markets
• Masala means spices and the term was used by International Finance
Corporation (IFC) to popularise the culture and cuisine of India on foreign
platforms
• The objective of Masala Bonds is to fund infrastructure projects in India, fuel
internal growth via borrowings and internationalise the Indian currency.
• Issuer of these bonds is shielded against the risk of currency fluctuation,
typically associated with borrowing in foreign currency.
• Besides helping in diversifying funding sources, the costs of borrowing via
masala bonds could also turn out to be lower than domestic markets
Other Types of Bonds getting popular in
light of climate change…
GREEN BONDS

• A green bond is a bond specifically earmarked to be used for climate and

environmental projects. These bonds are typically asset-linked and backed by
the issuer's balance sheet, and are also referred to as climate bonds.

• Green bonds are designated bonds intended to encourage sustainability and

to support climate-related or other types of special environmental projects.

• More specifically, green bonds finance projects aimed at energy efficiency,

pollution prevention, sustainable agriculture, fishery and forestry, the protection of
aquatic and terrestrial ecosystems, clean transportation, sustainable water
management and the cultivation of environmentally friendly technologies.
GREEN BONDS ISSUANCE

The World Bank is a major issuer of green bonds.

World Bank green bonds finance projects around the world, such as India's
Rampur Hydropower Project, which aims to provide low-carbon hydroelectric
power to northern India's electricity grid.
SOCIAL BONDS
Social Bonds are use of proceeds bonds that raise funds for new and
existing projects with positive social outcomes. Social Bonds are any type of
bond instrument where the proceeds will be exclusively applied to finance or
refinance in part or in full new and/or existing eligible Social Projects.

Sustainability Bonds
Sustainability Bonds are bonds where the proceeds will be exclusively applied to
finance or re-finance a combination of both Green and Social Projects

Bonds are categorized as Green, Social etc. as per guidelines issued by ICMA
(International Capital Markets Association), headquartered in Zurich (Switzerland).
SUBSCRIBER TO THESE BONDS

These bonds come with tax incentives such as tax exemption and tax credits,
making them a more attractive investment

This provides a monetary incentive to tackle prominent social issues such as climate
change and a movement to renewable sources of energy.

To qualify for green bond status, they are often verified by a third party such as the
Climate Bond Standard Board, which certifies that the bond will fund projects that
include benefits to the environment.

These bonds finance projects aimed at energy efficiency, pollution prevention,

sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial
ecosystems, clean transportation, sustainable water management and the cultivation
of environmentally friendly technologies

Big Hit with Pensions Funds who want to Hedge Climate Risk
RECENT ISSUES: PROMOTER-SHARES AS COLLATERAL FOR
BOND ISSUES
What does pledging shares mean?
When one takes loans against the shares held, it is called pledging shares. This means
that shares are offered as collateral or security against the loan taken by the
individual that has pledged his/her shares. Shares can be pledged by a promoter or an
investor.

Who gives loans against pledged shares?

Banks or nonbanking finance companies (NBFC) can lend money against shares.

Why do borrowers have to resort to pledging shares to get funds?

Borrowers can pledge shares to meet any shortfall in capital for business or personal
requirement. Pledging of shares is more common in companies where promoter
shareholding is high.

How much can be borrowed against pledged shares?

The minimum collateral value is agreed between the lender and borrower. An individual
can typically borrow anywhere from 50 to 80 percent of the value of their shares.
RECENT ISSUES: PROMOTER-SHARES AS COLLATERAL FOR BOND
ISSUES
Does ownership gets transferred to the lending entity once shares are
pledged?
Ownership is retained by the individual taking the loan at the time of pledging the
shares. However, if the borrower is not able to meet the repayment obligations,
the lender can sell pledged shares to recover money.

What are the implications of pledging shares?

Pledging of shares by promoters beyond a certain threshold raises the risk of some
of this equity being sold in the market in case he/she is not able to repay the loan on
time or provide additional collateral if the margin threshold is breached.
Since the loan is given against the value of the shares, as share prices fall, the total
value of the collateral falls. This can trigger a margin call.
RECENT ISSUES: PROMOTER-SHARES AS COLLATERAL FOR BOND
ISSUES

What is a margin call?

When a margin call is triggered, the borrower must either deposit more
cash or securities with the lender as additional collateral or sell the
shares pledged to settle the loan

A forced sale of pledged shares could create a vicious cycle, resulting in

the company’s share price falling even further.
THANK YOU