FOR years financial analysts and money market operators have bemoaned the absence of a vibrant retail debt market in India, which sees small (retail) investors—and not only institutional (wholesale) players—buying debt instruments such as bonds and debentures.
Not any more. Sample the retail component in some recent debt offerings (approximate figures gathered from merchant bankers): Kotak Mahindra 65 per cent, Indian Railway Finance Corporation 90 per cent, and ICICI 40 per cent. ICICI is, in fact, again in the market with four products clearly aimed at the retail investor—the 25-year deep discount bond, the monthly-income bond, the money-back bond and the regular-return bond. Among recent successes: the IDBI Flexibonds issue last month, which garnered Rs 1,400 crore against the targeted Rs 500 crore public issue with the option of retaining an additional Rs 500 crore; and the IFCI 8th Series bonds issue, that closed on March 25 netting Rs 300 crore against the estimated Rs 200 crore. "About 70 per cent of the subscription has come from the step-up liquid bonds with a face value of Rs 10,000 at a coupon rate of 16 per cent targeted at the small investors," says R.G. Sha-rma, general manager, IFCI.
The reasons for the boom: 1995-96 saw the worst ever liquidity crunch. The stockmarket plunged to its nadir, financial institutions were unable to disburse sanctioned amounts, and the GDR route failed to bring in enough funds. To raise money, industry needed a new instrument. It found one in retail debt. "The old retail finance culture tilted towards equity is poised to give way to a more equitable debt-equity ratio dictated by financial prudence and market forces," says Ashwajit Singh, president, Allianz Capital & Management Services.
Couldn't it just be a flash in the pan, doomed to burn out before attaining any sort of maturity? Not so, says S.K. Awasthi, managing director, PNB Capital Services. "In two-four years I see a more regulated, easily accessible and more mature debt market taking shape," he justifies. "Economic reasoning suggests that the market will see more debt offerings on a steady basis," says investment consultant P.N. Vijay.
Experts feel that with industrial production on the upswing, the demand for credit is unlikely to drop. And once the real impact of the demand for credit in the infrastructure sector sinks in, there's bound to be a capital crunch. Any reprieve by way of a slowdown in demand or inflow of foreign institutional investments will be at best temporary in nature.
Add to that the continuing downturn in the equity market. More and more companies are targeting fresh equity towards the wholesale (institutional) clients as retail investors swing towards debt. "Equity is no longer a win-win situation for investors and issuers," says Sharma. "The average Indian investor saves for his son's education, his daughter's wedding, old age care and health costs. It's he who will put the retail debt market on a firm footing."
Then, there's the flip side. "Increasingly, companies will realise that equity doesn't entail a one-time cost but has to be serviced too. You can't just keep bloating equity. It dilutes the promoters' holding. This will encourage a more critical view of equity," says Ravi Kapoor, vice-president (North Zone) of DSP Financial Consultants.
Market mechanisms to sustain a vibrant debt market are also falling into place. An effective credit rating system is already functioning. The NSE and BSE have a full-fledged debt trading system which indicates the recent flurry of activity in the bonds market may soon create a secondary market for debt. Once that happens, a true debt market would fall into place.
"More players are likely to enter the retail debt segment, as the battle for scarce funds hots up," says Kapoor. Financial institutions will be drawn to the debt market to maintain the growth rate in sanctions/disbursements. Banks will tap debt to fulfil capital adequacy norms and to augment long-term resource needs. PSUs will continue to approach the debt market to finance their modernisation plans after cutting the umbilical cord with the government. Ahmedabad Municipal Corporation is becoming the first Asian municipality to tap the bonds market for Rs 100 crore. Then, some corporates will have to adhere to stringent debt-equity norms to leverage their edge.
The small investor's growing relationship with debt looks definitely to be far more serious than a one-night stand.
