While The Stock Markets Boom, Debt Private Placements Lag

Companies have been tapping the capital markets for funding to benefit from the buoyancy in the stock markets. The money raised in initial public offerings (IPO) has increased from Rs 26,612 crore in the year 2020 to Rs 60,288 crore until August 2021, data from Prime Database showed. Investors are quite enthusiastic about IPOs, especially the IPOs of large tech companies like Zomato, Paytm, Nykaa, PolicyBazaar and others.

However, the market for private debt placements has not grown at the same pace as the stock markets. Private debt placement refers to fundraises by companies through bonds and debentures, which are sold to a selected group of investors through a private offering.

During the first eight months of the previous year, Indian companies had raised Rs 5.46 lakh crore through private placements, but this year the figure has declined to Rs 3.49 lakh crore for the first eight months of the calendar year 2021 – a drop of 36 per cent.

The year 2020 had seen the highest-ever annual fundraise in years – Rs 7.83 lakh crore. In contrast, public bonds saw a decline of 58 per cent, while overseas borrowing witnessed a decline of 32 per cent. Previously, private placements had crossed the Rs 7 lakh mark in 2017.

Low interest rates and liquidity measures by the Reserve Bank of India (RBI) to boost liquidity helped companies mop up the highest-ever sum in 2020, despite the pandemic. “43 per cent of the total amount (Rs 3.33 lakh crore) was in below 7 per cent coupon range and 36 per cent of the total amount (Rs 2.76 lakh crore) was in the 7-8 per cent coupon range.

Financial Institutions and banks had led the fundraising, with Housing Development Finance Corporation, followed by government agencies like Rural Electrification Corporation, Power Finance Corporation, National Highway Authority of India the National Bank of Agriculture and Rural Development.

The RBI had introduced several measures to prevent the economy from stalling. It also had to support banks as the loan moratoriums could result in cash flow mismatches for banks. The banks and financial institutions have always dominated the segment, followed by the infrastructure sector.

According to Pranav Haldea, the Managing Director of the Prime Database Group, the lower private placement numbers primarily stem from the withdrawal of liquidity measures by the RBI.

“The year 2020 saw record fundraising through private placements, led by liquidity windows introduced by the RBI and a lower cost of capital. The money flowed into non-convertible debentures and other debt instruments. Companies have built up their reserves but have not deployed the capital, and therefore do not require additional funds,” said Haldea.

Fundraising has majorly been led by the private sector, which has contributed anywhere between 50 to 70 per cent of the funds raised each year, over the last ten years. As corporate expenditure picks up, private placement fundraises might see an increase.