For a retail investor, options in the fixed income segment are getting narrower. With the drastic fall in interest rates post-credit policy, cost of funds have come into play again and, consequently, issuers are opting for private placements rather than taking the expensive public issue route. With banks and financial institutions flush with funds, issuers are also no longer willing to lure retail investors with high yields or incentives as in the past. In fact, most merchant bankers say private placements of bonds/debentures will dominate over public issues for most part of the current financial year.

SAIL's private placement, which was subscribed in a matter of few hours, has set the benchmark for a host of PSUs and institutions keen to follow suit soon. The reasoning is that if a AA+ rated company can manage to sell its paper at 14.5 per cent, top-rated corporates and institutions will offer only around 13.75-14 per cent. Even for the second-rung, interest rates are unlikely to go beyond 14.75-15 per cent. Elaborates Rajat Prasad of RR Financial, ``The indicative interest rate yield for AAA rated issuers will range around 13.50-14 per cent for development financial institutions (DFIs), 14-14.5 per cent for PSUs and 14.5-15.50 per cent for private sector companies.'' P K Sarkar of SBI Caps adds, ``Given the fact that the principal lenders in the debt market are banks, it will be difficult for any issuer to raise money at sub-PLR rates.''

However, even at these rates not many retail investors may be keen to stick their necks out considering that they have been used to yields as high as 18-19 per cent over the past nine months. The IDBI Flexibond II is a case in point, where the coupon of 15.5 per cent failed to enthuse retail investors. Although the financial institution mopped up around Rs 1,500 crore, it received only 3.5 lakh applications which indicates a predominance of bulk orders. On the other hand, the ICICI issue got a good retail response simply because the coupon of 16.25 per cent on its regular return bond was very attractive.

According to experts, the liquidity in the market is expected to continue in the first-half of this fiscal. The rider, of course, is the demand for money from the government. For example, recently, when the government retained the entire oversubscription of Rs 5,000 crore through SDLs and simultaneously announced the launching of the five-year government paper for Rs 3,00 crore, liquidity was affected and call rates rose sharply from 1 per cent to 9 per cent. Says P K Sarkar of SBI Caps, ``The credit policy freed a large portion of captive money in the form of SLRs and CRR and this will definitely have bearing on interest rates at least during the first-half of the current fiscal. However, in the medium-term interest rates will also be driven by the government's requirement of funds. In case the government sucks out liquidity to meet its own requirement, the rates will harden.''With interest rates expected to be depressed for most part of the year, retail investors will be hard-pressed for avenues to invest their money.

Options in the medium-term

What is the option open for him where he can realise his dream of safety, high returns and liquidity? Fixed deposits of corporate or non-banking financial companies is one such option. But with most top-rated NBFCs revising their rates to below 15 per cent on a one-year deposit, not many may want to lock their funds at these rates. There are AA+ or AA rated NBFCs which continue to offer good rates and incentives, but it is essential to check out the credentials of these companies before investing in their fixed deposits. Says K K Bajaj of Bajaj Capital, ``Rating alone is not the sole deciding factor. High rating and brand image of the company together should form the basis of an investor's decision.'' Bond funds are yet another investment opportunity as the tax benefits give good post-tax returns. But, considering the performance of most mutual funds, investors may be wary of investing in these schemes.

The best option, however, is to wait for a company coming out with infrastructure bonds which offer Section 88 or Section 54EA 54EB benefits. ``As wholesale investors are typically averse to investing in any other instrument other than plain vanilla bonds, corporates or financial institutions looking to raise money with through innovative bond structures to match their asset profile, will continue to access the retail market,'' says Sarkar.

The Section 88 benefit extended by the Finance Minister for issues of public financial institutions will make such forthcoming bond issues attractive to retail investors. For instance, a bond with a 14 per cent interest rate will normally have an yield of about 15-15.5. per cent. With the tax benefit, however, the yields will rise to as high as 16-17 per cent depending on the tax bracket. This will definitely rekindle the retail appetite for these bonds. Public issue of bonds from Konkan Railway Corporation (KRC) and Maharashtra Krishna Valley Development Corporation were big hits with retail investors as they had the Section 88 tag.

In the case of KRC, which offered a coupon of 10.5 per cent tax-free, the yield with section 88 benefit was in the range of 17.5 to 23.91 per cent, depending on the tax bracket of the investor. The Krishna Jalanidhi bonds from MKVDC had offered 17.5 per cent on the regular return bond and with the Section 88 benefit, the yield went up to 23.92 per cent for investors in the 40 per cent tax bracket.

Shake-out imminent

The change of tack from public issues to private placements is likely to see business shrinking for a number of brokers, lead arrangers and agents who have so far been thriving on the debt run. In fact, the executive director of a Delhi-based broking outfit goes as far as to say that the weeding out of small players has already begun. ``With the number of public issues falling over the past couple of months, business has been hit. Small players, who entered the market to make a fast buck while the going was good are finding it extremely difficult to maintain their spreads,'' he adds. Says Rajat Prasad of RR Financial, ``Agency business of arrangers is becoming competitive and fee generation would depend on value-additions provided.''

As interest rates go downhill, top-rated corporates are eager to replace their high cost debt with low cost funds while financial institutions will be keen to mobilise at lower rates to maintain their spreads. With both keen to tap only institutional investors, private placements have a distinct advantage because of its negligible over-head expenses.

Thus, the coming months are likely to witness a flurry of private placements from PSUs, institutions and corporates. While Reliance and IDBI has already made public their decision to tap the private placement market, a few others like MTNL, BPCL and IRFC are likely to follow suit soon. Unlike public issues, which require a maze of lead managers, co-managers and joint-managers to reach out to retail investors in order to sell the issue, private placements require fewer arrangers. Besides, with most private placements these days big pre-sold, the number of arrangers to an issue have also come down.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.