Retail Investors Lapping Up NCDs As Bank Deposit, Market Fail Them

The mayhem in equities market and falling deposit rates have retail investors lapping up corporate debt like never before, if the overwhelming response to the recent/ongoing non-convertible debentures issues from non-bank financial companies, which are facing one of the worst liquidity crisis ever, is any indication.

This shows that retail investors' confidence in NBFCs have not been deterred by the risks facing the sector following defaults by IL&FS, DHFL and Reliance Home Finance, show the subscription data.

For instance, the just concluded Rs 500 crore NCD issue from Tata Capital had Rs 175 crore reserved for the retail but got 450 percent oversubscription at Rs 787 crore, while IIFL's Rs 100 crore issue with Rs 40 crore for retail got an oversubscription worth Rs 163 crore or 408 percent as per the data from the Bombay Stock Exchange.

Similarly, JM Financial's ongoing Rs 100 crore issue has Rs 40 crore reserved for the retail but has seen a full 185 percent or Rs 78 crore oversubscription, while Shriram Transport got 278 percent, and Indiabulls Rs 333 crore for Rs 133 crore reserved for the retail.

More significantly, for Muthoot Finance's recent Rs 100 crore issue of which 50 percent was reserved for retail had got a whopping 1077 percent demand or worth Rs 538 crore.

In some other previous issues between April and July, issues by Srei Infra, ECL Finance, Muthoot Homefin, Magma Fincorp, the oversubscription ranged from 160 percent to 322 percent according to the BSE data.

This is significant as the issues closed between April and early August, the average retail subscription was only 61 percent, according to the exchange data and comes at a time the NBFCs are shooed away by banks.

According to BKR Sriram, the distribution head at Geojit Financial Services, the falling equity markets is taking conservative investors to fixed income space, hence the higher demand from retail investors.

"In NCDs closed mid-August, average individual participation on the total subscription was around 82.4 percent and retail is around 61 percent," Sriram told PTI.

Between January and July, there were 17 issues with issue size of Rs 19,000 crore against eight issues worth Rs 21,200 crore a year ago. Of the 17 issues in 2019, nine NCDs saw over-subscription in the retail category against four in non-retail category, he said.

Typically an NCD issuer reserves 60-80 percent for individual investors (retail & non-retail put together and going by the BSE data for 2019, the retail share on subscription level is around 83 percent on average and going over 90 percent.

"There is a healthy appetite for corporate debt from retail investors as such investments help diversify portfolio. Also, NCDs offer competitive rates compared to other fixed rate products such as bank FDs, and offer higher yields, while the risk is AAA," Rajiv Sabharwal, managing director at Tata Capital told PTI.

It can be noted that Tata Capital has done two NCDs-- in September 2018 and the second tranche in August 2019 with good retail participation collectively garnering over Rs 5,000 crore from these issues.

Sabharwal further said retail investors looking for a long-term investments instrument prefer NCDs which come with AAA rating, indicating stable business model, growth potential, good governance and reputed management team.

Sumit Bali, CEO at IIFL Finance, attributes the spike in retail demand for corporate debt to the steep fall in bank deposit rates and low or negative returns from stocks.

"In this scenario corporate bonds are an excellent option to lock into attractive rates. As one can see, interest rates are most likely to head south and likely to remain low given the inflation downtrend and falling growth. This is the best time for investors to lock into higher returns offered by NBFCs with high degree of safety" says Bali.

According to Surajit Misra of JM Financial Services, retail investors are shifting away from equity to NCDs and corporate fixed deposits.

"This asset allocation shift and will continue for some time. In 2016-18, major household savings got into equities and equity mutual funds which have given negative returns, so there is a natural shift to safety," he says.

Also, for the first time in the past three decades, we are seeing the best real return scenario wherein inflation is at 3-4 percent and interest rate at 8-10 percent. We always had high inflation and high interest rates. Thus individual investors see this as good opportunity to lock in for long term at good rates, he reasons.

Over the past one year, the retail participation in corporate debt has doubled as reported by all leading companies. Most NCDs today are subscribed fully or in excess of retail portion and spillovers from other segments (like QIB, corporates) is consumed by retail investors, he says.

According to a Reserve Bank of India report in January 2019, the bond market to gross domestic product ratio in the country is still a low 17.16 percent at about Rs 27 trillion, while this is close to 124 percent for the U.S. and 142 percent for Turkey. In China, it is 18.9 percent and 14.6 percent in Japan.

However, according to an October 2018 Crisil report, this is expected to more than double to Rs 55-60 trillion by 2023 from the present Rs 27 trillion.