Offering shares via a public listing is a way for companies to raise capital from equity investors. But did you know that there’s another way to bring in money for a company without giving away equity? By issuing fixed-income securities via a bond IPO.
What is a Bond IPO?
A Bond IPO is the process of raising debt capital from the general public through bonds instead of equity. It is also known as a bond offering.
Think of a bond as a security that guarantees interest in exchange for your capital (principal amount). A bond is an investment instrument wherein an investor lends money to an entity for a fixed period of time. In return, the bondholder gets a fixed rate of interest.
A bond IPO is the first issue of bonds to the general public. The subsequent issues are called the ‘public issue of bonds.’
The bond issue helps companies access capital. Investors can earn periodic interest on their funds.
SEBI lays down the rules and regulations for the processes and formalities related to a Bond IPO. Every listed company has to issue bonds based on the set guidelines. This article discusses how bonds are issued and the upcoming bond IPOs that traders can invest in.
The Process of Bond IPOs
Companies issue bonds to raise capital through Bond IPOs using the following process:
1. Issuer Preparation and Due Diligence
Due diligence is the first step before a company issues any IPO. It involves the investment bank and issuer company deciding the terms of engagement. Both the parties sign a non-disclosure agreement.
The issuer company discloses full information regarding the company’s financial, operational, legal, and regulatory information.
The investment bank proceeds to study the information and gain an understanding of the company’s working, structure, financial health, etc.
It checks the company’s annual business plan for three previous years, its strategic plans, and the composition of the board of directors to perform due diligence.
2. Appointment of Underwriters and Legal Advisors
The next step involves appointing underwriters and legal advisors to counsel the management on various aspects of bond IPO India.
The underwriter guides the company on matters such as the amount of capital that needs to be raised, the type of securities (in this case, bonds), and the underwriter-company agreement.
3. Bond Pricing and Allocation
The bond price can be determined by ‘discounting the expected cash flows to the present.’ This means the company uses a discount rate to calculate a present price to justify future cash flows.
In the open market, three factors impact bond pricing – credit quality, supply and demand, and term to maturity. Bond allocation is done on a first-come-first-serve basis once the issuance is closed.
4. Regulatory Filings and Approvals
The draft document prepared for the Bond IPO issue is submitted to the stock exchanges and the board.
The offer document contains true and fair information about the bond issue and the company. This information helps subscribers to make informed decisions.
The offer document includes detailed terms and conditions, the Articles of Association, the Memorandum of Association, and the issuing company’s financial performance in the last three years.
Upon completing the regulatory filings and approvals, the bond is listed on exchanges for retail investors to invest and trade. The issuer company must regularly pay the agreed-upon interest to the investor and the principal amount at maturity.
Benefits and Risks of Bond IPOs
Here’s a list of advantages of Bond IPOs:
1. Investors Can Start Small
Investors can start with a minimum investment of INR 10,000. Bonds offer high rates of interest to individual investors.
2. Added Liquidity
Bonds can be traded in the secondary markets. This added liquidity from trading in the secondary market ensures the prices stay competitive.
3. Safe and Compliant
From an investor safety perspective, bonds are attractive because they are regulated by SEBI. Their pricing is also largely constant and transparent. There’s better monitoring since all Bond IPOs are listed on exchanges.
4. Simple to Invest
The application process for bonds is simple and involves a few steps. This ease of application ensures greater accessibility to a larger investor base. Here are the risks associated with Bond IPOs in India.
5. Interest Rate Risks
The risk of the bond’s price falling due to increased market interest rates aka interest rate risk. As market interest rises, the bond becomes less attractive to investors, and its prices fall.
6. Reinvestment Risks
When you receive the bond proceeds upon maturity and seek to reinvest in a bond again, the interest rate may have decreased on the same bond. Bonds typically provide less returns compared to equity.
7. Default Risk
There are chances that an issuer company may default upon its contractual obligations at maturity. As a result, it is crucial to invest in bonds having good credit ratings.
Factors to Consider When Investing in Bond IPOs
There are several factors you should take into consideration while investing in a bond IPO.
Take note if the issuer company has been rated well for its creditworthiness by credit rating agencies like CRISIL, ICRA, CARE, etc.
2. Terms and Conditions
Thoroughly read the term sheet and memorandum containing the terms and conditions, interest rates, duration, etc., for the bond.
3. Portfolio Diversification
Bonds are a great tool for lowering the overall risk of your portfolio. Invest in bonds to diversify your investments. However, do not solely invest in them.
Upcoming Bond IPOs
If you are seeking to invest in Bond IPOs, here’s a list of five upcoming bond IPOs (NCDs):
- Muthoot Fincorp Limited
- Indiabulls Housing Finance Limited
- Kosamattam Finance Limited
- Muthoot Finance Limited
- Aditya Birla Finance Limited
*As of September 2023
Bond IPOs offer investors a unique opportunity to become creditors of a company. These offerings are strictly regulated by SEBI and given credit ratings by agencies such as CRISIL.
While Bond IPOs provide a pathway to diversify portfolios, it’s crucial to thoroughly assess creditworthiness as well as other factors like your risk appetite before investing in any bond.