If non-banking finance companies (NBFC) are coming out with the repeated tranches of retail bond and debenture issues in a matter of few weeks, it is the still-evolving retail debt market that is to be blamed and not the lack of subscription, say industry members.

Unlike equity subscription through initial public offer (IPO) which happens entirely in demat form, only around 25 per cent of bond market subscription happens in a demat form. The other 75 per cent is still through the physical form, which makes it important for companies to come out with repeat issues to cater to interested subscribers.

Infrastructure finance companies like L&T Infra Finance and IDFC opened tranche two of their tax-saving bond issues in early January, after the first issue closed in December 2011, while gold loans company Muthoot Finance is planning a third round of its non-convertible debenture issue by the third week of February, after the second issue closed on January 7.

“In tax-free bond issues, an investor gets maximum tax benefit on an investment of Rs 20,000 and most retail investors restrict their investment to that amount. That makes it important to come out with subsequent issues to meet a wider range of investors,” says GK Shettigar, vice-president, L&T Finance, to Financial Chronicle.

For the first tranche of its tax-free bond issue, where L&T Finance raised Rs 500 crore, the investor base was 2.70 lakh, compared with a maximum of one lakh in an IPO, he points out.

“Few people start tax-planning as early as November-December, few others plan in the January-February period, while some others do in the last minute in March. So, we have try to be open to all kinds of tax planners,” reasons S Venkatraghavan, managing director, IDFC Capital.

The fact that most of the subscription for bond issues still happens in the physical form, is a huge disadvantage for the companies. “To engage the 15,000-odd broker network spread across the country, circulating forms to them and then collecting funds from them takes time. In equity issue, it takes just three days to get the entire funds collected, since it is all through internet. Here, there are too many players in the whole process,” Shettigar explains.

Now, with the interest rates appearing to soften, we may not see subsequent tranches of issues.

“The interest rates have already started falling. During our first tranche, the interest rate was 9 per cent, and now in the second tranche, we are offering only 8.7 per cent. Based on how much we collect in our second tranche, we will think about coming up with a third tranche,” Venkatraghavan reasons.

Muthoot Finance, which is planning its third NCD issue, is also talking about a lower interest rate.

“Our third tranche of the issue will hit the markets in the third week of February. There is room for offering a lower interest rate compared with the 13.43 per cent that we offered in the second tranche,” said Oommen Mammen, chief financial officer, Muthoot Finance.

rsrividhya@mydigitalfc.com