Issuance Process of Corporate Bonds

Introduction

Over the past decade, India has witnessed rapid growth in its private credit market, and the burgeoning corporate bond market has been at the cornerstone of this development. As more investors become aware of the benefits of bonds, especially in terms of portfolio diversification, the corporate bond market continues to gain momentum. Corporate bonds have become an essential component of investment portfolios, providing a steady stream of income and relatively lower risk compared to equities. In this article, we’ll take you behind the scenes to understand how corporate bonds are issued in India and how they are brought to the market. Understanding this process is essential for investors who want to make informed decisions. At IndiaBonds, our goal is to bring clarity to the complexities of the bond market. So, let’s dive into the procedure to issue bonds and explore how corporate bonds make their way from issuers to investors!

Primary vs. Secondary Markets

Before we dive into the issuance process, let’s quickly recap: Corporate bonds are first issued in the primary market, where companies raise funds by offering these bonds to investors for the first time. After their initial issuance, these bonds can be traded among investors in the secondary market. But how are corporate bonds issued in India? There are two primary methods for issuing corporate bonds: private placements and public issues. Let’s explore each of these processes.

Private Placement of Bonds

Private placement is the most common method used by companies to issue bonds. In this process, the bonds are offered to a select group of investors, typically institutional or high-net-worth individuals, rather than to the public at large. In fact, a privately placed bond cannot be offered to more than 200 investors in a financial year (excluding Qualified Institutional Buyers, or QIBs). One key feature of private placements is price discovery through an Electronic Bidding Platform (EBP), an anonymous platform operated by stock exchanges. This mechanism allows for transparent pricing by facilitating competitive bidding, ensuring investors get fair value while preserving the exclusivity of the issuance.

The Role of the Electronic Bidding Platform (EBP)

The Electronic Bidding Platform (EBP) plays a crucial role in enhancing the transparency and efficiency of corporate bond issuances in India. For issuances exceeding ₹50 crore, it is mandatory to use EBP as per SEBI guidelines. The platform operates on an auction-based system, allowing multiple bids from institutional investors like mutual funds, insurance companies, and pension funds.

One of the key benefits of EBP is price efficiency—because bids are placed anonymously, it reduces market bias and helps discover fair pricing. Additionally, it significantly reduces the time required to bring a bond to market, with the entire process being completed in a day. EBP also ensures real-time tracking of bids, enhancing the platform’s transparency, while keeping the minimum bid limits high to cater to institutional investors. The use of EBP has standardized the bond issuance process, improving investor confidence and contributing to the overall liquidity and trust in the corporate bond market.

The Step-by-Step Issuance Process

Board and Shareholders’ Approval: The company’s board and shareholders pass resolutions approving the bond issuance in compliance with the Companies Act.

Credit Rating: The bonds must be rated by SEBI-accredited credit rating agencies to assess the issuer’s creditworthiness.

Debenture Trustee Appointment: A SEBI-registered debenture trustee is appointed to safeguard the interests of bondholders.

Disclosure Document: A disclosure document is prepared in line with SEBI regulations and other applicable laws.

Listing Agreement: The company enters into a listing agreement with a recognized stock exchange.

Lead Arrangers: Lead arrangers maybe appointed to facilitate the subscription process.

Issue Opening: The bond issue opens for subscription from select investors.

Regulatory Filings: The company files necessary forms with the Registrar of Companies (RoC).

Issue Closure & Allotment: Once the issue closes, bonds are allotted to investors in dematerialized form.

Listing on Stock Exchange: The bonds are listed on a recognized stock exchange within regulatory timelines.

Security Creation: Any security or collateral backing the bond issue is created as per regulatory timelines.

Public Issue of Bonds

Public issue is the second method through which corporate bonds are issued. Here, bonds are offered to more than 200 investors in a financial year, and the company can use various advertising and marketing techniques to attract investors. Unlike private placements, public issues involve extensive regulatory compliance. If the company fails to meet the required subscription amount, it must refund the entire application money to investors.

Key Conditions for Public Issue:

SEBI Clearance: The issuer must not be prohibited by SEBI from accessing the securities market.

Credit Rating: At least one SEBI-registered credit rating agency must rate the bonds.

In-principle Approval: The company must obtain in-principle approval from a recognized stock exchange for listing the bonds.

The Step-by-Step Issuance Process

Board Approval: The company’s board must approve the bond issue.

Merchant Banker Appointment: A merchant banker is appointed to manage the issue.

Due Diligence: Legal and business due diligence is conducted to ensure regulatory compliance.

Offer Document: An offer document containing all relevant financial and business information is prepared.

Regulatory Approvals: The offer document must be filed with SEBI for record-keeping purposes.

Marketing & Roadshows: The company conducts roadshows and advertises the issue to attract investors.

Issue Opening & Subscription: Investors can subscribe to the bonds during the issue period, which remains open for at least three working days.

Allotment: Bonds are allotted to investors once the issue is closed.

Listing: Finally, the bonds are listed on recognized stock exchanges.

Unlisted Bonds – The Risky Terrain

Apart from private placements and public issues, some bonds remain unlisted, which can carry higher risks due to lower liquidity and limited regulatory oversight compared to listed bonds. These bonds are not listed on any stock exchange and do not fall under the regulatory purview of SEBI or any other governing body. As a result, they are not subject to the same level of scrutiny or compliance. Unlisted bonds operate like bilateral deals between the issuer and the investor, with no regulatory oversight, making them highly unsuitable for most investors. Given their lack of transparency and increased risk, it is strongly advised that investors stay away from these offerings.

Major Differences Between Private Placement and Public Issue

It’s important to note that for public issues, the minimum denomination typically starts as low as ₹1,000, but the minimum application amount is ₹10,000. However, in private placements, bonds can have a face value of ₹10,000, subject to conditions such as the appointment of a merchant banker, and can go as high as ₹1,00,000. In terms of the number of investors, private placements are limited to 200 investors, whereas public issues can target a much larger base, making them more accessible to a broader audience. When it comes to marketing, private placements are typically offered to a select group of investors, while public issues are marketed more broadly, often with extensive advertising campaigns to attract wider participation. Additionally, public issues are subject to stricter regulatory compliance and oversight compared to private placements, which involves a more straightforward process. To read more about the differences between private placement and public issue, check out our blog on the same here.

The Growing Importance of Corporate Bonds

One recent success story is the Adani Group’s Non-Convertible Debenture (NCD) public issue, which was oversubscribed multiple times. This reflects the growing interest and trust in corporate bonds among retail and institutional investors alike. The NCDs were well-received, underscoring the importance of strong corporate governance and financial performance in attracting investors. As India’s corporate bond market continues to mature, we can expect more companies to tap into this channel for raising funds. For investors, this means more opportunities to diversify their portfolios and participate in the growth of India Inc. Understanding the procedure to issue bonds and how the bond market functions is key to making informed investment decisions. Whether you’re an experienced investor or just starting, this knowledge equips you to explore the corporate bond market with confidence.

FAQs

Q. What is the difference between private placement and public issue of bonds?

A. Private placement is when bonds are offered to a select group of investors, typically limited to 200 investors in a financial year. Public issue, on the other hand, allows the bonds to be marketed and sold to a much larger number of investors.

Q. How are corporate bonds issued in India?

A. Corporate bonds are issued in India through two primary methods: private placements and public issues. In private placements, bonds are offered to select investors, while public issues target a broader audience through extensive marketing efforts.

Q. Why is credit rating important in the issuance process?

A. Credit rating assesses the creditworthiness of the issuer and helps investors gauge the risk associated with the bonds. It is mandatory for bond issuers to obtain a credit rating from a SEBI-accredited agency.

Q. What role does SEBI play in the issuance of corporate bonds?

A. SEBI regulates the issuance of corporate bonds, ensuring transparency and compliance with legal and regulatory frameworks. The offer document must be filed with SEBI for record-keeping purposes.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.