Reservation for retail buyers worries issuers

Last Updated: Fri, Nov 30, 2012 03:22 hrs

While fears of bunching of tax-free infrastructure bond issues has already made issuers nervous, the 40 per cent reservation for retail investors is now raising fears about market appetite. With around Rs 16,000 crore out of Rs 53,500-crore worth bonds on offer expected to be made available to retail investors over the next four months, analysts see the retail portion remaining undersubscribed.

Companies will have to raise at least 75 per cent of the amount of bonds issued through public issues, out of which 40 per cent would be earmarked for retail investors. The rest can be through private placement, according to a finance ministry notification issued this year.

Moreover, the brokerage or commission given to brokers has been brought down. Rural Electrification Corporation (REC), which gave a commission of 1.2 per cent to brokers last year, has slashed it to 75 bps this time. Analysts at broking agencies say this might add to the negatives.

Bankers too, are sceptical of the move of earmarking 40 per cent for retail investors. “Investment appetite for infrastructure bonds is not seen good. The reward on tax benefit may not be seen adequate to cover higher credit risk. The macroeconomic dynamics are also weak with less optimism from lack of political consensus on reforms,” said Moses Harding, head-asset liability committee and global markets, IndusInd Bank.

However he added the only attraction is from locking into fixed-rate longer tenor assets when the rate reversal cycle is long overdue.

The only hope that remains is when the undersubscribed bonds from this segment would be transferred to other ones like institutional investors or HNIs. The finance ministry notification has classified retail individual investors as “those individual investors, Hindu undivided family (through karta), and non-resident Indians, on repatriation as well as non-repatriation basis, applying for up to Rs 10 lakh in each issue”. This would widen the base of retail investors and can turn out to be helpful in consuming the earmarked quantity, analysts added.

The government this year has allowed India Infrastructure Finance Company, Indian Railway Finance Corp and National Highways Authority of India to raise Rs 10,000 crore each through the issue, Housing and Urban Development Corp, National Housing Bank, Power Finance Corp and REC (Rs 5,000 crore each), Jawaharlal Nehru Port Trust (Rs 2,000 crore), Ennore Port (Rs 1,000 crore) and Dredging Corporation of India (Rs 500 crore). In the budget for the current year, the government had proposed raising of Rs 60,000 crore through tax-free infrastructure bonds. However, the notification that came out earlier this month slashed the amount by Rs 6,500 crore. Last year, the government-run infrastructure entities raised a total of Rs 30,000 crore through these bonds.

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