The drying of corporate bond issuance in recent months has made even Life Insurance Corporation of India (LIC), largest in the segment, shift focus on non-convertible debentures (NCDs).
According to a senior LIC official, the Insurance Regulatory and Development Authority rules require it to invest at least half of its funds in government bonds and 15 per cent in infrastructure. Then, 20 per cent in corporate bonds, 10 per cent in equities and five per cent in the money market.
“In this fiscal (financial year), there have been no primary issuances in corporate bond markets, due to high interest rates. We invested in NCD issues to enhance the yield on investment. It is a safe investment,” the official said.
Market players say the trend has been triggered by a liquidity crunch in the system and a fuzzy interest rate outlook. In recent weeks, five entities, including two public sector banks, have raised capital from LIC by way of NCDs. This is despite the fact that it takes a longer time to close a transaction with the insurance behemoth.
“LIC is considered to be an investor of last resort for raising capital through NCDs. The time to close a transaction with LIC takes more than two weeks, while the life insurer also demands a higher coupon rate,” said Ajay Manglunia, head of fixed income at Edelweiss Financial.
Union Bank and Bank of India are said to have raised Rs 1,500 crore and Rs 1,000 crore, respectively, with Basel-compliant tier-II bonds at 9.8 per cent from LIC.
LIC officials say as a large investor, they’re particular about reviewing the minute details of each company and the proposed NCD issue before deciding. “Being a player in the rated bond market, LIC takes into account the ratings, prospects, quality of securities, company management and corporate governance practices. This could mean more time than other investors to decide,” one explained. Normally, a privately placed NCD issue is closed in two days.
"There is a dearth of bank bonds in the market. LIC would have jumped to invest in these. The insurer needs good long-term bonds to invest in, to take care of its allocation," said the treasury head of a public sector bank.
Experts also said given the lack of primary equity issuance, LIC must be diverting some of the surplus funds into debt instruments. However, an LIC official said they were keeping a balance between the debt and equity markets.
Other life insurers, too, are turning to other investments in the absence of good papers in the corporate bond market. Government securities is one such area.