Indian companies turn corporate bond investors

While Indian companies are taking advantage of falling yields to raise debt, they are also actively increasing their investments in the rupee bond market.

The emergence of major companies as investors will help to broaden and deepen the bond market as they join traditional buyers like banks, mutual funds and insurers. “Blue-chip companies have become very active in the corporate bond market since the yields are attractive and they can generate decent trading income,” said an investment banker.

The Clearing Corporation of India (CCI) posted record trading volumes of Rs 1.15 trillion ($17.26 billion) on August 12, according to its website. “Volumes have increased in the secondary market because participation from large companies has increased beside mutual funds,” said Lakshmi Iyer, chief investment officer with Kotak Asset Management.

Corporate bonds rated AA and above are offering higher returns relative to the shrinking yields on government securities. The 10-year government benchmark is trading at 6.923 per cent, the lowest level since June 2009, whereas corporate bonds are offering returns that are 50bp-100bp higher.

“Companies are willing to take on some risks for slightly higher returns because the gilts and bank deposits are offering lower yields,” said Moses Harding, an independent financial services strategist. Reforms Corporate investments in bonds are picking up at a time when supply has increased after the Reserve Bank of India announced regulatory changes to improve bond-market liquidity.

Private-sector borrowers have lined up public debt offerings in the past month. Dewan Housing Finance Corporation raised Rs 140 billion ($2.1 billion) and Indiabulls Housing Finance printed nearly Rs 70 billion using the same route.

“Corporates invested very heavily in the recent public issue of bonds,” said a fixed-income trader. Corporate investors bought 20 per cent of Indiabulls Housing Finance's recent public offering and 10 percent of DHFL's.

The issues offered attractive returns in the range of 8.55 per cent to 9.25 per cent.

The introduction of electronic bidding has also encouraged more participation from companies since they can bid directly. “Earlier, corporates had to contact a merchant banker to bid for an issue,” said Ajay Manglunia, head of fixed-income markets for Edelweiss. “Now, it makes sense for them to bid directly because of more transparency and price discovery.”

Meanwhile, changes in the taxation of debt funds introduced two years ago have had the result that “taxation on short-duration bonds and mutual fund debt funds is on par," Manglunia said.

Instead of locking in money in funds for three years, companies were investing in bond issues, a DCM head said.

Earlier this year, blue-chip companies, such as Tata Consultancy Services, Reliance Industries and Larsen & Toubro, invested large cash holdings in government bonds. TCS bought $3 billion of government paper between January and March.

Since then, yields on government securities have fallen further, encouraging the shift into corporate paper.

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