Public Vs Private Issue of Covered Bonds: What’s the Difference?

Most of us know about the two major instruments used to raise funds, i.e. the equity market and the debt market (also known as the bond market).

 

For a long time, the equity market has been much more popular especially amongst retail investors. Nonetheless, in recent years, the debt market has seen tremendous interest in terms of the number of participants and the amount of investments.

 

According to the Securities Industry and Financial Markets Association (SIFMA), as of 2021, the size of the bond market is estimated to be around $119 trillion worldwide.

 

Major participants in the bond market are generally big institutions and corporates who have massive amounts to invest. In simple words, an institution borrows money from investors and issues them bond units for their investment and these units can later be traded in the market as and when required. 

 

An institution can issue a bond either through a private placement or through a public issue. 

 

Confused? Let’s understand each of these individually.

 

What Is a Private Placement?

 

Suppose an institution wants to raise money from a particular investor (or  even a few number of investors), then it can directly raise money from the investor by privately issuing bonds. In a private issue transaction, the investor will pay the complete amount of money upfront to the issuer.

 

There is no minimum amount of issue size for such private issues. These bonds can be listed or non-listed on the exchange as mutually decided by the two parties.

 

Listed bonds can be further exchanged in the secondary market through an off-market transaction.

 

Here’s what Wint Wealth does.

 

We pay the issuer upfront and receive privately issued bond units. We further down-sell these bonds to our investors in the secondary market through an off-market transaction.

 

What Is a Public Issue?

 

 

Public issue is more like an IPO of the debt market. The issuer lists the bond units on the exchange, and then the investors can apply to subscribe for the bonds. The major difference here is that investors can directly apply for these bonds in the primary market itself, and these can be further traded easily like an equity share by simply placing a buy-sell order on the exchange.

 

Since the investor base is prominent in a public issue, an issuer is required to provide a lot of documents related to its business and the transaction and detailed diligence is undertaken by one or more Merchant Bankers. 

 

So, what has changed now?

 

Recently, SEBI has brought in some changes in the regulations. From now onwards, the face value of one unit of privately placed bonds has to be a minimum of ₹10 lakh, which earlier could be as low as ₹1000.

 

This means, anyone who wants to invest in privately issued bonds has to invest in multiples of ₹10 lakh, even if they are buying it in the secondary market.

 

Also, for public issues, a minimum floor of ₹100 crores was kept by SEBI on the amount of issue size until now. But with the recent regulation changes, SEBI has removed this minimum floor, to ensure that even small issue size bonds can be issued publicly, increasing retail participation gradually.

 

The idea behind bringing these changes in the regulations could be an attempt to encourage retail investors to invest in publicly issued bonds only.

 

Public issues, like I said require a lot of information related to the issuer as well as the transaction to be released publicly. This information helps retail investors make an informed investing decision.

 

What is the story now, and how is the investment for retail investors in public and private issues going to be different:

 

PUBLIC ISSUE

PRIVATE ISSUE

Minimum Investment size can be ₹10,000 or even lower ₹10,00,000
Major Participants in the Primary Market Retailers & Institutions Institutions

 

Wrapping up

 

The implication of the recent changes brought in by SEBI, would mean a positive change for retail investors in the mid-to-long term, because now with the removal of min. 100 cr. limit, the public issue market will soon begin to open up and more NBFCs will get comfortable with making public issues.

 

This will ensure more retail investor participation in debt instruments and less dependency on institutional investors. One of the greatest benefit of this would be the increase in the liquidity state of the market which is currently very low as compared to equity market.

 

We at Wint Wealth, are working towards the idea of democratising the debt market and we are striving to bring more and more public issues for our investors. 

 

Happy Winting!

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