Public vs. Private Bond Issue: What Investors Should Know
There are two major instruments that are used to raise funds. The most popular one is the equity market, and the other is the debt market (also known as the bond market).
For the longest time, the equity market has been more popular, especially amongst retail investors. However, in recent years, the debt market has seen tremendous interest in terms of the number of participants and the amount of investments.
As of 2021, the size of the bond market is estimated to be around $119 trillion worldwide, according to the Securities Industry and Financial Markets Association (SIFMA).
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. These units can later be traded in the market as and when required.
An institution can issue bonds either through private placement or public issues.
Confused? Let’s understand each of these individually.
Private Placement V/s Public Issues: What are They
|Private Placement||Public Issue|
|Let’s say an institution wants to raise money from a particular investor (or a very few investors), then it can directly raise money from that 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 depending on the mutual decision taken by the two parties. The listed bonds can be further exchanged in the secondary market through an off-market transaction.
|Public issue is more like an IPO of the debt market.
The issuer lists bond units on the exchange, and then the investors can apply to subscribe for these 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 certain documents related to the business, the transaction details and also, a systematic diligence is undertaken by one or more merchant bankers.
What has changed now?
In October 2022, SEBI has brought in changes in its regulations. Henceforth, the face value of one unit of privately placed bonds has to be a minimum of ₹1 lakh, which earlier was as high as ₹10 lakh.
This means anyone who wants to invest in privately issued bonds has to invest in multiples of ₹10 lakh, even if they are buying in the secondary market.
Also, for public issues, a minimum floor of ₹100 crores was kept by SEBI on the amount of issue size. But with the recent regulation changes, SEBI has removed this minimum floor, to ensure that even the smallest issue size of bonds can be issued publicly, increasing participation from retail investors.
The idea behind bringing these changes in the regulations could be an attempt to keep retail investors in publicly issued bonds only.
Public issues, like we mentioned, 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.
How is the investment for retail investors in public and private issues going to be different?
|Basis of Difference||Public Issue||Private Issue|
|Minimum Ticket size||₹1,000||₹1,00,000|
|Major Participants in the Primary Market||Retail investors & Institutions||Institutions|
|Due Diligence by Merchant Banker||Mandatory||Optional|
The implication of the changes brought by SEBI has proved to be a positive change for retail investors in the mid-to-long term. With the removal of a minimum of 100 cr. limit, the public issue market has opened up, and more NBFCs are getting comfortable in structuring public issues. This has promoted more retail participation in the debt market and less dependency on institutional investors. One of the greatest benefits has been an increase in the liquidity of the market, which was previously very low compared to the equity market.
We at Wint Wealth are working towards the same goal, which is – democratising the debt market, and we are working towards introducing public issues for our investors.