Public V/s Private Issues: What Investors Should Know

We’re all aware of the two major instruments used to raise funds. They are the equity market and debt market (also known as the bond market).

 

For a long time, the equity market has been 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.

 

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.

 

Wint Wealth does pay the issuer upfront from their account and receives privately issued bond units.

 

Then we further down-sell these bonds to our investors 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?

 

Recently, 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 ₹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 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?

 

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  by SEBI, would mean a positive change for retail investors in mid-to-long term.

 

Now with the removal of minimum 100 cr. limit, the public issue market will soon begin to open up and more NBFCs will get comfortable in structuring public issues.

 

This will ensure more retail participation in the debt market and less dependency on institutional investors. One of the greatest benefits of this would be the increase in the liquidity of the market which is currently very low as 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. 

 

Happy Winting!

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