ii. Procedure for Primary Issuance Private Placements:

Majority of the issuances in the Indian corporate bond market takes place through private placements. Under Section 81 of the Companies Act, 1956, a private placement is defined as an issue of shares or of convertible securities by a company to a selected group of persons.

The maximum number of investors in the private placement markets is limited to 49. Private placement process is flexible and is operationally easy for the bond issuers to raise money from the market.

Public Issue:

A public issue is an offer made to the public in general to subscribe to the bonds. In a public issue, the company has to issue a prospectus before issuing the bonds. A prospectus is a document containing details about the company and the bonds to be issued. After the public issue, these bonds are listed on a recognized stock exchange in India. In case of a listed bond, the investor can buy the bonds in the public issue at the face value or from the exchange at a premium or discount. Public issue, even if involves more stringent process, offers the advantage of wider investor participation and thus diversification of risk.

Private placements not only dominate the corporate debt market, but also lead the primary segment of both the public and private issues. Corporate have continued to prefer private placements over public issues. As a result financial institutions have tended to dominate public issues in the primary corporate debt market.

Figure F-7 describes the total resource mobilized from public and private issues only through private placements in India over several years. The figure clearly shows that the volume of privately placed public sector issues, till the year 2005-06, remains almost stable and found to be higher than the volume of private sector issues. But 2006-07 onwards, both public and private sector issues, made through private placements in India, started rising, with stronger rise in private sector issues. More interestingly, during 2009-10, the Indian private sector have experienced a huge rise, more than double of the public sector, in the number and volume of securities issued through private placements. Table T-10 describes the resource mobilized by Indian financial and non-financial institutions, both from the public and private sector through private placements of securities in several years. Irrespective of the nature of the instruments, it is commonly observed from the total figures that both the number and amount of private placement issues tends to increase over the years, except in some periods when trends are found little different. These have made it very clear that market would always prefer private placements to mobilize the necessary resources. If the nature of resources raised only by the corporate sector is evaluated, as briefed in table T-11, it is very clear that on an average 80% of the corporate resources, in most of the years, are raised from the debt market. Out of this debt issues, corporates are found to raise more than 90% through private placements in most of the years, except a few. These estimates makes it very clear that even if corporate sector attempt to tap the debt market to meet their financing needs, they mostly prefer to go for private placements route, rather than depending on public issues. This fact is again supported by figure F-8, where the strength of debt financing, especially through private placements, are brought out along with the possibility for financing through equities.

Figure F-7:

Source: SEBI Annual Reports

Table T-10: Resource Mobilization through Private Placements in India

Year

Private Sector (Amount: Rs. in Crore) Public Sector (Amount: Rs. in Crore) Grand Total Financial

Table T-11: Resource Raised by Corporate Sector

The roles of Financial and Non-Financial Institutions in mobilizing resources through private placements are also depicted in figure F-9. The figure shows that the role of financial institutions in mobilizing resources through private placements is stronger than the non-financial institutions. Almost in all the years, the FIs are found to raise resources by 55%

to 60%, or even more. 2010-11 is the period when the FIs are found to play the strongest role in private placement market, in last one decade, through resource mobilization by 71.71%.

Therefore, it is very clear that private placement market in India is mainly dominated by the FIs, by raising more resources than their Non-FIs counterpart.

Figure F-9:

Source: SEBI Annual Reports

Even if the issuers of corporate debts prefers to go for private placements rather than public issues, as supported by several figures, SEBI has made it mandatory to report all the trades in corporate bonds, even if issued through private placements, to be reported at least in one of the platforms, viz. NSE, BSE and FIMMDA. The number and volume of such private placement issues, reported in these platforms, over the periods are depicted in figure F-10. It is very clear from the figure that there is a consistent rise in the total number of issues, and the volume of issues, especially reported in NSE. This also demonstrates the growing importance of private placements in issuing corporate debts in India, and also the importance of the National Stock Exchange as the major reporting platform for issue of corporate bonds.

Figure F-10:

Source: SEBI Annual Report (2010-11, 2009-10)