Corporate bonds in India: Market Analysis

Corporate bonds market in India are investments with low risk if an individual is looking for a short-term investment system. Such bonds are considered to offer high returns in comparison to bonds issued by the government. 

But before investing in a corporate bond, each individual must be aware of the risk associated with it.

This Article discusses the basics, benefits, investing structure, and miscellaneous details relevant to the concept of Corporate Bonds.

Introduction

Corporations issue bonds to investors for raising finance for their operations. These are generally debt securities sold by corporations to investors. These investments made by the investors are repaid either in the complete principal amount or in the amount of interest earned over time.
In simple terms, when an individual purchases corporate bonds they are providing it as a loan amount to the corporation for the reasons they were subjected to selling and/or for its operation. 

Corporate Bonds by Government and Private Companies

Sometimes, Companies and Governments require funds for expanding their functions such as infrastructure building, social programs and etc. Usually, banks are known for providing loans. Then what is the requirement of Bonds? Sometimes big volume loans are required by the entities that banks restrict providing.
In such cases private entities as well as government institutions issue bonds for the public to raise funds. Therefore, it can be concluded that a bond is like a loan raised in parts by thousands of investors for the company to fulfill its capital requirements. 

Debt Instrument: In simple words, bonds are debt instruments that the government or a company issues for raising capital. In such cases, the investor acts as the lender, and the entity that issues such bond acts as the borrower.

Interest: Investors in a way lend their money as a loan to the government or any private entity by purchasing a bond. In return, the entity or the issuer of the bond will pay a particular amount of interest on the amount of money that is lent.

Corporate Bond Market

When infrastructure-related companies raise long-term debts through bonds, it reduces the instant burden on the banks. Trading volumes within the debt market are much higher in comparison with the stock market in most of the international markets of corporate bonds.
Liquidity is also high with enough sellers and buyers willing to deal in bonds that have a low credit rating with hopes to receive a huge profit.

This liquidity enables companies in raising finances and funds across different policies including for the expansion of operations or for infrastructure projects with long periods of gestation.

In India, a well-functioning corporate bond market is missing. Along with it, there is more burden on the governments and on the banking sector institutions for financing operative projects relating to ports, roads, airports, parks, etc.

This in return put traditional lenders such as banks under pressure. For example, such investments establish mismatched asset liabilities in the case of banks. 

In simple words, individuals in such a scenario are investing in long-term assets and short-term maturities such as highway projects, etc. 

Corporate Bonds and Stocks

The corporate bonds market in India is not similar to Stocks. They operate as legal contracts binding the corporation for purpose of repaying the money that is borrowed from the individuals along with interest.

Types of Corporate Bonds

Corporate bonds in India are categorized into two types;

• Convertible bonds: These bonds can be converted at the disposal of the investor into predefined stocks. If at any point in time, the investors feel that the stocks are possibly to provide them better returns than bonds, the investors have can convert such bonds into shares,
• Non-convertible: These bonds cannot be converted into stocks. These are just plain bonds that are purchased from any entity for only a specific duration.

Benefits of Investing in Bonds

There are several benefits of investing in bonds. Some of these are covered as follows;

• High-Interest Rate: Corporate bonds generally have a high-interest rate in comparison with any government bonds. It creates a good investment opportunity for investors that desire higher rewards,
• Low/Minute Risk: Before investing hard-earned money, investors must analyze the risk of such investment. Corporate bonds in India attract less risk as the bonds within the country are not usually affected by situations of inflation,
• Instant Rewards: Corporate bonds are usually short-term investments. Investors are likely to earn the benefits of the investment in the meantime.

Corporations Selling Bonds

Corporate bonds are such debt instruments that are issued by entities with the purpose of raising capital. As stock issuing, financing of debt is also common for firms/entities. 

Debt funds are generally not expensive and they also do not require the selling of an ownership stake. Entities issue debt bonds to receive cash and meet immediate capital requirements for big-scale projects.

However, for issuing corporate bonds, the entities must reflect strong financials. 

Rating: Corporate bonds receive ratings from credit agencies based on several factors such as business performance, creditworthiness, track record, etc. so lenders can rely on and compare the ratings before buying these corporate bonds.

Corporate Bonds, Stocks, and Government Securities

For investment, there are several options available to the individuals such as Stocks and bonds.
Investment inStock is a common way through which companies sell partial ownership within the entity/company.
When it comes to investing in bonds, investors have several choices such as-sec bonds, corporate bonds, capital gain bonds, sovereign gold bonds, etc.
Both Stocks and bonds serve different purposes for the customers. 
Objectives
Corporate bonds are issued with the purpose to profit the organization and also profit the investors by offering a high rate of return. While on the other hand, G-sec bonds provide a payment assurance by the government. 

Investing in Corporate Bonds in India

Corporate bonds offer a rate of interest on income that is generally high in comparison to the rate of interest on bonds issued by the government of India. Investors can invest in corporate bonds from the exchange or through a broker where all the corporate bonds that are available for investment are listed. The maximum cap for corporate bonds is Rs. 2 lakh.

How are Corporate Bonds sold?

Indian bourses list all the available corporate bonds for trading.Corporations/entities issue these bonds at par value or face value by following an organized structure of standard coupon payment,

• With the help of an investment bank, companies and entities list their bonds for selling to investors,
• Until these bonds are matured, they make regular interest payments, the interest payment can either be at a floating rate according to the market or at a fixed rate,
• Upon maturity, investors can redeem their bonds at face value,
• When the bonds have a provision of call that would allow them an early repayment in case of the interest rate changes,
• In such a situation of calling provisions, the company would issue new bonds and recall the old bonds, when it is profitable,
• Company bonds can be traded by investors in the secondary market,
• The price of a bond in the secondary market is analyzed and decided by the count of interest installments that are still due before the maturity date of the bond,
• In such a situation, the investors may receive lesser value than the face value of the particular bond,
• Apart from direct investment, investors can also deal in corporate bonds through specially designed ETF investment and mutual funds.

Way Forward

New norms by RBI make it compulsory for companies that have large exposures for raising at least 25 percent of their fresh borrowings or incremental from the bond market.

Along with it, the use of an electronic platform is also made necessary for any entity that is planning to raise debt funds of more than 200 crore Rs. and the objective behind it is to execute and record it on an e-platform. This is also intended for improving transparency in the process of allotment.

Conclusion

Small-scale investors from India do not often get any good corporate bond investment opportunities from any AAA-rated company. The regulating authorities also do not offer any satisfactory reason for this aggregate position in the bond market. 

While government lacks opportunities that are provided by any big corporates, the small-scale investors are often left with a bare amount of opportunities and a state of unawareness.

Therefore, there is a persistent need to regulate and improve the market of bonds for offering more corporate bonds from top-rated and AAA companies.