ABCD Ltd (name changed) wanted Rs 300 crore urgently. The public issue route was ruled out in view of the parlous situation in the market. Top managers of the company were not sure whether a rights issue or a debenture issue would succeed.They finally made a private placement of bonds. But nobody knows the purpose of this fund mobilisation. Yes, privately placed and unlisted bonds are thriving, raising concerns over transparency and disclosure standards.Hardly any new public issues hit the market last year. In fact, the number of IPOs has been coming down over the years. But corporates and institutions have been merrily raising funds through bond issues in the private placement market. The fact that there are no regulations and regulators monitoring this fund-raising route has made the task easier for them.A study by Prime Database has revealed that companies and financial institutions have raised a whopping Rs 48,424 crore by privately placing bonds in the market in 2002-03. This was 5 per cent higher than Rs 46,220 crore raised in the previous year.According to experts, corporates have now found it convenient to raise funds through bonds in the private placement market, avoiding the rigamarole associated with IPOs or other instruments. This market could become the next attraction for scamsters. Analysts feel that the private placement market is following a dangerous trend. The government should bring in regulations to monitor the private placement in bonds, they say. Why should a company prefer a private placement of a bond issue?“In this case, there is no formality like filing the offer document with the market regulator Sebi or the Reserve Bank of India. More than that, there are no specific guidelines governing such private placement of bonds. So any Tom, Dick and Harry can come out with a bond issue with nobody raising any questions about it,” said a merchant banker.What’s even more surprising is that there’s no mechanism to monitor the end-use of funds in these cases. When a company privately raises funds through a bond issue, there’s no way to find out how the company used the funds raised in this manner. This is not the case with IPOs where use of funds is monitored at several stages. Even term loans from banks and institutions are monitored.It may be recalled that thousands of companies had closed down or vanished after raising a huge money from the investors. Most of this looting happened in the name of IPOs in the 1994-97 period. ICRA has expressed concern over the “unsatisfactory” disclosure and documentation standards for privately placed and unlisted bonds. “It was imperative for the country to have standardised practice for ameliorating the problems of information asymmetry, low liquidity and consequent distortions in corporate debt segment,” ICRA said.“Some of the corporates which floated bond issues could have diverted funds to other areas. There’s a total lack of transparency. There’s hardly any disclosure at the time of floating bonds,” said a BSE dealer Pawan Dharnidharka. Institutions which floated bonds in the private placement market had defaulted on repayment commitments. Maharashtra Krishna Valley Development Corporation which made several bond issues defaulted last year and was given default rating by credit rating agencies.The investor apathy to corporations promoted by States has already started showing. State-level undertakings recorded a 31 per cent fall in mobilisation of debt through private placement from Rs 6,334 crore in 2001-02 to Rs 4,389 crore in 2002-03.The story of inefficiency in the Indian corporate debt market doesn’t end here. ICRA has found the trading of highest safety instruments had progressively gone down, while that of the inadequate safety wielding junk bonds surged during 1997-2001. The rating agency had examined the month-wise frequency of trading of bonds of different categories among the 20 most frequently traded bonds and the share of bonds of different rating categories in the total frequency of trading. The share of highest safety ‘AAA’ rated bonds, which stood at 13 per cent of the total trading in 1997-98, fell to 0 per cent by 2000-01. The share of high safety ‘AA’ rated bonds also fell to 15 per cent during 2000-01 from 22 per cent in 1997-98.The share of bonds — having inadequate safety rating of ‘BB’, risk prone rating of ‘B’, substantial risk prone ‘C’ and defaulted instrument ‘D’ —were on the rise. The share of trading of such junk bonds rose alarmingly to 52 per cent in 2000-01 from 34 per cent in 1997-98. “The bond market needs an overhaul,” said a banker.The bond market is at the cross-roads. If proper guidance and monitoring is not given, there is a chance that it will go the IPO way. It’s time that the government and the regulators put entry barriers in the debt private placement market. Otherwise, one can expect another big scam from this market.
