When investing in the bond market, you often hear a company issuing bonds through either a private or public placement. What does this mean? Simply put, when a company chooses a private placement of bonds it means it will offer its bonds to a select group of investors/institutions instead of offering it publicly, in an open market for anyone to invest. Initially, public offerings (IPO) or public placements of bonds are when a company decides to offer its bonds publicly.

Private and Public placement both have their advantages and disadvantages but the latest report indicates that companies have been preferring to offer bonds through the private route. Along with the inherent advantages private placement offers, a study by the Reserve Bank of India(RBI) "found strong evidences of macroeconomic conditions affecting a firm's choice for private placement."

Data from SEBI showed that fundraising of Indian companies through private placement of bonds more than doubled last November, clearly indicating the preference of companies towards raising funds through private placements of bonds.

The difference between private and public placement must first be understood before we can understand the reasons for it

Private placements, unlike public offerings, are excluded from the requirement to submit an offer document for review by the Securities and Exchange Board of India (SEBI). Additionally, it cannot include any kind of public statement, appeal, solicitation, advertisement, seminar, or gathering to promote such an offering.

From Rs 10.51 lakh crore at the end of FY12 to Rs 40 lakh crore at the end of FY22, India's outstanding stock of corporate bonds has expanded by a four-fold increase. From Rs 3.80 lakh crore to about Rs 6 lakh crore, annual issuances have surged during this time. Private placement has, nevertheless, been the main method of fundraising. According to SEBI data, Rs 11,589 crore was raised through public corporate bond issuances in FY22, which is only about 2% of the Rs 5.88 lakh crore raised through private placements.

Why do firms favor private placements?

The first benefit is that it is a quick and inexpensive way to raise money. Second, it can be set up to accommodate investors' and entrepreneurs' needs. Third, unlike a public issue, a private placement does not require meticulous compliance.

The private placement is chosen because it has fewer onerous disclosure requirements, costs less money, takes less time, and makes it simple to raise a lot of money from a small group of investors. Additionally, there are a lot of middlemen for private placements who aid in reaching the target market and ease the process of finding and negotiating a price. Securities are distributed to investors more quickly in a private placement than they are in a public offering. As a result, money is not kept frozen. Additionally, a quicker allocation reduces market turbulence or event risk.

Are there any price differences?

By going with the private placement route, a company can quickly settle on the price, yield, and terms based on specific interests that are agreed upon by both parties. They are easy for issuers to manage and service, and they don't cost too much.

In a public offering, rates tend to be higher so that more investors will be interested. This costs the issuers a lot of money. Costs are also increased by making retail participants aware of a public issue.

Most issuers have an in-house team that helps them raise money through private placement, so the costs are low.

In a public issue, on the other hand, the cost of marketing is very high, and even the issuer doesn't know for sure if retail investors will buy into it. Also, to attract investors in a public offering, one has to hire merchant bankers, pay underwriting fees, spend a lot on marketing, and offer a high coupon. All of these things raise the cost of capital as a whole.

Can anything be done to increase public placements?

Experts think that the corporate bond market needs to be more liquid in order for the number of public offerings to go up. Also, retail investors will need to be brought into the market by making them aware of it, teaching them about it, and giving them incentives.

Retail investors are used to traditional fixed deposits, which are safer and more liquid than other types of investments. This needs to change, and they need to be encouraged to buy bonds that are sold to the public. To do this, it is important to shorten the time it takes to issue bonds, loosen regulations, and offer tax breaks for small investors. In this case, it is important to build up the market over time, with a focus on bonds for small investors only.

In addition to bond portals, banks and non-bank financial companies (NBFCs) should be encouraged to sell bonds to their customers over the counter, just like they sell mutual funds and fixed deposit products.

Another way is for regulators to allow private placement of things like 54EC capital gains bonds. These bonds are made for people who want to avoid paying taxes on long-term capital gains. Through this route, both private and retail lots of bonds will have the same coupon.