India’s municipal bond market lastly opens doorways to retail traders
The fastened revenue market is again on traders’ radar, and for good purpose. With yields having moved up previously couple of years, many bonds are providing engaging rates of interest. Yield on the benchmark 10-year authorities securities offers some perspective. From a low of 5.8% in June 2020, it has risen to 7.4%.
But not all bonds can be found for retail of us to put money into. Take for instance municipal bonds or non-convertible debentures (NCDs) which, till the latest difficulty from Indore Municipal Corp., have all been privately positioned to this point. Also, these bonds have excessive face worth – they arrive in denominations of Rs. 10 lakh – placing them out of attain of retail traders. While these bonds are listed on the exchanges, they lack buying and selling volumes.
“They supply little or no liquidity as there are not any prepared sellers or patrons at any explicit cut-off date. Bonds from earlier issuances have largely been held by establishments with a long-term horizon,” says Deepak Jasani, head of retail research, HDFC Securities. He however, expects the Indore Municipal Corp. bonds to have sufficient liquidity in the secondary market, enabling investors to buy and sell them.
The availability issue aside, it’s important to remember that these bonds typically come with AA-, AA, or AA+ ratings, and to that extent, cannot be considered as low-risk as Government of India or state government bonds, both of which are backed by central government guarantees. “Municipal bonds are issued by local government bodies, and do not carry any government guarantee. Having said that, no municipal corporation has ever defaulted on its debt,” says Jasani. He additionally highlights that these bonds have a structured fee mechanism whereby the coupon and principal compensation is completed by way of an escrow account. The municipal company has to periodically transfer a set sum of cash (for these funds) from its revenues into the escrow account. This offers some assurance on the bonds being serviced on time.
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The newest difficulty
The Indore Municipal Corp. lately got here out with a difficulty of inexperienced municipal NCDs with a face worth of Rs. 1,000 comprising of 4 STRPPs (individually transferable and redeemable principal components), that’s, STRPP A, B, C and D, every with a face worth of Rs. 250, and coupon charge of 8.25% each year, payable half-yearly. The 4 STRPPs have tenures of three, 5, 7 and 9 years, respectively. The major difficulty was open throughout 10-14 February, and referred to as for a minimal software quantity of Rs. 10,000. For every NCD allotted, the traders will probably be allotted 4 STRPPs. The Green Bonds have been assigned a ranking of ‘CARE AA: Stable’ by CARE Ratings and ‘IND AA+/Stable’ by India Ratings & Research. This is a notch under the AAA ranking which signifies the very best diploma of security.
With the first difficulty closed, you’ll be able to put money into these NCDs solely as soon as they get listed on the National Stock Exchange on 21 February. You will want a broking account for this. They will commerce individually with particular person ISINs (International Securities Identification Number) on the change. That is, you should buy and promote every STRPP individually, not like within the major difficulty, the place every NCD allotted comprised 4 STRPPs with a variety of maturities.
With the Indore Municipal Corp. bond difficulty opening the market to retail traders, how ought to one view these bonds viz-a-viz company bonds of comparable scores? “You can examine them with company bonds on parameters corresponding to maturity and scores, and if the coupon charges or yield to maturity are related or higher than the company bonds, then one can delve extra deeply into their financials and the escrow mechanism. If you might be happy, you’ll be able to put money into them,” says Jasani.
One can discover scores stories on these bond issuances on the web sites of credit score scores businesses. This could be a good place to begin to get an outline on the financials of the municipal firms.
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