* Low-yield placements sap drive to improve Indian market
By Krishna Merchant and Suvashree Choudhury
SINGAPORE/MUMBAI, April 3 (IFR/Reuters) - For all of India's
efforts to improve transparency in the rupee bond market,
investors are still a long way away from finding the right price
for corporate debt.
A cluster of recent issues at much lower yields than
secondary market levels has prompted a backlash from market
participants on worries that more off-market deals could distort
"Any trade that is contrary to the collective market pricing
is injurious," said Killol Pandya, head of fixed income at
Peerless Mutual Fund.
The introduction of an electronic bidding platform last year
was supposed to improve price discovery and help deepen the
Instead, a series of bilateral deals at off-market levels
has highlighted the lack of liquidity in India's shallow
corporate bond market and made it harder for investors to value
some such paper.
In the first week of March, Dewan Housing Finance
and Adani Ports and Special Economic Zone sold bonds
to Life Insurance Corporation of India, the state-owned insurer
DHFL also confirmed the details of the placement, while
Adani Ports declined to comment.
In both cases, LIC bought the bonds directly from the
issuers instead of involving bankers or underwriters, at yields
80-120 basis points lower than were available in the secondary
market for similar credits.
In most mature markets, new issues of debt or equity come at
a discount to secondary market levels. Instead, the LIC deals
show that thin trading in the Indian secondary market is having
the opposite effect.
"LIC's heavy purchases of bonds at much lower levels have
distorted the historical spread," said one corporate bond dealer
at a foreign bank. “Such off-market deals not only create wrong
benchmarks for similarly rated companies to raise funds, but
even stakeholders in the investing companies lose out on higher
LIC bought DHFL's 15 billion ($232 million) rupee 10-year bonds
at a yield of 8.0 percent, sharply lower than the 9.2 percent
rate for 2026 bonds in the secondary market, even though the new
issue had a longer tenor.
It also purchased 10 billion rupee 10-year Adani Ports bonds
at 8.22 percent for a similar tenor, lower than the 9.00 percent
yield for the issuer's outstanding 2026 bonds, according to data
on NSE's trade repository.
LIC said in an email that its investment policy always
favoured secure investments with a reasonable return. In
assessing DHFL's bonds, “it has taken into consideration the
size and tenor of the issue, AAA rating, current market
conditions, security cover and company financials”, LIC said.
In an email, DHFL said it had priced the AAA rated bond in
line with the spread issued by the Fixed Income Money Market and
Derivatives Association, the industry body for debt markets in
However, bankers said that DHFL typically prices its AAA
rated bonds about 100bp-120bp wider than Housing Development
Finance Corp, which is seen as the best-quality credit, and the
yield on the bilateral deals, therefore, came as a shock.
Indian rules require large bond transactions to be conducted
through electronic bidding platforms in order to make offerings
more efficient and transparent. However, the recent LIC
placements underline the limitations of that requirement, as
some issuers and investors still prefer to agree pricing
One of the reasons for bilateral deals is the low liquidity in
the secondary market, which means a large trade can move prices.
India's corporate bond market is very shallow, with an
average trade size of 40-50 billion rupees daily, compared to
five times more volume in the government bond market.
The pricing of a corporate bond depends partly on the size.
"If an investor wants to buy or sell a huge quantum of, say,
10 billion rupees ($152 million) or more, it will likely impact
the market, and the yield can show variations from the secondary
market," said Lakshmi Iyer, senior vice president and head of
fixed income and products at Kotak Mutual Fund.
Bilateral deals will continue to happen because of the lack
of depth in the secondary market.
"If today a large buyer comes to the market and buys a
sizable chunk of bonds, the prices could get affected by a huge
margin because the market is shallow,” Iyer said.
Low liquidity in DHFL bonds in the secondary market could
have impacted its yields there, DHFL said in its email.
“The market is opaque and it is still in a private placement
domain,” said another DCM banker.
The government security market is very liquid and buyers and
sellers can execute huge transactions, but this is not
replicated in the corporate bond market. In February, the
Securities and Exchange Board of India put out a consultation
paper recommending that issuers should maintain fewer, larger
bond lines to avoid fragmenting liquidity.
Until there is a vibrant secondary market, bilateral trades
at off-market prices will continue to be an attractive option
for issuers and large investors alike.
(Reporting by Krishna Merchant of IFR and Suvashree Choudhury
of Reuters News; Editing by Daniel Stanton and Steve Garton)