In a market dominated by non-banking financial institutions, a government bond issued by an Adani group entity is the first by a non-lending company since 2016, when the National Highways Authority of India made an issue. A government bond issue occurs when a company offers them to retail or individual investors.
The Adani Group has been working to diversify its lending for the past 8 years, and the government bond issue is a step in that direction. Jugishinder Singh, chief financial officer of the Adani Group, said that this issue will test the domestic debt capital market for corporate bond issuances.
The Adani Group operates in capital-intensive sectors and relies heavily on long-term borrowing options. It will use about 75% of the proceeds from the bond issue for prepayment or repayment of debt and reserve the remaining amount for other corporate purposes.
This bond issue could also serve as a pilot to test whether the ports and media conglomerate can rely on Indian investors for its long-term borrowing needs, considering allegations of financial irregularities made by US-based short-seller Hindenburg Research in early 2023.
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“The maximum horizon (5 years) coincides with the next election cycle and is not significantly crossed, so policy risks related to infrastructure are also mitigated to some extent,” said Sandipan Roy, Chief Investment Officer, Motilal Oswal Private Wealth.
“There is a shortage of debt issues from companies in the non-financial services sector and therefore AEL may generate quite a bit of interest also due to the size of the issue,” he added.
In the general scheme of things, the ₹The Rs 800 crore public issue will constitute a small portion (1.4%) of the Adani Group’s flagship company’s total gross borrowings. ₹57,000 crore rupees.
“From an investment perspective, we don’t have any need for this,” Singh told Mint in an interview on the sidelines of a roadshow. “But from a funding structure point of view, we want to have a certain equity funding profile for the next 10 years.”
The offering
Adani Enterprise aims to raise ₹800 crore through secured, redeemable, non-convertible debentures. In simple words, the interest and principal are backed by assets worth 1.1 times and do not offer an option of conversion into equity shares. But the bond offers the option of redeeming it at chosen intervals.
The coupon interest rate ranges from 9.23% for a 24-month term, 9.65% for a 36-month term, and 9.90% for a 60-month term. Buyers can choose quarterly, annual, or cumulative interest payments.
Care Ratings rates the issue as A+/positive, two levels below the highest rating.
“Investors have options in terms of whether they want regular cash flow or whether they want compounding at a higher multiple on principal at maturity,” said Roy, an investment strategist at a national wealth manager who has more than ₹1 trillion in assets under advice.
“Investors who want regular cash flows should choose quarterly or annual cash flow options, while investors looking to maximize the investment multiple should consider the compounding option,” Roy said.
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The bond issue will be open for subscription between September 4 and 17. The bonds will be traded on the Boston Stock Exchange and the New York Stock Exchange after subscription.
The minimum ticket size for IPO application is ₹10,000.
All listed securities, including bonds held for more than 12 months, will be considered long-term assets and any gains from their sale will be subject to a 12.5% tax. No indexation or inflation adjustment will be applied.
If such bonds are held for 12 months or less, they will be considered short-term and gains from their sale will be subject to tax at applicable rates.
A 10% tax-deductible rate is applied to the coupon (interest) received, but investors must pay the discount rate when filing their income tax returns.
How to invest
The government bond market is a niche market and not many people know how to apply for an issue. In fact, the process is relatively simple if you use the services of an online bond platform provider, OBPP.
Not all providers of this type offer IPO subscriptions and the step-by-step process will vary slightly from platform to platform. You can go to an OBPP platform and apply for a subscription. You will need to choose the term and how much you want to invest. The minimum amount for an IPO issue is ₹10,000.
Unlike the IPO of a stock, the IPO of a government bond issue is on a first-come, first-serve basis and is stored in demat format. “If an investor is not allotted the issue for any reason, he or she will typically get the amount back within five days of the issue closing,” said Vishal Goenka, co-founder, IndiaBonds.
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For investments up to ₹5 lakh, an application can be submitted through a UPI mandate. For larger amounts, investors will need to submit an ASBA (applications backed by blocked amount) form to their bank.
Non-resident Indians can invest in the Adani Group’s government bond issue only if they have an NRO (non-resident ordinary) bank account, Bondbazzar said.
Risk factors
Investors should be aware that these bonds have exposure to a corporate group, which creates a concentration risk. In addition, unlike a fixed-term bank deposit, a public bond issue does not include a ₹5 lakh deposit insurance by Reserve Bank of India.
Investors should consult their financial advisors and understand the risk before investing in such corporate bonds. Investors may also have difficulty selling the bond in the secondary market.
“It is important to note that investors should consider subscribing to these bonds with the aim of holding them till maturity as there may not be much liquidity in the secondary market for these bonds,” said Roy of Motilal Oswal Private Wealth.
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