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Firms take a fancy to debt

Mumbai, April 29: Cash-strapped companies are increasingly opting for the non-convertible debenture route to meet their expenditure needs.

Construction firm Jaiprakash Associates will raise Rs 4,000 crore from a non-convertible debenture (NCD) issue to meet its working capital needs and other expenditure.

Tata Motors, which is looking to refinance around $2 billion for its Jaguar-Land Rover acquisition, is reportedly planning a Rs 2,000-crore NCD issue. A Tata Motors spokesperson, however, refused to comment on the plan.

Tech Mahindra raised Rs 600 crore by floating an NCD issue to finance its acquisition of a 31 per cent stake in Satyam Computer Services for Rs 1,756 crore.

In the third and fourth quarter of 2008-09, several corporate houses had opted for the NCD route, including Reliance Industries. The Mukesh Ambani-owned company raised NCDs from the Life Insurance Corporation. So did Tata Motors after the company’s rights issue devolved. The state-owned insurer extended over Rs 25,000 crore to companies during the last fiscal through NCDs.

“Given that equity sources have dried up over the last six months, companies are tapping all possible routes. One of the key funding sources in recent times are NCDs as public sector units are willing to lend on a secured basis and have more than enough liquidity to do so,” said Ernst & Young transaction advisory director Jayesh Desai.

“People who have no choice are raising money through debt at the current rates,” said Prithvi Haldea of Prime Database. Coupon rates for these NCDs range from 9 per cent to 13 per cent, said Desai.

LIC’s executive director (investment operations) N. Mohan Raj said the coupon rate had been 8 per cent for most AAA firms, while it is in double digits for some.

Raising pure debt is expensive. The ideal option is a sweetener in the form of warrants that can subsidise the interest on debt. While bonds and warrants are great instruments, there is no separate exchange for corporate bonds.

“Even the Reserve Bank is aware of the under-developed state of the bond market,” said PricewaterhouseCoopers executive director Robin Roy.

While financial institutions are willing to lend to large-cap companies, mid-sized companies are ignored, said an investment banker.

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