View: Why a debt IPO may be a safer bet than equity

Equity-linked initial public offerings (IPOs) continue to attract investors, essentially due to their immediate high returns potential. In India, there’s immense interest in the IPO opportunity among short-term as well as long-term retail investors despite the underperformance of several IPOs in the recent past.

We are witnessing a perceptible mindset shift, particularly among middle-class retail investors who are seeking better returns as compared to traditional fixed return instruments like fixed deposits (FDs) and recurring deposits (RDs).

Partly similar to equity IPOs, debt IPOs, also known as Non-Convertible Debentures (NCDs) IPOs, offer a better investment solution. They are used by companies to raise the funds they require to scale while ensuring non-market linked returns for investors.

One of the foremost differences between an equity IPO and a debt IPO (known popularly as NCD IPO) is that the latter ensures the investor remains a lender and does not become a shareholder in the company. This entitles him or her to get their investment back, along with interest, at the stipulated date, irrespective of the company’s stock performance.

For retail investors seeking to safeguard their portfolio from high stocked market-related risks, while ensuring better returns than FDs, and RDs, a debt IPO serves as a fixed-term instrument with guaranteed returns at pre-determined rates.

This makes debt IPOs an ideal choice for goal-based investments. Unlike equity IPOs, they allow investors, including senior ones, to invest their funds in alignment with strategic financial management.

This is a major differentiator, given that global volatility and an unpredictable business environment continue to threaten businesses, stock performances, and returns on equity IPOs. Understandably then, small to mid-sized portfolio investors are keen to look out for better investment alternatives.

For investing in equity-linked IPOs, the risk is typically linked to the company’s performance as well as the overall stock market trends. However, in the case of debt IPOs or NCD IPOs, the risk varies based on the type of instrument you choose.

Secured NCDs come with a limited amount of risk as they are guaranteed against company assets or future cash flows. In case of business non-performance, the borrowed money is returned to investors by liquidating those assets. In such an instance, the first preference for the return of funds is given to NCD holders, and not the company’s shareholders. On the other hand, non-secured NCDs, though they do offer relatively higher yields, they bear more risk as there is no such security guarantee.

All said and done, debt IPOs are a moderate risk instrument. To make an informed investment, investors need to consider the industry the company belongs to as well as past performance while carrying out due diligence in evaluating the company’s stability and growth potential.

The ever-increasing volume of funds raised through debt IPOs in India indicates the future potential for retail investors who are keen to consider moderate-risk and higher-return instruments. The need of the hour, though, is for all stakeholders – companies seeking to raise capital through debt IPOs, investors or lenders, investment advisors, and facilitators – to raise the level of awareness, information, and access to these investment options.

Unfortunately, a majority of retail investors are unaware of opportunities offered by debt investments and also suitable channels through which they can invest in NCDs. Greater awareness about the digital channels available today to purchase, track, and sell NCDs is crucial. Unlike traditional, offline channels, which make investing in NCDs a complex affair, especially for senior citizens, online platforms offer high convenience, transparency, and decision-making authority.

Debt IPOs or NCD IPOs are not merely an asset class for portfolio diversification, they can be much more. They can be leveraged as instruments that deliver on financial goals, provided the investment is based on a thorough study of the company raising funds.