Depending on the type of bonds, they can be issued by public sector units (PSUs), governments as well as corporate organizations in order to raise capital. Before investing in these bonds, however, it is important that you have a clear idea of how and where to invest in order to achieve maximum returns by investing in bonds. Bond market can be explained on the basis of the type of bond-corporate bonds and government bonds
The company which is planning to raise funds through corporate bonds will offer a public issue or a private placement. A private placement is usually made to institutional investors and not to retail investors.
A public issue means an offer will be made to the public, in general, to subscribe to the bonds. In a public issue, the company has to issue a prospectus before issuing the bonds. A prospectus is nothing but a document containing details about the company and the bonds to be issued. After the public issue, these bonds are listed on a recognized stock exchange in India. Hence such types of bonds are called listed bonds. Bonds are being traded in the same way as done in equities.
In case of listed bonds, an investor can buy the bonds through 2 ways:
- Through the public offering by the company
- Through the exchange
The public offering by the company is referred to as primary market and the trading of the bonds subsequently through the exchange is called secondary market. You can buy bonds through either of these markets. If you buy the bonds through the public offering, you will be buying the bonds directly from the company and if you buy the bonds through the secondary market, you will be buying the bonds not from the company, but from sellers who wish to sell the bonds held by them.
To buy bonds through public offering you will have to fill out an application form and submit it to any branch of the issuing company with the application fee and required documents. These documents may include a copy of your PAN card, address proof, identity proof, etc. If you have a demat account, you can fill out the details in the form, and the bonds will get credited to it.
When you buy the bonds through a public offering, you usually buy it at the face value of the bond. However, the issuer may also issue the bond at a premium or a discount. When you buy the bonds from the exchange, you have to pay the market price, which may be higher or lower than the face value.
Government bonds, unlike shares, are not traded on the stock market. To buy government bonds in the primary market an investor needs to approach a primary dealer or a bank. Banks or primary dealers place orders on behalf of an investor and an auction. After the bid is over and allotment is done, the securities are transferred to the account of the investor. An upfront payment needs to be done for the purchase of these securities.
To sell the securities, an investor needs to obtain the quote i.e. is the price of government security in the secondary market. These securities are traded on NDS-OM. After the quote has been obtained, a form needs to be filled and submitted to the primary dealer/banker. The instruction to be debited demat account also needs to be done. Post sale of bonds, the sales proceeds are credited to the bank account of the investor.
NDS-OM is a screen based electronic anonymous order matching system for secondary market trading in Government securities owned by RBI.