top of page
Search

SEBI's Proposal: Transforming Retail Participation in the Corporate Bond Market

Abstract:

This article examines the Securities and Exchange Board of India's (SEBI) recent proposal to lower the minimum investment ticket size from Rs. 1,00,000 to Rs. 10,000 for retail individual investors (RIIs) in the corporate bond market. In line with larger initiatives over the previous fifteen years to improve the market's growth and efficiency, the action intends to increase retail participation. The importance of the suggested changes is discussed in this article, with a focus on the advantages that issuers and investors may experience. It talks about the market's growth trajectory, regulatory interventions, and historical background. Although the paper acknowledges the constructive intentions behind SEBI's initiative, it emphasizes that careful examination of structural and implementation elements is necessary to ensure a meaningful impact on the development of the corporate bond market.

Introduction

The economy is developing at a fast pace, and various initiates and investment plans have been introduced in the market for people to constantly expand their income sources, one of which is the corporate bond market. “A bond is a fixed-income instrument that represents a loan made by an investor to a borrower.” Investment in the corporate bond market is currently very low, also because banks these days serve a better interest on investment than these bonds. The minimum ticket size for investors to buy the corporate bond is Rs. 1,00,000 currently but SEBI is discussing changing specifically reducing the ticket size to make this bond more accessible to small investors namely retail individual investors. In this article, we'll discuss the corporate bond market and SEBI’s initiative and its effects on the bond market.


Image Source: http://surl.li/pmwpm

 

What’s in The News?

In a consultation paper released on 19 December 2023, SEBI proposed the possibility of allowing issuers to introduce NCDs (non-convertible debentures) or NCRPS (non-convertible redeemable preference shares) with a face value of Rs 10,000 as reduced from a previous face value of Rs. 1,00,000. This initiative seeks to increase the involvement of non-institutional investors in the corporate bond market. As outlined in the SEBI document, the issuer is required to engage a merchant banker to oversee the implementation of this proposal.

 

What Is a Corporate Bond?

“Corporate bond is a kind of financial security that a firm issues and sells to investors. The investor receives a certain amount of interest payments at either a fixed or variable interest rate in exchange for providing the firm with the money it requires. The bond "reaches maturity," or expiration, at which point payments stop and the initial investment is refunded.”

 

Why Is the SEBI Bringing in These Reforms? What Is the History of It All?

Considerable and varied work has been done in the last fifteen years to improve the growth of corporate bond markets. These measures cover a wide range of reforms, from the creation of a supportive regulatory framework to enhancements in the corporate bond market's microstructure. Moreover, initiatives to develop associated risk and derivative markets as well as policies to increase secondary market liquidity have been undertaken. The main regulator of the corporate bond market, SEBI, has been instrumental in improving the microstructure of the market. These efforts include, among other things, implementing an electronic bidding platform (EBP) for primary issuances, operationalizing a trade reporting platform for increased transparency, introducing request for quote (RFQ) platforms, consolidating stock through reissuance, and introducing delivery versus payment (DvP) settlement mode to eliminate settlement risk.

 

By requiring large borrowers to raise a portion (roughly 50%) of their incremental borrowings through market instruments, increasing investment caps, and introducing the Voluntary Retention Route, the RBI has also helped to develop the corporate bond market by allowing banks to offer partial credit enhancement (PCE) to increase the pool of potential investors. Additionally, attempts have been made to persuade the RBI, IRDAI, and PFRDA, among other regulatory bodies, to invest in corporate debt instruments.


Over the previous five years, the corporate bond market has grown at a compound annual growth rate (CAGR) of 9%. Crisil Ratings predicts that the market's remarkable size will more than quadruple from about Rs 43 lakh crore at the end of the previous fiscal year to Rs 100–120 lakh crore by FY30. The pace is likely to continue.


Even after such different measures and potential for growth, participation of retail individual investors (RII) in trading and investing in the corporate bond market remains limited. This is not a good thing. Reducing the ticket size from Rs. 1,00,000 to Rs. 10,000 is to bring in the retail crowd to invest in the corporate bond market Retail investors and issuers will significantly benefitted from the approval of these measures for various reasons:


1. A lower face value makes investments more accessible to retail investors and gives them more options for investing than just fixed-income products like fixed deposits, which can lead to better returns.

2. Retail investors' portfolios, which have historically been primarily concentrated on traditional investments like government securities and equities, are anticipated to become more diversified as a result of this shift.

3. Increased participation from non-institutional investors could democratize the corporate bond market by drawing in a wider range of investors.


From the issuer’s point of view, this move will help them in various ways. Like:

1. Issuers believe that a diverse investor base is essential to sustaining steady market demand. For example, take just your perspective- will it not be beneficial for you to get various products when going outside to buy a product? A diverse group of investors with varying risk tolerances, investing philosophies, and goals promotes active trading, liquidity, and affordable borrowing.

2. Retail investors provide greater flexibility than institutional investors, who could have certain restrictions on investing tenors. This enables issuers to satisfy the demand from retail investors for longer tenors, which may not be available to institutional investors.

3. This flexibility allows issuers to acquire money for long-term projects or operations in line with their company demands. Moreover, the increasing retail participation's diversity can lessen reliance on a small group of institutional investors, making the institutional market less vulnerable to short squeezes and extreme market fluctuations.


Conclusion

SEBI's initiative of reducing the ticket size designed to enhance retail involvement in the corporate bond market development aligns with broader efforts over the past fifteen years to enhance the growth and efficiency of the corporate bond market. As we delve into the details of SEBI's proposal, the historical context, and the potential implications for both issuers and retail investors, it becomes clear that while the move is positive, However, careful consideration and discussion on certain structural and implementation aspects are necessary to ensure a substantial and meaningful impact on the corporate bond market.

References:

*This article is authored by Chetna Gupta, Student of Symbiosis Law School, Noida and reviewed by Agam, Student of Symbiosis Law School, Noida.


 

 

 

Comments

bottom of page