Sebi plans bond distributor model to deepen retail debt market

The Securities and Exchange Board of India (Sebi) plans to create a specialised category of distributors for debt securities—mirroring the mutual fund distribution model—to widen retail participation in India’s bond market.

“Much like mutual fund distributors, it is envisaged they will simplify the investment process for retail investors by assisting with KYC formalities, documentation, and initiating transactions,” Sebi whole time member Amarjeet Singh said at the FICCI Financial Products Distribution Summit in Mumbai on Wednesday.

The proposal comes as Sebi pushes to deepen household participation in capital markets other than equities. India’s fund management industry, including mutual funds, portfolio management services, and alternative investment funds, has expanded at a compound annual growth rate (CAGR) of more than 19% over the past decade, with assets under management reaching ₹91 trillion as of March 2026.

Debt funds have assets worth ₹19.31 trillion compared to ₹35.8 trillion in equity mutual funds as of April, according to the Association of Mutual Funds in India. Debt funds have been out of favour with retail investors of late because of unfavourable taxation on capital gains. Gains from debt mutual funds are taxed at the investor’s income tax slab rate, irrespective of the holding period, while equity mutual funds enjoy concessional capital-gains tax rates of 20% for short-term gains and 12.5% for long-term gains.

Singh said distributors continue to play a central role in broadening financial participation, especially for first-time retail investors. Nearly 54% of mutual fund industry assets are mobilized through regular plans routed via distributors, he said.

The broader financial distribution ecosystem has also expanded rapidly. The number of active mutual fund distributors has risen to 340,000 over the past five years, while business correspondents and insurance agents have also seen sharp growth.

'Growing complexity brings risks'

However, Singh also cautioned that rapid digitisation and increasing product complexity are creating new risks in the distribution ecosystem. Financial products are becoming more sophisticated, ranging from passive investing and factor-based products to private credit and alternative investments, he said. While complexity itself is not necessarily problematic, investors often understand potential upside better than downside risks, he added.

Singh also flagged concerns around misinformation and speculative behaviour amplified through social media platforms. “Market participation should be driven by informed decision-making and long-term planning —not momentum or social media trends. Distributors have a key role here, and I urge the industry to ensure that all digital communication—like offline communication—reflects the same standards of suitability and transparency,” Singh said.

The growing use of artificial intelligence in financial distribution has similarly raised concerns around accountability, transparency and so-called ‘AI washing’, in which firms exaggerate their technology capabilities.

Singh also warned against conduct risks arising from an excessive focus on short-term sales, rapid customer acquisition and distribution volumes, saying such practices could lead to unsuitable recommendations and mis-selling.