Are bond platforms a good option for retail investors?

Most Indians are not familiar with the concept of directly buying a bond. Fixed deposits are the most common fixed income instruments, followed by debt mutual funds. Some investors are familiar with tax-free bonds from PSUs, but fresh tax-free bonds have not been issued in several years by the government. The capital gains tax saving bonds under Section 54 EC of the Income Tax Act, 1961, are another familiar instrument. But these are also available for a specific purpose—to save capital gains tax for someone who has incurred a capital gain, for instance by selling property. Past instances of aggressive sales of direct bonds to investors have left a bad taste in the mouth for some, such as the buyers of DHFL bonds or the perpetual bonds of Yes Bank. Both issuers defaulted and a resolution scheme for the latter wiped out the claims of bond holders.

Despite these instances, players in the bond market feel that the appetite is ripe for direct retail investment in bonds.Three large bond platforms from the private sector launched in recent years are Altifi by Northern Arc, Bondskart by JM Financial and Wint Wealth whose platform goes by the same name. Most of these players are essentially brokers. Credavenue, a fourth platform which also facilitates bond trading is more focused on corporates, banks and high net worth individuals. They sell bonds that they own (called prop or proprietary book holding) to retail investors. In some cases, they may not have the bond in question, and hence they procure it from the market. Each platform is different. For instance, Wint Wealth focuses on relatively high risk bonds from NBFCs. ‘Covered bonds’ are an innovative structure that sought to reduce investor risk and hence enhance rating commonly offered by Wint Wealth. Recent RBI rules seem to have put an end to the market for covered bonds and Wint Wealth has pivoted to ‘Senior Unsecured Bonds’.

However, the platforms focus on some unique selling points (USPs). First, they showcase an end-to-end digital process where investors can purchase a bond from the comfort of their home, just as they would trade in stocks. Bondskart comes with an app in addition to a website presence. Second, they allow ‘bite-size’ investing. On the bond platforms of stock exchanges like BSE and NSE, trading happens in lots of ₹5 crore or more, essentially cutting out retail investors. The latter can trade in ‘odd lots’ but liquidity there tends to be poor. The platforms claim to offer investors the ability to buy and sell in small amounts of a few lakh rupees. Third, they claim to offer investors a ‘curated experience’ where the really risky bonds have been culled out. According to JM Financial, the focus will be on AAA and AA bonds.

“The creation of new bond platforms deepens the market and is hence welcome. However, I do not think that retail investors should directly invest in bonds given the lack of liquidity and price performance risk unless the intent is to hold to maturity. Bond trading is not as easy to understand," said Roopali Prabhu, chief investment officer, Sanctum Wealth Management.

Apart from the first claim, the rest can only be verified over time. It is unclear whether platforms will actual provide the liquidity they propose.

As far as curation goes, the platforms do not owe investors a fiduciary duty in law and hence there is no obligation on them to exercise utmost due diligence.

Wint’s new bond issue

Wint Wealth has partnered with UGro Capital to raise ₹50 crore from investors. The non-convertible debentures of 27-month maturity issued at a coupon of just over 10% have been issued by UGro. They will be amortized (repaid) every nine months to an extent of 33% so investors don’t have to wait till maturity to get back capital. Wint and its ‘warehousing’ partners have bought the bonds in the primary market and will be selling them to investors on the secondary market through stock exchanges.

Investors can invest as little as ₹10,000. The bonds are senior secured debentures, meaning they are backed by assets, in this case loans against property, in case UGro cannot pay. The platform has raised ₹100 crore so far in other issues since it was launched in 2020 and says it has faced no default so far. It says 6,000 investors and 43,000 users have expressed interest. Sebi norms that did away with a ₹100 crore minimum issue size for public issues of debt have paved the way for similar offerings, according to Wint.