Over the last year, the Securities and Exchange Board of India (Sebi) has been working relentlessly to enhance the participation of retail investors in the corporate bonds market. It started in October 2022 with a circular titled ‘Reduction in denomination for debt securities and non-convertible redeemable preference shares’, whereby it reduced the minimum face value of listed debt securities under private placement from ₹10 lakh to ₹1 lakh. For the uninitiated, the ticket size of publicly issued bonds is ₹1,000. In November 2022, Sebi’s subsequent circular titled ‘Registration and Regulatory Framework for Online Bond Platform Providers (OBPPs)’ prohibited these providers from facilitating unlisted debt securities transactions to protect retail investors from liquidity risk in such investments.
While the right intentions guide Sebi’s regulations, there is still a lot of scope to increase the participation of retail investors in the corporate bonds space while protecting their interests. For example, the ticket size of privately placed corporate bonds is still much higher than what more retail investors can afford. Here are the four key reasons why this should be reduced even further:
Diversification challenges: Ideally, retail investors should allocate 5-10% of their portfolio to bonds to realize any meaningful gains. A higher ticket size restricts investors from diversifying across multiple bonds because even by investing ₹1 lakh, they can only buy a single bond unit. Even to invest ₹5 lakh in bonds, their overall investment portfolio should be around ₹25-50 lakh. Such a portfolio is only possible for those under the ₹25-50 lakh annual net income bracket. As per the financial year 2022-23 ITR filings data, only 500,000 people meet that criterion. So, the total addressable market of retail investors who can derive value from bond investments is extremely restricted. For the rest of the retail investors, the ticket size of ₹1 lakh is a major hindrance. As a result, they mostly rely on low-yield fixed deposits for their debt allocation.
Supply constraints: The next natural question is: Why don’t retail investors explore bonds through public issues? According to Sebi’s 2022-23 Annual Report, in FY 23, private placements made 98.79% of the debt mobilized in India. Only the remaining 1.21% was raised through publicly issued bonds. This means most of the bond supply is available at ₹1 lakh ticket size. There are very few good public issues in which retail investors can participate meaningfully.
Investor awareness and faith: To adopt a new asset class, retail investors always need a positive nudge and a leap of faith. An example case is mutual funds, which gained mass when the ticket size was reduced to ₹500. Over the years, bite-sized mutual funds became accessible to millions of households at the tap of a button. On the contrary, the ₹1 lakh ticket size becomes a substantial friction for retail investors who want to explore corporate bonds. This friction should be reduced significantly to give a similar chance to bonds.
Regulatory parity: As per the July amendments to Sebi’s Issue and Listing of Non-Convertible Securities Regulations, 2021, issuances of non-convertible securities through private or public placements have similar processes and disclosures. Therefore, it also makes logical sense to eliminate the disparity of ticket size of publicly issued and privately placed listed bonds.
There are several other reasons which emphasize the need for a smaller ticket size of privately placed bonds for retail investors. At ₹1,000 ticket size, millions of investors who currently invest in traditional fixed-income products like fixed deposits, which does not beat inflation, will have the motivation to explore bonds for the debt part of their portfolio. As a by-product, corporates will have more opportunities to raise funds via the debt market to grow their business. This will also have a positive ripple effect in the form of increased liquidity in the debt market: a win-win situation for everyone. Considering all these points, we can sum up that Sebi has put sufficient guard rails in place to protect retail investors from any systematic risk while investing in corporate bonds. Thus, it is high time they explore this asset class without worrying about the ticket sizes.
Anshul Gupta is co-founder and chief investment officer, Wint Wealth
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