SEBI Plan To Cut Corporate Bond Face Value May Not Immediately Lure Retail Investors

India's market regulator's move to further reduce the face value of corporate bonds to draw retail investors may not immediately generate interest, according to debt market participants.

The Securities and Exchange Board of India has proposed to cut the face value of corporate bonds to Rs 10,000, making it almost similar to systematic investment plans for equity funds. The regulator is looking to widen the bond market by boosting participation from individual investors, enhancing liquidity. SEBI had earlier reduced the minimum face value of listed debt securities under private placement from Rs 10 lakh to Rs 1 lakh.

The regulator's move is aimed at complementing increasing interest in bond market on the back of rise in online bond market platforms and lower face value. Non-institutional participation in listed privately placed debt securities moved up from general average of 1% to 4% in July-September, according of data cited by SEBI in its consultation paper. Total volume of trades aggregated to around Rs 333 crore by 1,974 investors during the period.

The regulator also proposed to introduce processes to fast-track debt public issues or bond IPOs and cutting listing time to three (T+3) days from the current six (T+6).

“This can be looked as a good attempt for risk mitigation exercise. Investors can invest the Rs 10,000 amount in different bonds in different intervals and diversify that way...," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap LLP. "This may also create competition in the market... can expect mutual funds to come out with credit funds based on the interest."

Yet, according to others, the move may not immediately deepen the public listed debt market, considering bonds are slightly illiquid as they are held till maturity, and there is also credit risk attached.

“It will not be an easy task for a retail investor to analyse the rating and performance of a bond, especially when there is an option on investing on it through a fund where a fund manager is evaluating the instrument,” said Murthy Nagarajan, head-fixed income, Tata Mutual Fund. “The right product to come with is to first start with bonds coming from PSUs, banks and AAA-rated instruments which could make it easier.”

Overall supply from quality and big corporates is something that also needs to be watched. Banks are still offering funds at a cheaper rate to large corporates like manufacturing companies, according to Srinivasan. So supply of corporate bond issues will come when there is better pricing, he said.

Also, the overall cost of coming up with the bond issue will also be slightly higher because of the requirement of appointing merchant banker, and other compliances suggested in case of issuances of face value of Rs 10,000.

"Retail investors can now participate in bond issues provided they understand the credit risk. Yields are higher just now due to the rate hike scenario. As the rate cuts happen next year, investors can see capital appreciation," said Marzban Irani, chief investment officer–fixed income, LIC Mutual Fund. “Supply in the same issue can be painful. However, presence of different issuers leads to diversification.”

Earlier this year, the regulator had asked mutual funds to invest in repo transactions on commercial paper and certificates of deposits to boost the corporate bond market. Still, fund managers haven’t seen active participating.

SEBI should look more into disclosure norms, how ratings move over three or five years, according to Nagarajan. It should focus on how the investors are protected other than making the instrument marketable.