Face value reduction: A welcome step towards democratising fixed income

Corporate Bonds

The corporate bond market is an essential element of any economy, be it a developed nation or a developing one. Bonds, which are also known as fixed-income instruments, are a viable investment option that serves as an augmentation to one’s income stream apart from stocks, while also being more stable in nature. Bonds, additionally, pave the way for a diverse investment portfolio which ensures that there is minimisation of risks involved with volatile markets. Developed markets such as the United States have a massive debt capital market, comprising 38.7 per cent of the $126.9 trillion securities across the globe. As a consequence, the country has one of the most liquid capital markets in the world.

Closer home, India has predominantly relied on the dominance of traditional banks for its financing and investment needs. However, in recent times, the financial landscape has witnessed an unprecedented push from both the regulators and market participants toward deepening the bond market and opening it up to private/retail investors. Through the means of RBI, retail direct, and various investor education initiatives, there has been an attempt to make fixed-income instruments more accessible and comprehensible to retail users. In light of the importance of a healthy bond market, SEBI has undertaken targeted efforts to deepen the debt market in India through successive measures over the past few years.

Despite these measures, one key bottleneck towards democratising fixed income that continues to persist has been the ticket size of investments. Currently, the minimum face value of the instrument for a listed, privately placed debt is ₹10 lakhs, which limits such corporate debt to only being part of the portfolio allocation of high-net-worth individuals and ultra-high net worth individuals (HNIs/UHNIs).

In the past few months, there have been multiple representations and appeals to SEBI for the reduction of the face value of listed instruments to increase corporate bond liquidity. Reduction of the face value would result in holistic democratisation as more investors will be empowered to participate in the corporate bond market. In a welcome move, SEBI has come out with a circular, whereby, effective from 1st January 2023, the face value of listed privately placed debt has been reduced to ₹1 lakh. This presents a tremendous opportunity for individuals and wealth managers to add more listed corporate bonds as part of their portfolio allocation. The key differentiator, thus, is the accessibility of listed securities which provide enhanced regulatory disclosure and protection to investors. Widespread adoption from retail investors could materially deepened the corporate bond market which stood at over ₹40 lakh crore as of September 2022.

The move is also likely to shift allocation from unlisted instruments (wherein ticket size limitations were not applicable) to listed bonds. In FY23, unlisted bond issuances amounted to close to ₹2 lakh cr. Migration of some of this appetite to listed issuances would be a favourable outcome as listed bonds have higher disclosures and compliance requirements, while also being more liquid.

Reduction in face value also ensures that listed corporate debt becomes comparable to other low ticket investment options such as fixed deposits and mutual funds. Corporate bonds provide a compelling case to earn real returns while being rated, secured, and stable in dynamic markets that are prone to fluctuations.

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The renewed face value denomination further implies that the trading lot will be reduced to ₹1 lakh as well for investors. A consequence of this would be the growth of the secondary market for corporate bonds along with improved liquidity in the corporate bond market.

A mature secondary market is favourable for investors as it provides them the opportunity to either liquidate or exit bonds before their maturity, much like equity shares. Investors can further sell bonds in the secondary market without hassle as they will not have to await the maturity of the bond to receive returns.

The most significant positive outcome of this change is that the bond market, which has typically been dominated by institutional investors, can now witness increased participation from retail investors seeking better returns and stability; especially in an inflationary environment. SEBI’s efforts are a push towards the deepening of the Indian bond market in line with the feedback from ecosystem players. Improvement in the secondary market liquidity from retail investors will see greater bond adoption and thus, truly democratise fixed income in the long term.

Views expressed by Sarath Bhaskaran, Head – Sales, Yubi Invest.

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