Reducing the minimum ticket size Rs 1 lakh to Rs 10 K.
Does a reduction in the ticket size of corporate bonds to Rs 10,000 attract retail investors to invest in bond bonds?
In a recent and potentially game-changing decision, the Securities and Exchange Board of India (SEBI) has proposed significant changes to the corporate bond market. One of the key changes is the reduction of the minimum ticket size for investments from INR 1 lakh to a mere INR 10,000*. This move is expected to open up new avenues for retail investors, potentially revolutionizing the bond investment landscape.
The challenges for bond retail investors are significant, but not insurmountable. Raising awareness about bond investment and educating retail investors about its safety compared to equity investment is a crucial first step. Equally important is making the availability of bonds for investment as easy as equity, in terms of lot size, price discovery, and settlement. In this endeavor, primary dealers play a pivotal role, helping to make a market for Bond – GOI/corporate, and ensuring a smooth and transparent bond investment process.
Thus say that what SEBI is working on reducing the the narrow approach to resolve the bond investment by retail.
SEBI's strategic initiative, while limited in scope, has the potential to significantly broaden access to the bond market. This could open up new opportunities for a wider array of retail investors, allowing them to diversify their investment portfolios and potentially increase their returns.
One of the most promising initiatives by SEBI in this regard is the appointment of Online Bond Platform Providers (OBPPs). These providers, including some players already in operation and some newly licensed, are set to play a significant role in making bond investment more accessible and user-friendly for retail investors. This move is a clear indication of SEBI's commitment to democratizing access to the bond market.
Let’s examine the specifics of these changes, their implications for retail investors, things to note before investments, and the fact that the Online Bond Platform Providers (OBPP) platform has been in existence for a few years and aimed to fulfil the retail investor requirement of investing in bonds with ease. Still, no data exists on how OBPPs play a crucial role in this evolving market landscape.
The OBPPs operating in India may scare retail investors further as the platforms lack basic bond offering data regarding bond risk measure tools, the non-availability of high-yield, low-risk bonds, and the display of old and incorrect data. Wrong data or incorrect data can lead to avoidable losses to investors.
Details of the Amendments and outcomes
The key amendments introduced by SEBI are designed only to lower the entry barriers for potential investors, not to enhance the overall efficiency and transparency of the bond market, as the vibrant bond market needs more.
Reduction in Minimum Investment: By decreasing the ticket size to Rs 10,000, SEBI is not making corporate bonds attainable for a broader spectrum of investors because the price marking for the retail lot is higher than the market lot size. If SEBI does not introduce some mechanisms that help promote pricing retail lots like market lots, reducing the ticket size would not help retail market growth,
Standardization Record Dates: This is another misconception of what SEBI is working on. It fails to encourage issuers to make as much as issuing SIMPLE bonds (coupon date and maturity fall on the same day), and not by implementing a standardized record date for bond interest payments and redemptions 15 days before the due date simplifies operations and provides clarity on payment timings.
Enhanced Information Dissemination: Just allowing service providers who adopt modern technologies to share financial information does not reduce dependency on making the right buy or sell; it depends on the daily updates change on the three essential risk measures (current valid applicable credit rating, price-sensitive data, and bond liquidity).
Understanding of Bond Investments changed.
Unlike fixed deposits or other fixed income options that typically have long lock-in periods (such as 5-10 years) and are non-transferable,
Nowadays, direct bond investments offer investors a choice, while some bank deposits provide liquidity at any time without penalty and with more investor-friendly features. Buying primary issuances of T-Bills on the CCIL Retail platform through RBI Retail offers an easy investment process and better yields compared to bonds and FDs. SEBI continually overlooks promoting this option.
Access to Higher Returns: GOI T Bils defy the illusion of Bonds that can offer higher returns compared to traditional savings accounts, FDs, or other schemes for the short term. RBI T Bills are currently an attractive option for investors seeking better yields, 90 Days Bank FD gives 4.50%, 90 Days T Bills 6.8287%, 6 Months FD at 5.75%, but T BILLS pays 6.9848% and 1 year FD at 6.60% against 1 Year T BILS gives 7.0059%.
Diversification of Investment Portfolio: No diversification is required for bond retail investment, as bonds from any reputed issuer are much safer than equity in the same company.
Capital Preservation: Bonds are always considered safer than stocks, providing a more secure investment vehicle for capital preservation as there is a defined income stream and redemption dates. However, for some reason, SEBI promotes equity stock more than bonds. The reason is only known by financial analysts.
Key Considerations for Bond Investors
After the Harshad Mehta^ case, which is related to the BR (Bank Receipt Scam) there was large number of discussions on making a transparent and vibrant bond market, which resulted in NDS WDM by then RH Patil, which is considered one of the biggest nations in the direction of the bond market. Unfortunately, no official from any of the companies dealing with the bond market is good enough to fulfil Mr RH Patiel's dream of making the bond market NDS OM Way. This shows the authority lacks vision and is not ready to collaborate with outsiders who have the vision to make the bond market active, reachable, and friendly.
Because of this, the bond market is still in the nascence stage.
When considering bond investments, retail investors should align their financial goals and assess their risk appetite, investment horizon, and asset allocation. It's important to understand the impact of interest rates on bond prices and to assess the credit rating of bond issuers to gauge investment risk. Bonds with lower credit ratings or unrated bonds are considered riskier and may require a proper understanding and offer higher returns.
Now, is it Time for Bond Investments?
The timing is right as bond investments become increasingly attractive for several reasons, especially for retail investors in India. The important characteristic that bonds process is Bonds are known for their stability and predictable returns, and they typically present lower risk compared to stocks.
We're currently observing the peak of the interest rate cycle in India, which is an opportune time for investors to lock in high yields before potential rate cuts by the central bank if one can hold it till maturity. If investors expect some liquidity in between, it is better to change the duration of some of the bonds into the medium term. Notably, bonds in the A+/A category from good issuers currently offer fixed returns ranging from 8% to 9%, so we need caution in avoiding a Negative outlook in this category.
The long-debated inclusion of Indian government bonds in the Global Indices of JPMorgan and Bloomberg is expected to attract a $30 billion additional flow from offshore investors, which will be a good influence on the bond market's growth.
Baby Step Role of Online Bond Platform Providers (OBPPs) and Technological Integration
OBPPs are expected to play an essential role, but their presence is yet to be felt. The OBPP platforms, regulated by SEBI, have not made any notable marks yet, because the platform is not designed to overcome some of the present problems of making ability more bond at market-related rates, risk-related data and tools and reliable data on bond convenient and ease of buy and sell
Way Forward
With only about a small percentage of demat account holders in India owning fixed income, the state of the bond market is highly worrying. We see SEBI's actions, including any step forward to grow this market, hardly result in any development, including SEBI's recent certificate program for retail investors.
Compared to SEBI, which is more fond of the growing equity market, bond investments provide a much better portfolio balance and steady return. Compared to equity volatility related to risk, the interest rate risk is easily manifestable as the outcome from such changes is limited against the unlimited equity investment risk and uncontrollable erosion of principle in the equity market.
Previously, investments in fixed income were not easily accessible for most. The question is whether the introduction of OBPP has changed dramatically. The answer is no.
*We assume that the lot size for all fresh, private placement issuances and the market lot for trading /dealing in the secondary market is Rs 10000 across all platforms/activities of primary and secondary bond market Bonds.
^1. Harshad Mehta Scam – 1992.
2. Ketan Parekh Scam 2001,
3. UTI Scam – 2001
4. NSE Colocation Scam – 2015,
5. Karvy Scam – 2019,
