For most countries across the world, direct access to the bond market was the preserve of banks, financial institutions, and corporates with large treasury operations. However, as of February this year, we have seen a major structural reform as the RBI has granted retail investors direct access to the domestic market for government debt. Though, the RBI has been allowing small investors to participate in G-Sec market since 2001, it did not gain significant traction as the ticket size was high and is mostly confined to institutional investors being a high-volume game and specialised in nature. This makes India the 3rd country, apart from the US and Brazil, to have done this. This move essentially allows retail investors to lend to the government, providing them with a potentially higher return while increasing the available pool of investors for the Centre. Further, with additional tax incentives and the ticket sizes being as low as ₹ 10k, this would allow for public savings to simply be a click away.
Notwithstanding the above, one should note that the RBI has been encouraging retail participation in the government securities market for long with several initiatives like introduction of non-competitive bidding in primary auctions, permitting stock exchanges to act as aggregators/facilitators for retail investors and allowing odd-lot segment in the NDS-OM (negotiated dealing system-order matching) secondary market, among others, in the past. As such, the most recent initiative is another effort by the RBI to manage a ₹ 12 Lakh Crore in government borrowing for the coming year. The ultimate hope being, that the RBI has opened an endless tap for the government to borrow from the public, similar to what has been done in the stock market, to match the demand to the supply of G-secs.
While the government securities market continues to create incentives for retail investors, we potentially see a mismatch of supply and demand in the corporate bond segment as well. As per a CRISIL study published at the start of the year, the supply of corporate bonds in the domestic market is expected to reach ₹65-70 Lakh Crore by March 2025, while the demand is expected to be around the ₹60 lakh crore mark. Further, in order to fill the gap from the demand side, various enablers such as credit default swaps, index linked funds along with the essential increase in retail participation in the corporate bond market.
The report goes on to highlight some potential methods in which retail participation can be bolstered in the corporate bond market. These methods include:
- Encouraging more bond ETFs, including thematic funds
- Offer tax sops for retail investment in debt MF
- Bringing tax parity in capital gain tax between equity and debt products
- Increasing liquidity support for secondary markets
Govt. has already pioneered the initiative by approving launch of Bharat Bond ETF linked to PSU Bonds. SEBI has also announced that it will be announcing launch of Bond ETFs soon. Given expectations as highlighted by CRISIL, SEBI is currently contemplating the creation of “market makers’ in the corporate bond market to create liquidity in the secondary market for such bonds. Moreover, SEBI is also looking to revamp the corporate bond database which will provide granular level information about debt covenants to all investors. Furthermore, in a proposal from SEBI, the Union budget for 2021-22 saw the announcement of a creation of a backstop facility that would purchase investment grade debt securities both in stressed and normal times and help the development of the bond market. It is strange that when retail investors could participate with much riskier assets in equity market they don’t have access to bond or credit markets in same fashion. While individual investors can participate in public bond issuances, small retail investors don’t get opportunity to participate in large no. of private bond placements – due to lack of access as well and the higher ticket size of ₹ 10 lakh.
Private Company Initiatives
While we see significant steps being taken by Govt. and regulatory agencies to deepen bond markets, a review of the facilitating framework towards greater retail access would give us a more complete picture. Currently the entire private market placement of bonds is confined to institutional investors and very few HNIs. Despite SEBI taking steps to bring in Electronic Bidding Platforms [EBP] for issuances of above a certain threshold and making it mandatory for insurance companies and mutual funds to invest and trade only through RFQ platforms in the recognised stock exchanges, order matching continues to be driven through bilateral negotiations and over the counter form of trades.
In addition to the above, New age companies are taking a step forward to make their products (including bonds both primary and secondary) investor-friendly by providing both recommendations as well as a thorough understanding of the basics. Some of them have come with a user-friendly platform with better access to information, analysis and recommendations. This is an essential service in a country where the financial literacy rate hovers around 27%. Further, these companies are looking to spearhead the digital revolution of the bond market in India and assist individual retail investors in getting access to a wider choice of bond investment opportunities that provide stability, thus helping them in generating predictable income and meeting their own investment objectives.
A few companies in this space have been highlighted below:
- India Bonds
- Golden Pi
- Bonds India
But we also see Robinhood models of platform like Zerodha giving access to bond issuances including Market Linked Debentures which is gaining popularity. Some of the models being piloted include underwriting large issuances and disseminating them into smaller lots with retail investors.
We also see much more sophisticated platforms like Cred Avenue which curates bonds for specific institutional or HNI investor interest and able to offer for subscription – providing extensive data analytics and information – both in primary and secondary segment. This platform by providing access to suite of fixed income products to institutional investors – be it PTCs, Securitisation pools, supply chain offerings, enterprise loans. Investors are able to see as one stop shop access to various offerings in the fixed income market.
Further, the types of services provided in the corporate bonds space include:
- Curating bonds based on investor preference
- Facilitating bond sale
- Providing insights and reports
- Directory of bonds
- Expert advice and assistance
Given a confluence of factors leading to the democratisation of financial instruments, we see direct retail participation in corporate debt markets poised to grow exponentially in the coming years. As bond markets become accessible and transparent, we would be able to unlock the significant potential which lies locked away in Indian Debt Markets.
Given the potential for deepening of the bond markets in India and the increasing awareness and appetite to subscribe to such products from retail investors, successful platforms which are able to provide extensive data analytics and enable quicker decision-making will promote greater participation of investors in the coming years.