Sebi's SIF move aims to deepen corporate bond market for investors, issuers

A nudge to deepen India’s corporate bond market is here, with the Securities and Exchange Board of India (Sebi) introducing a new asset class called Specialised Investment Funds (SIFs). The minimum investment threshold for SIFs has been set at Rs 10 lakh. 

While SIFs are expected to focus on potential equity investments and related strategies, they could also draw investors with a higher risk appetite in debt or credit investments. 

Investments in credit-focussed alternative investment funds (AIFs) have increased in recent times because of demand for higher risk-adjusted returns. Total AIF investments in debt and securitised debt reached Rs 1.14 trillion as on March 31, 2024, from Rs 39,000 crore as on March 31, 2020 (source: Sebi annual reports). 

But the norm of minimum Rs 1 crore investment meant they largely catered to family offices and affluent investors. Credit-focused SIFs with lower minimum investment thresholds can provide a more practical option for investors with higher risk appetite relative to what is offered by the credit-risk mutual funds (assets under management stood at Rs 21,000 crore as of September 2024, according to Association of Mutual Funds of India data) of asset management companies (AMCs), but may not be able to meet the Rs 1 crore minimum investment threshold of AIFs. 

Compared with credit-focused AIFs, SIFs could offer a superior value proposition to investors for two reasons. One, they could draw more investors seeking relatively higher returns than traditional debt mutual funds with an intent to invest down the credit curve given the lower ticket size requirements compared with AIFs. This could also partly compensate for the reduced attractiveness of debt funds since the modification of the applicable capital gains tax treatment during the last fiscal. 

Two, periodic redemption would be predefined by the funds and hence, these need not be largely closed-ended, such as AIFs. Given that the underlying debt securities will be largely listed, the disclosure and rating requirements would aid investor confidence. 

A category comparable to SIFs is liquid alternatives in the United States which has grown significantly in the past decade. In liquid alternatives, one of the popular strategies is credit-oriented stratification, where the funds invest in instruments progressively lower down in the credit spectrum in an effort to enhance returns. India’s corporate bond market is concentrated in the high-safety category. The bond market also remains modest at Rs 50 lakh crore as on September 30, 2024 (17 per cent of GDP). Of the overall bond market, mutual funds have contributed around Rs 6 lakh crore or 12 per cent, with strategies focused largely on high credit quality investments and liquidity (source: SEBI). In the Indian context, SIFs, similar to the liquid alternatives in the US, will make a strong case for investments down the credit curve. Financial profiles of ‘A’ category rated corporates in CRISIL Ratings’ portfolio have improved steadily.  

The median interest coverage and median gearing of ‘A’ rated players have strengthened significantly and were five times and 0.1 time, respectively, in financial year 2024, which are similar to levels seen among ‘AA’ rated players in 2017.  Moreover, the three-year cumulative default rate has declined to 0.7 per cent for financial years 2014-2024 from 1.9 per cent during 2007-2017. The risk-adjusted returns for ‘A’ category rated bonds were 40-60 basis points higher compared with ‘AA’ category over the three years ended fiscal 2023. 

While investors typically take time to adopt any new investment class, credit-focused SIFs have the potential to grow considerably as they offer an underpenetrated avenue for investment. Using SIFs as a vehicle, AMCs could have credit-focused funds which have higher share of mid-rated papers and thus possibility of higher return.  

This can enable many ‘A’ as well as ‘BBB’ rated issuers to tap debt capital markets at a lower cost compared with credit AIFs. The transparency and disclosure norms in credit-focussed SIFs could enable improved pricing for ‘A’ and ‘BBB’ rated issuances in the bond market. After all, transparent pricing and addressing a large set of issuers and investors is the hallmark of a well-developed bond market.  

All these ingredients could lead to a much needed push for deepening the Indian bond markets. SEBI’s move to introduce SIFs has the potential to be a win-win for investors and issuers alike in the bond market, subject to the investor response for the new asset class. 

Subodh Rai is Managing Director, CRISIL Ratings