This shows the capital market regulator’s confidence that a well-developed retail-bond market will democratise and deepen the investor base, and bring in a new set of participants including issuers and intermediaries to take it to the next level.
Let’s analyse some of the recent steps taken by Sebi.
The reduction in the face value of debt securities issued on private placement basis to Rs 100,000 from Rs 1 million is a significant step. All along, the higher face value had meant it became a product for the rich and ultra-wealthy. And 98 per cent of the issuance was privately placed. With the face value being reduced to Rs 100,000, a new set of investors will join the markets and existing investors will get to diversify their portfolio by balancing out their exposure to multiple issuers. With more issuers and investors participating, this will lead to better price discovery as well.
Going by the current norms, it also meant that issuers were raising money by issuing multiple ISINs (International Securities Identification Numbering System), maturing in and around the same period. And with a lot of outstanding ISINs, it was difficult to keep track of, even as it fragmented investors in different ISINs, which caused illiquidity. With the restriction on the number of ISINs maturing in a particular year, the size of the issuance might go up and liquidity in a particular ISIN might increase. And the management of borrowing for issuers also becomes comfortable.
Clarity in the meaning of credit ratings assigned to issuers will definitely remove the ambiguity experienced by investors in interpreting ratings and help them understand the safety and risk levels involved. Retail participants will not need to depend on others to understand the implications of the level of safety for a particular rating level, giving them an opportunity to make informed and wise decisions.
Stockbrokers placing bids on behalf of the clients in the RFQ (Request for Quote) segment will further enhance liquidity, because it is like placing orders on behalf of clients in the capital markets segment. This will broaden the market and, going forward, institutions will also participate and sell odd-lot debt.
To have online bond platforms registered as stockbrokers will ensure transparency, clean dealings, and protection of investors’ rights. However, the onus lies on investors to ensure that they are dealing with market participants. This is one of the strongest moves, as many online platforms have come up over the past two years. Regulating them was of utmost importance, keeping in mind the interests of retail investors.
Over the years, we have seen market regulators talking a lot about deepening the bond market to make it robust, vibrant and democratic, and accessible to all, with risk management protocols and investor education in place. It is definitely a big step in this direction and there is no doubt that we have come a long way in the debt market, starting with tax-free issuances in the 2011-12 fiscal year.
We assume that regulators will look at the tax inefficiency aspect while investing directly in bonds, as compared with investing through bond funds. A small reform in the tax angle towards investment in the direct fixed-income market will give a strong boost to this growing market. With a friendly regulatory environment, let us hope for a new dawn — the growth of a robust, strong, transparent fixed-income market, without entry barriers, in the coming years.
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