Govt should amend SMC Bill to unify regulation of the corporate bond market

To facilitate retail participation in G-Secs, RBI came out in November 2021 with a scheme for direct retail participation in G-Secs through its own depository system and the NDS-OM trading platform

One of the most desirable financial sector reforms would be the “unification of the bond market”, i.e., unifying the regulatory regime for G-Secs (government securities) and corporate bonds. This would greatly simplify the lives of investors, traders, and other stakeholders, besides increasing retail participation in G-Secs and developing the corporate bond market.

 

To facilitate retail participation in G-Secs, the Reserve Bank of India (RBI) came out in November 2021 with a scheme for direct retail participation in G-Secs through its own depository system and the NDS-OM trading platform. The result has been hardly encouraging. The RBI’s scheme is not the right approach to encourage retail participation; it only results in an artificial segmentation of investors across different types of securities.

 

G-Secs are like any other security. To achieve greater ease of doing business and with a view to facilitating greater investor participation, G-Secs should be issued and traded through the stock exchange mechanism. The Securities and Exchange Board of India (Sebi)-regulated online bond trading platforms, introduced in 2022, have been quite a success in enhancing trading volumes of corporate bonds.

 

The trading and settlement take place through the market infrastructure institutions regulated by Sebi. While these platforms also facilitate trading in G-Secs, they haven’t helped much, as most of the G-Sec trading volume is on the NDS-OM platform and settlement is through the Clearing Corporation of India Ltd, institutions under the RBI’s regulatory oversight. The question to be asked is: Why have two separate trading mechanisms for corporate bonds and G-Secs?

 

While shares and bonds of government-owned companies and statutory bodies can be held in an investor’s single demat account with securities market depositories, G-Secs require a separate account with the RBI’s Public Debt Office (PDO), which holds only G-Secs. Unlike the PDO, the securities market depositories have a wide spatial spread, covering 99 per cent of the PIN codes in the country.

 

Having a single operating demat account both for G-Secs and other securities will ease the process of making investments across all securities, thereby increasing the investor base for debt securities. The government should issue G-Secs in demat form so that demat holders (currently more than 210 million and increasing) can easily and smoothly invest in G-Secs. In fact, G-Sec-based Exchange Traded Funds should be developed to increase retail participation.

 

G-Secs have an overwhelming presence in the debt market in India — as of December 2025, the outstanding G-Secs were around ₹115 trillion, as compared to outstanding corporate bonds of ₹58 trillion. The pricing of corporate bonds is intrinsically dependent on the presence of a continuous yield curve in G-Secs. At present the G-Sec and corporate bond market follow different regulatory regimes. Unifying these markets would enable seamless transmission of pricing information from G-Secs to corporate bonds. Having the same regulatory regime for trading, clearing and settlement of corporate bonds and G-Secs and a holding structure that provides for frictionless transfer of G-Sec and corporate bonds will result in “economies of scale and scope” leading to greater competition, efficiency, and liquidity in the markets.

 

An active repo market is an important pre-condition for improving liquidity in the corporate bond market. This is mainly because active traders, especially market makers, are in a position to provide finer two-way quotes (bid-offer spreads), if they are able to finance their inventory of bond holdings through an active repo market.

 

In addition to helping market makers, an active repo market has the following additional benefits: (i) Improves liquidity in the underlying debt securities, (ii) Holders of debt have the ability to monetise debt securities without selling the underlying, and (iii) In the short to medium term, issuers also benefit as the prices of bonds may improve due to improved liquidity.

 

While rule-making powers for issuance and trading of corporate bonds are vested with Sebi, such powers for repo in corporate bonds are with the RBI. The right approach would be to have a single regulator regulating all aspects of the corporate bond market. This would require amendment to the RBI Act.

 

Different governments over the decades have been talking about the need to deepen the bond market in India. The Securities Market Code (SMC) Bill, introduced in Parliament in December 2025, was an opportunity to inter alia harmonise the regulatory architecture of the bond market. Unfortunately, the SMC confines itself to the consolidation of the Securities Contracts (Regulation) Act (SCRA), the Sebi Act, and the Depositories Act. It should have comprehensively looked into the bond market-related provisions in all concerned laws, including the Government Securities Act, 2006, the RBI Act, 1934, and the Payment and Settlement Systems Act, 2007, to take a holistic view and suggest appropriate amendments. The government must take steps to bring in required amendments to the SMC Bill to unify the bond market, and bring all aspects of regulating the corporate bond market under a single regulator.

 

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The author are, respectively, former chairman of Sebi and partner, SPRV consultants