Opinion
Sebi paper holds out big hope for private debt issuers and retail investors
Summary
- The move allows retail investors to buy corporate debt that can beat inflation
Over the last year, the Securities and Exchange Board of India (Sebi) has taken several steps to increase the trust of retail investors in the corporate debt market and broaden their participation. The reforms started in October 2022 when the market regulator reduced the minimum face value of listed debt securities under private placement from ₹10 lakh to ₹1 lakh. For publicly issued bonds, this face value stayed at ₹1,000. Sebi further prohibited ‘Online Bond Platform Providers’ (OBPPs) from facilitating trades in unlisted debt securities to protect retail investors from liquidity risk in such investments. However, the ticket size of ₹1 lakh for privately placed bonds was still a bit too much for retail investors. Sebi’s latest consultation paper proposes reducing the ticket size of such securities to ₹10,000 to make the market more inclusive for retail investors.
For context, Sebi’s own data suggests that about 98% of debt securities issued in India are through private placements. Thus, retail investors had few opportunities to invest in corporate debt at lower ticket sizes. We have always advocated that retail investors should invest in at least 5-10 bonds so that the portfolio remains diversified. Due to ₹1 lakh face value, investors had to invest at least ₹5-10 lakh in order to diversify. This meant that only those with portfolio of more than ₹50 lakh were investing. As per the financial year 2022-23 income tax returns filings data, only 500,000 people meet this criteria. Sebi’s consultation paper could change the game and encourage more retail investors to tap the debt market. Here are the other benefits of lower ticket size of privately placed bonds:
Encouragement for retail investors: Any asset class grows in volume only when early investors try it, learn the pros and cons, and encourage other investors to do the same. How many people would have tried mutual funds if the minimum investment amount was ₹1 lakh? At a minimum investment of ₹500, mutual funds became the preferred way for household investment in India. If Sebi goes on to follow the proposed amendments in its consultation paper, millions of retail investors will have the access and choice to invest in corporate debt that can beat inflation.
Regulatory parity: As per the July 2023 amendments to Sebi’s ‘Issue and Listing of Non-Convertible Securities Regulations, 2021’, issuances of non-convertible securities through private or public placements have similar processes and disclosures. Therefore, it is logical to make their ticket sizes the same. Sebi’s consultation paper takes a step in that direction.
Ease of doing business: Many corporates rely on raising debt to meet their business requirements. However, at ₹1 lakh ticket size, they could barely tap the retail investors. In the last one year, Sebi has put the necessary guard rails in place to protect the interests of retail investors who invest in corporate bonds. Therefore, these companies can tap a larger lender base at a reduced ticket size for privately placed bonds to grow their business. As a by-product, we can also expect better liquidity in the market, which will help every lender.
To be on the safer side, Sebi has also stipulated that only plain vanilla corporate bonds can be issued at ₹10,000 face value, and bonds with any structure obligations would continue to have a much higher face value. Such rail guards will ensure that retail investors are well protected. Considering all the benefits, we expect that the proposals in the consultation paper will receive support from all the industry stakeholders and become a part of the regulation in the coming months. This will unlock a massive opportunity for the Indian debt market and retail investors.
Anshul Gupta is co-founder and chief executive officer of Wint Wealth.
