For retail investors, the door to debt investments is opening wider, with the Securities and Exchange Board of India reducing the face value of corporate bonds by 90 per cent to ₹10,000.

This is salutary, because an additional investment avenue is being created in a country where more than a third of household savings is allocated to relatively lower-yielding bank fixed deposits (FDs).

Today, about ₹47-lakh crore of corporate bonds are outstanding, originating from 4,200 issuers. But retail investors’ share is less than 3 per cent. That compares with 21 per cent for mutual funds and 26 per cent for insurers.

From a returns perspective, the 5-year AAA rated corporate bond was yielding 7.68 per cent this May, compared with 6.7 per cent on a similar-tenure FD, on average. From a small investor’s perspective, that spells opportunity missed. The regulatory thrust on retailisation of debt, therefore, is timely.

Apart from the reduction in face value, recent efforts include the creation of the Retail Direct platform by the Reserve Bank of India (RBI) for government securities and state development loans, and adoption of single schedule of disclosures to fast-track public issuances with reduced time, cost and effort.

Then there are systemic tailwinds building, as two points of data — proxies for supply and demand — show.

One, Crisil estimates corporates will have to raise ₹100-120-lakh crore via corporate bonds by fiscal 2030.

Two, the RBI’s household savings data suggests financial assets tantamount to over 10 per cent of India’s GDP.

Given the size and significance of these two markers, measures to ‘retailise’ the corporate bond market could prove transformational and help achieve the objectives of policymakers.

Global experience

Typically, retail investors are less aware of corporate bonds than bank deposits, life insurance and postal savings.

The World Economic Forum (WEF) Insight Report of 2022 revealed that the number of retail investors worldwide has increased significantly, while users of low- and no-fee stock trading apps grew 48 per cent between 2019-20 due to a favourable macroeconomic environment.

But a significant portion of them still do not invest in the capital markets.

Retail participation globally is in the 1-6 per cent range. Nearly two-thirds of the investors surveyed cite awareness-related challenges (product and execution) when it comes to investment in bonds.

In the US, there was a surge in direct investments in corporate bonds in the early part of the last decade, but that changed after the emergence of cheaper options such as bond exchange traded funds and bond funds.

For Indian investors to take advantage, and for the policy makers to encourage retailisation, a few more steps are essential, such as:

Improving awareness: Concerted efforts through SEBI’s investor education program and other financial market organisation initiatives on financial literacy are vital.

Guardrails for investors: SEBI can continue to drive the agenda of transparency around products features and risk-return trades-offs, in line with retail products such as mutual funds.

Liquidity: A mechanism or institution would be necessary to provide liquidity to underlying bonds. Intermediaries can also be incentivised to promote market making.

Tax incentives: Tax sops can encourage investors. The 2011 infrastructure bonds is a good example.

The ultimate objective should be growth of the corporate bond market and both forms of investment — direct and indirect, through mutual funds/pension funds — should be encouraged.

The writer is Managing Director & CEO, CRISIL Ltd

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