Nitin Kamath, co-founder of Zerodha, welcomed market regulator Sebi’s recent decision to reduce the face value of corporate bonds to Rs 10,000 from the current Rs 1 lakh, which is expected to strengthen the participation of retail investors in the debt market.
“Companies can now issue bonds with a face value of Rs. 10,000. This is an important measure that can help attract retail participation in bonds. With all the changes in recent years, SEBI has done an incredible job in making bonds accessible to individuals. small investors,” Kamath said in a tweet. Kamath had earlier spoken out against the non-availability of bonds to retail investors. Bonds are an HNI product and no one sells them retail, he had said.
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“There were two major problems: 1. The availability of bonds with small denominations. Most of the bonds are issued through private placements and have a face value of ₹10 lakh+. Individual investors were therefore excluded. 2. All bond transactions had to be settled through the clearing companies, and they only accepted RTGS as a method of payment. Thus, the minimum transaction size became Rs 2 lakh + by default,” Kamath had written in January 2023.
Traditionally, investing in corporate bonds in India was out of reach for many retail investors due to the high minimum investment amount. Most corporate bonds have a face value (minimum investment amount) of Rs 1 lakh (around $1,250). This large initial investment excludes many small investors who might be interested in the benefits of bonds.
Sebi’s solution: lower the barrier to entry
Sebi has approved a proposal to significantly reduce the minimum investment amount for corporate bonds issued in India. The new face value will be Rs 10,000 (around $125).
Benefits of change:
Increased accessibility: This reduction makes bond investments much more attractive and accessible to a wider range of retail investors.
Portfolio Diversification: Retail investors can now more easily include bonds in their portfolios, which can provide benefits such as stable income and lower volatility compared to stocks.
Potential Growth: Increased participation by retail investors could lead to a more vibrant bond market in India.
The recent changes made by SEBI aim to simplify and streamline the process of issuance and management of non-convertible debentures (NCDs) in India. Here’s a look at what each change means:
1. Lower denomination:
This is the simplest change. Sebi has reduced the minimum investment amount for NCDs. This makes them more accessible to small investors who previously could not afford the higher minimums.
2. Standardized registration date:
Previously, the date for determining who was eligible for interest or principal repayment on NCDs (record date) could vary depending on the issuer. Sebi has now standardized the date of registration. This simplifies the process for both issuers and investors, since everyone knows the exact date used to determine eligibility.
3. Harmonized format of the due diligence certificate:
A debenture trustee is an independent third party who oversees the issuance and redemption of NCDs. They also provide a due diligence certificate that assesses the financial health of the issuer and its ability to meet its obligations.
SEBI has standardized the format of this certificate. This ensures consistency and clarity of information provided, making it easier for investors to compare and evaluate different NCD offerings.
4. Flexibility in the publication of financial results:
Sebi said its board has approved the proposal to provide issuers with the option of issuing NCDs or NCRPS through the private placement mode at a reduced face value of Rs 10,000, along with the requirement to appoint an investment banker.
Which investors should consider?
Research is key: As with any investment, proper research on the specific bond and issuing company is crucial before investing.
Investment Objectives: Bonds are generally considered less risky than stocks, but also offer lower potential returns. Investors should consider their risk tolerance and investment objectives when deciding whether bonds are a good fit for their portfolio.
