Is India's corporate bond market getting a makeover?

SEBI (Securities and Exchange Board of India) is suggesting changes that might make it easier for people to access corporate bonds.

In a recent move, market regulator SEBI has unveiled potential changes that could reshape how companies issue corporate bonds. Before we dive into the nitty-gritty, let's break down the concept of corporate bonds—essentially a way for companies to borrow money from investors. SEBI's proposal revolves around a simple yet impactful adjustment: lowering the face value of these corporate bonds.

To understand this,

Consider face value as the fundamental worth of any financial instrument. If a company aims to raise ₹10,000 by issuing 1,000 bonds, each bond might have a face value of ₹10. However, when these bonds hit the market, their trading price can vary based on demand and supply, becoming their market value.

SEBI's recent consultation paper suggests a move to lower the face value of privately issued corporate bonds to ₹10,000 each. This adjustment specifically applies to bonds that won't be listed publicly. To put this in perspective, the face value was ₹10,00,000 until last year, and it was later reduced to ₹1,00,000 in October 2022.

Now, why does this matter, and what's the reasoning behind SEBI's proposal?

To grasp the significance, let's delve into the world of corporate bonds. Companies have various avenues to raise funds, such as borrowing from banks, issuing shares to the public, or opting to borrow directly from individuals. They articulate to investors the purpose behind seeking funds, whether it's expanding production capacity, establishing branches in new locations, or supporting promising projects.

Here's the catch: Investors don't share in the profits generated by these projects. Instead, companies essentially say, "Lend us the money now, and we'll return it in a few years"—the timeframe could range from 2 to 10 years or more. However, investors earn annual interest for the amount loaned to the company.

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Now, why would investors consider corporate bonds when alternatives like fixed deposits or the stock market offer different avenues?

The answer lies in the risk/reward profile. While fixed deposits may offer a 7% interest rate, corporate bonds, being slightly riskier, could provide a higher interest rate, say 10%. Considering the average inflation rate at 6%, after taxes, corporate bonds may still outperform fixed deposits. Moreover, compared to the stock market, bonds are rated by credit rating agencies, providing a degree of stability.

This explains why corporate bonds could be an attractive option for retail investors, striking a balance between the safety of fixed deposits and the volatility of the stock market.

However, there's a hurdle. Retail investors have traditionally faced challenges accessing the corporate bond market due to certain entry barriers. Companies often prefer private bond offerings to avoid the regulatory requirements associated with public listings, limiting access to a select group of investors.

Another significant barrier is the high face values of these bonds, making them less accessible for retail investors. SEBI's proposed adjustment aims to address this concern, potentially making corporate bonds a more feasible investment avenue.

But what does SEBI stand to gain by making corporate bonds more accessible?

India's corporate bond market, while growing, is not as robust as its global counterparts. By reducing face values, SEBI aims to attract more retail investors, potentially expanding the market. Lowering entry barriers could facilitate companies, including government entities, in raising capital for infrastructure expansion without solely relying on banks. 

While this shift may transfer some burden to retail investors, it aligns with the pursuit of higher returns. It's important to note that SEBI's proposal is currently a consultation paper, and its fate depends on the feedback received during the comment period. 

In essence, SEBI's proposal holds the potential to reshape the landscape of corporate bonds, fostering greater retail participation and contributing to the growth of India's corporate bond market.

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