An active corporate bond market serves multiple functions. Apart from providing borrowers an alternative to bank finance, corporate bonds can lower the cost of long-term funding. Banks are typically constrained in lending long-term because their liabilities are relatively of a shorter tenor. An efficient corporate bond market with lower costs and quicker issuing time can offer an efficient and cost-effective source of longer term funds for corporates. At the same time, it can also provide institutional investors such as insurance companies and provident and pension funds with longterm financial assets (“preferred habitat”), helping them match the durations of their assets and liabilities.
One, you can subscribe to primary issues, but they are floated mostly through private placements and public issues are occasional.
Through bond houses or other intermediaries. They would show you the available inventory of corporate bonds, where deals happen in sizes appropriate for HNIs (high net worth individuals) or the mass affluent segment.
The issue with the corporate bond market is that there is not much liquidity. If the magnitude of transactions in the equity market or the G-Secs market is the benchmark, traded volumes in the corporate bond market is much on the lower side.
The transactions take place in large lot sizes. The reason is that ‘big boys’ like banks, MFs, and insurance companies are the participants here and not individuals.
Dealing houses source the bonds from the wholesale market in larger lots and make bonds available in lot sizes appropriate for HNIs or the mass affluent segment.
Given that there is not much liquidity even for bonds listed at the exchanges (NSE/BSE), screen-based trades are limited. Traffic flows through telephonic conversations, in known circles, as the market is confined mostly to a few square kilometres in Mumbai.
With the benefit of technology, nowadays there are online bond dealing platforms floated by bond houses or associates. Being online, you can open an account anywhere, anytime.
Minimum lot size
The minimum lot size for the deals is usually Rs 2 lakh.
The rationale for the minimum deal size is that bond deals are usually settled through the bond reporting and settlement platform of the BSE, called the Indian Clearing Corporation Ltd (ICCL). ICCL accepts payments only through RTGS, which has a threshold of Rs 2 lakh.
The Proposed Regulatory Framework by SEBI, mentioned earlier, enumerates certain areas of improvement in the context of online bond platforms. Post public comments and post further analysis, the final guidelines would be issued.
Not to say the structure is weak now, but the proposed developments would make the structure more robust. The SEBI paper mentions that in certain cases the role of clearing corporations (NSE/BSE settlement platforms) was played by these bond platforms by directly accepting funds from clients and processing settlements off-market.
These instances were also observed in cases where the bonds are unlisted and/or the value of the transaction is below Rs 2 lakh in view of the RTGS threshold. The regulators can take the initiative, and if the clearing platforms accept NEFT payments, it will pave the way for supervised settlement of smaller trades as well.
If the regulator pushes all bond market participants towards executing trades through the exchange debt segment (for listed securities) or exchange clearing platforms (including unlisted), the system will be uniform.
Investors would be assured that the deal settlement is monitored by a third party. The SEBI paper also mentions that only listed debt securities can be offered by online bond platforms. Market participants and issuers of bonds may be nudged towards listed ones.
However, if the issuance of the bond is happening through private placement and if it is not a public issue, it requires a minimum face value of Rs 10 lakh per bond, and Rs 1 crore for perpetual bonds. The high face value is a reason to float unlisted bonds. Not all unlisted bonds are of inferior quality, but to make it available at any face value, even for less than Rs 10 lakh, would be convenient for retail investors in secondary market transactions.
Net-net, with the expansion of the market, the number of issuers, the investor base and fleet-footed intermediaries, corporate bonds are offering an avenue to you. You can diversify your portfolio as per your needs and suitability.
The Regulatory Effort
The efforts taken to develop the corporate bond markets broadly over the last decade and a half have been wide ranging. The reforms and developments have ranged from advancements in the corporate bond microstructure to the evolution of a facilitative regulatory framework, complemented by efforts to develop related risk and derivative markets and measures to enhance secondary market liquidity.
SEBI, the primary regulator of the corporate bond market, has taken significant steps over the years to improve the market microstructure for corporate bonds; settlement through delivery versus payment (DvP) mode which removes settlement risk; operationalisation of a trade reporting platform for enhancing transparency; introduction of an electronic bidding platform (EBP) for primary issuance; consolidation of stock through reissuance; introduction of request for quote (RFQ) platforms and many more.
RBI has also been taking measures to develop the corporate bond market; permitting banks to provide partial credit enhancement (PCE) to incentivise a larger investor base; requiring large borrowers to raise a share (about 50%) of their incremental borrowings through market instruments; encouraging FPI investment by raising investment caps, introduction of Voluntary Retention Route; etc.
As entity regulators, RBI, IRDAI and PFRDA have encouraged their regulated entities to invest in corporate debt securities.