Mehak Mittal, 24 years old, works as a relationship manager at a wealth management firm in Gurugram, Haryana. As such, she keeps herself aware of investment products and is as focused as one can be on keeping her money safe and growing. She has built for herself an equity portfolio of around Rs 5 lakh, investing in stocks, fixed deposits (FDs) and gold. One thing she has not invested in is: corporate bonds.
And Mittal is not alone. Even as millions of Indians have thronged the stock markets in the last three years, at the corporate bonds market, there has been little activity. But that might change soon. With the Securities and Exchange Board of India (SEBI) reducing the face value of corporate bonds, that is the minimum investment required to buy these bonds, from Rs 1 lakh to Rs 10,000, the bonds market believes corporate bonds could become the next FDs.
Corporate bonds are debt securities issued by corporate groups to investors to raise money to grow their businesses, pay bills, make capital improvements or for other business needs. In return for buying corporate bonds, investors are paid a pre-established number of interest payments at either fixed or variable rates of interest. When a bond expires, the original investment is returned. They form an essential source of capital for corporate groups aside from banks and equities markets.
Attracting Retail Investors
Indians, traditionally, have been used to putting their savings in fixed-income assets such as bank fixed deposits (FDs). Over the years, campaigns like Mutual Funds Sahi Hai have prompted an interest in mutual funds. A riskier bunch has bet on equities. Some have also invested in small government savings schemes and national savings certificates. But corporate bonds have failed to attract the average Indian investor. This is in spite of the fact that corporate bonds offer safety and a fixed income, and investors can be sure they will not lose the money they have invested.
One of the reasons for this lack of interest in corporate bonds, the Securities and Exchange Board of India (SEBI) thought, was the high face value of corporate bonds. Until 2022, corporate bonds had a face value of Rs 10 lakh. That year, in a bid to attract greater investment in these bonds, SEBI reduced the face value to Rs 1 lakh. The move seemed to help. The proportion of non-institutional investors buying corporate bonds went up from a general average of 1% to 4%, according to a paper released by SEBI.
The success prompted SEBI to reduce the face value of corporate bonds further. On May 1, 2024, SEBI decided to lower the face value of listed bonds from Rs 1 lakh to Rs 10,000. For now, SEBI seems to think that it was the entry barrier that was one of the key reasons why retail investors were not buying corporate bonds and that lowering the face value will give bond markets the much-needed fillip.
But that might not just be enough.
Beyond Face Value
The current enthusiasm around stock markets is primarily because of its high returns. Retail investors with small kitties walk into the stock markets in the hopes for higher returns. That is not the case with corporate bonds. Even AAA-rated bonds, the best that the bond market has to offer, yield returns between 7 and 8% per annum. On the other hand, a low-risk mutual fund offers a return of around 15%.
Experts also say that not enough people know about corporate bonds. “The decision to reduce the face value of listed bonds is a welcome move. But this is just an initiator,” says Dwijendra Srivastava, executive vice president and chief investment officer (CIO) debt at Sundaram Asset Management Co.
The other reason why the corporate bonds market has seen little retail participation is taxes. Listed bonds held for more than 12 months attract long-term capital gains tax (LTCG) on gains earned thereon and are taxed at 10% without an indexation benefit. The gains from bonds held for less than 12 months are categorised as short-term capital gains (STCG) and are taxed according to income slabs.
“The tax arbitrage between debt and equity is very high and not great for an economy like ours where we need significant capex. Because it impedes money from being channelled towards debt (especially bonds) which is 60–70% of any typical project,” says Ashish Khandelia, founder at Certus Capital, a firm that helps institutional investors and family offices invest in real estate.
The other problem with retail investment in corporate bonds is the lack of liquidity. Corporate bonds typically have few exit options. When someone makes an FD, they can break that FD after a few months if they need the money, says Marzban Irani, CIO debt at LIC Mutual Fund. Irani believes bond platforms should offer an adequate exit to someone who wants to sell the bond.
He says bond platforms have a lot of inherent costs and thus when the buyer goes to sell, they may not get the right price. Anil Gupta of commercial banking company ICRA says liquidity is a challenge for investors when they invest in corporate bonds. They have to be mindful that they may not be able to get the liquidity immediately or maybe not till the time of maturity, he says.
Dressing Up Corporate Bonds
Things are being done to make corporate bonds more attractive to retail investors. “An important step taken last year was when the tax arbitrage between debt mutual funds and other forms of debt instruments was removed,” says Khandelia of Certus Capital.
Regulatory measures are also being taken to tackle liquidity issues, such as restricting the number of International Securities Identification Numbers (ISINs), says Gupta of ICRA. “By limiting ISINs, regulators aim to enhance liquidity in the corporate bond market, thus improving attraction for investors,” he says.
With fewer ISINs representing similar bonds, trading volume becomes more concentrated. This enhances the overall visibility and attractiveness of these bonds to investors. As liquidity improves, bid-ask spreads tend to narrow. This translates to lower transaction costs for investors.
Efforts are also being made to generate awareness among investors regarding investment options aside from equities. SEBI has launched Online Bond Platform Providers (OBPPs) to attract more money towards bonds and fixed-income instruments.
In the enthusiasm around equities markets, corporate bonds are forgotten often. Nevertheless, they are important. Companies often rely on money flowing in through corporate bonds to make long-term investment plans. For the retail investor, corporate bonds are a safer avenue, with fixed returns. What corporate bonds lack today is sheen. Regulators and companies need to come together to make corporate bonds glamorous.
