New Dawn For Corporate Bonds In India With Regulatory Reforms!
The Indian investment horizon has undergone a significant revolution in recent years. Innovations in investment products, economic growth, global exposure, burgeoning middle class, and shifts in investment psychology are crucial contributors. In the wake of this growth, debt investments are grabbing attention. The Indian bond market, and particularly the corporate bonds, have been experiencing a major uptick in their values in the past decade.
A decade back, corporate bonds were merely 15% of the total bond market as of March 2014. Cut to March 2024, this data has advanced to 47%1. Thoughtful regulatory framework and reforms are some of the key contributors to this growth. Let us explore more about corporate bonds and their regulatory advancements.
What Are Corporate Bonds
Businesses require significant capital from debt sources. Procuring it from the public can help access larger amounts. Corporate bonds are one of the most suitable tools to fulfil this need. Investors willing to get corporate investment exposure may find these attractive. They offer interest income at predefined intervals with potential capital appreciation at maturity.
Moreover, being a debt instrument, its repayment becomes the priority for the companies. In India, this instrument was not significantly popular among investors a few years back. It started gaining attention when people became aware of its mechanism. In recent times, the growth prospects of the bond market are rapidly evolving.
Corporate Bond Market Landscapes
Globally, the shift in preference for corporate bonds was evident after the 2008 financial crisis. It was due to the credibility of bonds, lack of trust in bank debt and diversification opportunities in the untapped market. Post the crisis period, the growth started gaining momentum, and today, as of early 2024, the market is valued at $133 trillion2. The prospects of this growth are positive.
The Indian bond market is no exception to this growth. A few years back, the investment horizon of Indian investors was limited to instruments like fixed deposits (FDs).
Specifically, the corporate bond market is valued at approximately $1.1 trillion (45%). The current market trends that can drive its growth are as follows.
- Millennials prefer investing in corporate bonds, and it may increase the investor base and value in upcoming years.
- In modern times, the private placement of corporate bonds has raised to INR 8.38 trillion in 20241. It seeks to simplify the process and other investment services.
- The regulatory reforms for the overall bond market, such as reduction in face value, can potentially encourage investors.
The regulatory assistance for the bond investment process has played a significant role in making it investor friendly.
Regulatory Framework For Corporate Bonds In India
Corporate bonds are regulated by the Securities and Exchange Board of India (SEBI). The institution and government are constantly seeking to catch the market trend and bring reforms based on holistic assessment. In the history of corporate bonds in India, these top 5 reforms have made a major impact on their growth:
1. Reduction in Face Value (2024)
It is one of the most crucial reforms that has the potential to make a significant impact in growing investor base and value for corporate bonds. Despite ample benefits, bond investment was difficult for retail investors due to its face value of INR 10 lakhs. In a recent series of reforms, SEBI first reduced this limit to INR 1 lakh in 2022, and later more recently in July 2024, reduced it further to INR 10,000. This is expected to provide a significant push for retail investments in corporate bonds.
2. Removal of Held-To-Maturity (HTM) Cap (2024)
With effect from April 2024, the Reserve Bank of India (RBI) removed the existing ceiling on the investing in corporate and state bonds under HTM for the banks. Previously, this cap was 23% of their total deposit. Removal of the cap expanded significant horizons of eligible assets for the banks. This will provide more flexibility and diversification to them.
3. GID and KID (2023)
The dissemination of appropriate information about the investment product is crucial to protect investors from misinformation and fraud. Having multiple documents may confuse investors. Therefore, the market regulator mandated the filling of General Information Documents (GID) and Key Information Documents (KID). These documents include disclosure of information regarding securities at the time of issue and for material changes. Such qualitative reforms are crucial to instil confidence in the investors.
4. OBPP: Online Bond Platform Provider (2022)
In the era of pacing digitalisation, the OBPP reform was essential to tap the rising demand in the bond market. It instructs all the online platforms for bond transactions to register at the recognised stock exchange. Moreover, the trading of bonds should be done through the RFQ platform.
This reform has been instrumental in encouraging investors by simplifying the process and creating a transparent functioning. Investors can simply open a DEMAT (dematerialised) account and complete the norms to invest in bonds, very similar to what they do in the case of stocks.
5. RFQ: Request for Quote (2020)
RFQ is an integrated platform for dealing with all different debt instruments in one place. Initially it was introduced in 2020 only for institutional investors, but since January 2023, it has been open for regular investors to transact through their brokers.
It seeks to eliminate the dangers of traditional Over-the-Counter (OTC) platforms. Since the launch, the platform has gradually started gaining traction, with nearly 30% of the corporate bond trading on this platform.
6. EBP: Electronic Bidding Platform (2016)
The launch of the platform aimed at creating an authentic marketplace and price discovery avenue for investors. Investing in corporate bonds through private placement may seem lucrative due to potential returns, but determining a suitable valuation and price is essential.
It is mandatory for entities with an issue size of more than INR 50 crores to register on EBP. Over the past few years, EBP has revolutionised private placements with market access and transparency.
In addition to regulatory reforms for the Indian bond market, global recognition has significant potential to transform the market.
Global Bond Indices
Several global financial institutions have cohorts of securities from diverse countries. Similarly, a bond index is a group of bonds from different countries. The inclusion in such an index is based on varied criteria of these institutions. However, it has the potential to drive foreign investments through such securities.
Indian Bond Inclusion Milestone
Indian government bonds recently achieved this milestone when they were included in the ‘JPMorgan Government Bond Index - Emerging Markets’ (GBI - EM). The weightage of these bonds was 1% as of June 2024, which was planned to be increased up to 10% in April 2025. This global recognition can potentially result in an inflow of $25 to $30 billion by the end of FY 2024-25.
In addition to this, Bloomberg and FTSE Russell have announced that they will be including Indian bonds in their respective emerging markets indices beginning 2025.
Corporate Bond Market Evolution And Future Prospects
As of early 2024, the overall value of the Indian bond market was $2.6 trillion3. In the wake of modern advancements in terms of technology, growing inclination of investors, evolving varieties of instruments, and more, the value of the corporate market in India may experience a significant uptrend. Moreover, the recent regulatory reforms may mobilise retail investors to the market and contribute better liquidity for the market.
Summary
The regulators are seeking to provide investors with more investment options to avoid concentration. Moreover, inclusion in the global bond index has the potential to grow the investor base for the market. Investors willing to invest in corporate bonds may find a suitable opportunity in the market due to modern regulatory reforms. Debt investing can be futuristic with these reforms.
Investing in corporate bonds can provide desired diversification for the portfolio. Sign up to Grip today and unlock this opportunity!
Frequently Asked Questions About Corporate Bonds In India
1. Who regulates corporate bonds in India?
The Securities Exchange Board of India (SEBI) is liable for regulating all the investment securities in India, such as equity shares, bonds, debentures and more. It monitors the security markets and protects investors.
2. What are global bond indices?
The bond indices are the cohort of bond instruments from different countries. These indices are usually by global leading financial institutions. However, they may differ based on country and bond type. For example, the JPMorgan Government Bond Index - Emerging Markets (GBI-EM).
3. Why should I hold bonds in my portfolio?
Bond investments are a unique opportunity for investors to diversify their portfolios. They offer an interest income at prescribed intervals. Investors can also reinvest this interest to get the compounding benefit. Moreover, investing in high-rated bonds can help investors protect their money against default risk.
References
1. NSE, Accessed from https://nsearchives.nseindia.com/web/sites/default/files/inline-files/NSE_Assocham_Corporate_Bond_Report_2024.pdf
2. WEF, Accessed from https://www.weforum.org/stories/2023/04/ranked-the-largest-bond-markets-in-the-world/
3. Business Today, Accessed from https://www.businesstoday.in/personal-finance/investment/story/millennials-driving-growth-in-corporate-bond-investments-grip-invests-latest-report-reveals-key-trends-447509-2024-09-25#:~:text=However%2C%20in%20India%2C%20the%20equity,growth%20from%20the%20current%20levels.
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