Corporate bond markets are of paramount importance for any economy. For a developed economy like US, debt capital markets i.e., bonds or fixed income instruments provide about 77% of total financing (against bank/other sources).
The US debt capital markets are the largest in the world comprising 38.7% of the $126.9 trillion securities outstanding across the globe; this is 2x larger than the next biggest market, the European Union.
As a result, the US market continues to remain the deepest, most liquid and most efficient. Healthy capital markets facilitate transfer of funds from those who seek a return on their assets to those who need capital to expand. They are an integral part of job creation, economic development and growth.
The Indian Scenario
In India, we have observed traditional bank dominance and seen that majority of financing needs are addressed by banking channels in the country.
However, since the importance of an efficient bond markets is clearly important, SEBI, has been making concentrated efforts over a period of time, to deepen and boost the bond market in India.
We, at Yubi Invest, acknowledge and deeply appreciate the effort made by SEBI in deepening the debt markets in India over a period with various initiatives.
Results of the same is partially visible from the following data:
- Outstanding stock of corporate bonds shot up 4 times to -₹40 lakh crore (Sept-2022) from -₹10.50 lakh (FY2012) (against global fixed income outstanding of $87.9 Trillion to $126.9 Trillion i.e., 1.44 times);
- Annual issuances of listed bonds during this period increased to – ₹6 lakh crore (FY 2022) from – ₹3 lakh (FY2013).
Although the Indian debt market’s scale against their GDP remains small, as compared to other major Asian economics and developed countries, the corporate bond market in India has grown steadily.
This further demonstrates the compelling potential for inevitable growth to be led by concentrated regulatory effort and market adoption.
SEBI’s Efforts in Developing the Indian Bond Market
SEBI has taken significant steps over the years – like settlement through delivery versus payment (DvP); operationalisation of a trade reporting platform; introduction of an electronic bidding platform (EBP); consolidation of stock through re-issuance, among others
While each of these initiatives require a separate detailed discussion, the two most recent announcements made by SEBI are quite impactful and can gives a significant push to deepen the bond markets.
1. Reduction in Face Value to INR 1 lakh
SEBI reduced the face value of each listed debt security to INR lakh from INR 10 lakhs, on October 28, 2022. SEBI actively considered the representations of market participants as well. The amendment will be effective from January 1, 2023. This will serve 2 purposes:
Increase in Participation of Retail/Non Institutional Investors
The high face value (INR 10 lakhs) served as a deterrent for retail/non institutional investors to invest in debt market instruments earlier.Hence, this is a revolutionary step in attracting investors to invest in listed debt securities. Listed securities provide enhanced and adequate regulatory disclosure as well as protection to investors, as compared to unlisted securities.
Boosts Liquidity in Secondary Markets
Due to the reduction in face value, the trading lot is also reduced to INR 1 lakh for investors. This will in turn boost liquidity in the corporate bond market and help grow the secondary market for corporate bonds. Mature secondary markets provide flexibility to bond investors to liquidate/exit bonds before maturity (like equity shares). By selling bonds in the secondary market, investors do not have to wait until the bond matures to receive returns.
2. Capping of ISIN Limit for Issuers
ISIN stands for, “international security identification number” that is used to identify securities. For debt instruments, a particular ISIN is linked to a bond, which expires on a particular date.
SEBI came out with a circular on October 31, 2022 announcing that the total number of ISINs (i.e., bonds) issued by a particular issuer/borrower and maturing in a single financial year cannot exceed 14.
This limit is further bifurcated to 9 for plain vanilla instruments and 5 for structured instruments (i.e., Market linked debentures). Another way to look at this is that, an issuer will not be able to issue more than 14 bonds maturing in a single financial year. The said circular is applicable to ISINs and utilised for issuances made post April 1, 2023.
But what will the above help achieve?
- Increasing Liquidity in the Secondary MarketImagine there are multiple options or instruments which are differently structured and available to the public composed of investors. The liquidity of a single instrument or option will not be much, as compared to a scenario where there are fewer options.This will eventually result in a scenario wherein investors may not have enough demand when they want to liquidate a bond by taking secondary exit.Evidently, investors will have a better secondary market and demand for fewer ISINs having the same features.The secondary market trades during FY11 was INR 4.50 lakh crore which rose to INR 14.37 lakh crore in FY22. This was a reasonable jump but not harmonious with the development in the bond market.
And while secondary market liquidity haunts other developing economies and is not specific to India, much needs to be done.
Due to the above, SEBI had been nudging issuers to consolidate ISINs by capping ISINs as well as pushing issuers towards re-issuances under the same ISIN. SEBI had also come out with a circular in March, 2017 capping total ISINs to 17 which had helped in consolidation of ISINs and boosted secondary market liquidity for bonds.
We have made steady progress in developing the corporate bond market and SEBI’s incremental efforts are steered in the right direction by taking active feedback from market participants.
We are excited to deepen the Indian bond market, democratise fixed income and be a significant member in developing the bond market in India. Efforts and initiatives by regulators are welcome by the market and we are sure to see further market adoption.