In recent years, efforts by regulators to develop the domestic bond market have revolved around the stick — setting compulsory quotas for large borrowers and getting institutions to buy bonds by diktat. With these measures having little effect, market regulator Securities and Exchange Board of India (SEBI) is now trying out an incentive-based approach. SEBI’s latest consultation paper seeks to make it easier for good-quality issuers to raise money through fast-tracked NCD (Non-Convertible Debentures) offers, while lowering the bar for retail investors to buy them. While this approach may work to attract more issuers and investors to bonds, it needs to be accompanied by better safeguards.    

The proposal to allow privately placed NCDs at a minimum ticket size of ₹10,000 instead of ₹1 lakh opens up a wider menu of options to retail investors, as 98 per cent of all NCD offers take the private placement route. The lower ticket size will allow first-time investors to test the waters, while affluent ones can diversify across multiple issuers instead of concentrating on only a few. It was only in October 2022 that the ticket size for privately placed NCDs was trimmed from ₹10 lakh to ₹1 lakh. SEBI also plans to extend the ₹10,000 ticket size to SDIs or Securitised Debt Instruments — where an aggregator bundles multiple bonds into a single basket. Now SDIs can be a dicier proposition for retail investors because many of them consist of BBB or A-rated financial entities.

SEBI hopes to mitigate this risk by making merchant banker appointments and due diligence compulsory, for privately placed NCDs and SDIs with lower face value. But there have been many over-priced equity offers piloted by merchant bankers, where retail investors have burnt their fingers; so, while necessary, this may not be a sufficient safeguard. With interest rates ruling high, bond platforms are today flush with offers from lower-rated firms offering double-digit yields. SEBI must perhaps devise a risk-related disclosure for SDIs and NCDs akin to the risk-o-meter for mutual funds, so that retail investors are aware of credit risks.  

SEBI has also suggested procedural simplifications for NCD issuers willing to shift from the private placement route to the more transparent public issue option. It plans a fast-tracked route for public issues of NCDs provided issuers meet eligibility criteria such as a two-year history after listing and a minimum AA- credit rating. For banks and NBFCs making these issues, it plans to waive minimum subscription limits and allow a higher green-shoe option.  These are indeed attractive carrots that could nudge issuers to shift to public issues for fund-raising from private placements.  

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