India's bond market norms: How they have evolved over the last decade

Retail participation in bond market remains low due to investors’ preference for bank fixed deposits and post office savings schemes, among others.

Despite lower retail participation, India's bond market has gradually gained some depth in the last 10 years on the back of a higher concentration of qualified institutional investors, high net worth individuals (HNIs), and family offices, experts said.

Retail participation remained low even after various reforms announced by regulators — the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) — to increase the depth and participation in the last 10 years. This, experts said, is due to the lower interest of retail investors in fixed-income products and their preference for bank fixed deposits and post office savings schemes, among others.

“Retail investors never had an opportunity to learn about fixed-income products. Retail investors have traditionally invested their money in bank fixed deposits, post office savings account schemes, and some percentage in the equity market,” said Venkatakrishnan Srinivasan, founder and Managing Partner of Rockfort Fincap LLP.

According to the data compiled by Moneycontrol, the outstanding amount of government securities (G-Secs) and corporate bonds has seen a growth of over 165 percent in the last 10 years.

Further, in terms of the increase in the depth of the bond market, V Ramachandra Reddy, DGM - Head Treasury, Karur Vysya Bank, said it is dominated by aggressive government debt issuances in this period.

“In a growing economy, increasing debt levels are common. The growth is being driven by capital investments primarily by the government, followed by private investments,” Reddy added.

In the last 10 years, regulators have announced various reforms to increase retail participation in the bond market, such as the RBI Retail Direct Scheme, a reduction in the minimum investment in corporate bonds from Rs 10 lakh to Rs 1 lakh, permission to sell G-Secs by online bond platforms to retail investors, and online bond platform regulations, among others.

Let us take a look at each of these measures announced by the regulators in the last 10 years and their purpose.

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The RBI Retail Direct scheme was announced by the apex bank on February 5, 2021, to encourage retail participation in the G-Secs market.

The RBI announcement said that as part of continuing efforts to increase retail participation in G-Secs and to improve ease of access, it had decided to move beyond the aggregator model and provide retail investors online access to the G-Secs market — both primary and secondary — along with the facility to open their gilt securities account (‘Retail Direct’) with the RBI.

Since then, the growth in retail participation has remained mild.

According to the RBI data, the total number of registrations stood at 114,715 as of November 20, 2023, since inception. The data further shows that most investment done by retail investors is in Treasury bills (T-bills), at Rs 2,135.67 crore since inception.

Further, several initiatives, such as the introduction of non-competitive bidding in primary auctions, permitting stock exchanges to act as aggregators/facilitators for retail investors, and allowing the odd-lot segment in the NDS-OM secondary market, were also taken over the years.

SEBI, in a circular on October 28, 2022, announced the reduction in the face value of debt security and non-convertible redeemable preference shares issued on a private placement basis to Rs 1 lakh from the current Rs 10 lakh with effect from January 1, 2023.

The move came after the regulator received representations from various market participants, including issuers, requesting a review of the denominations.

"In particular, non-institutional investors consider the high ticket size a deterrent that restricts their ability to access the market for corporate bonds. If the face value and trading lot are reduced, more investors can participate, which in turn will enhance liquidity in the corporate bond market," the SEBI circular said.

The securities markets regulator released its Registration and Regulatory Framework for Online Bond Platform Providers (OBPP) in November 2022.

As noted by the regulator, given the significant increase in the number of people transacting on online bond platforms, it was time they were brought under a regulatory framework.

This was later amended after some missellings happened on some platforms. After this, OBPP formed an industry association, which recently received approval from the government.

On November 25, Moneycontrol, citing sources, reported that the Ministry of Corporate Affairs had approved the application submitted by online bond platform providers for the formation of their industry body.

The regulator also allowed the sale of G-Secs on these platforms.

“Post-COVID-19, most Indian retail investors have learned to invest through online tech platforms, which has helped in the growth of the retail bond market to some extent,” Srinivasan added.

Last year, SEBI put a cap on the International Securities Identification Number (ISIN) for debt securities issued on a private placement basis maturing in a financial year.

This move aimed to boost liquidity in the corporate bond market.

With respect to the private placement of debt securities, SEBI said that a maximum of 14 ISINs maturing in any financial year will be allowed for an issuer of debt securities.

Apart from these, various measures have been taken by the government to increase the depth of the market and retail participation.

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In the last 10 years, the bond market has seen an exponential increase in outstanding amounts.

As per SEBI data, corporate bonds outstanding in 2014 were Rs 16.49 lakh crore, which increased to Rs 44.16 lakh crore in 2023.

Similarly, government borrowings through G-Secs increased to Rs 15.43 lakh crore in FY24 from Rs 5.79 lakh crore in FY14.

Srinivasan said that across the world, most of the developed nations are using the bond market as their main source of financing. For India too, which is now one of the fastest-growing nations, it has become important and essential to diversify the financing options of the borrowers.

“The percentage of the bond market in India is still minuscule compared to developed nations,” Srinivasan added.

Between 2014 and 2023, the yield on the 10-year government bond moved in the range of approximately 4.96 percent to 9.11 percent. Currently, the 10-year bond yield is around 7.27 percent.

During the COVID-19 pandemic, the 10-year benchmark bond yield went down to approximately 5.80 percent following the rate cuts by the RBI.

Reddy further said that with the advent of new technologies, mobile penetration, social media influence, and government and regulator support, retail participation in debt markets has been increasing phenomenally. The accessibility of mutual funds for small investors has also increased.

Investors mostly prefer the 10-year G-Secs, which is the most liquid bond in the market, experts said.

“In the Indian debt market, the 10-year security is the benchmark and the most liquid bond. It has always been the favourite security of traders,” Reddy said.

The repeated issuance of this security in very large amounts has made it the benchmark bond.

Whereas, on the corporate bond front, market experts said that investors mostly prefer bonds issued by the Housing Development Finance Corp (HDFC), Bajaj Finance, LIC Housing Finance, and the National Bank for Agriculture and Rural Development (Nabard), among others.

"Liquid, strong names survive. HDFC, Bajaj, LIC Housing, etc. are the favourites,” said Rajeev Pawar, Head of Treasury, Ujjivan Small Finance Bank.