Sebi’s high value debt entity tweak may have limited impact on lower-rated bonds

Bond Market

Regulatory easing in India’s corporate bond market might be strengthening issuer incentives but market participants remain cautious on whether this will meaningfully revive appetite for lower-rated debt.

During its latest board meet, the Securities and Exchange Board of India (Sebi) raised the threshold for classifying a High Value Debt Listed Entity (HVDLE) to Rs 5,000 crore from Rs 1,000 crore, sharply reducing the number of issuers, subject to equity-style corporate governance norms.

According to Akshat Garg, Head, Research & Product at Choice International, the move materially alters issuer economics.

“Earlier, any entity issuing listed debt of over Rs 1,000 crore had to comply with governance norms designed for equity-listed companies, like independent director mandates, related-party transaction rules, and frequent reporting,” Garg said.

According to him, “that disproportionately burdened issuers who access bond markets but are not equity market participants.”

Garg estimates the change removes around 89 entities (largely NBFCs, housing finance companies and ARCs) from the HVDLE universe, thus shrinking it by about 64 percent. ARCs refer to asset reconstruction companies and NBFCs mean non-banking financial companies.

Issuance economics

“Lower compliance costs should improve issuance economics. More issuers may now prefer bond markets over bank funding, deepening the credit universe,” he added, noting that this could eventually support better pricing and potentially higher coupons, particularly for distributors and credit fund managers.

However, market veterans caution against drawing a straight line between regulatory relief and investor behaviour.

“This is fundamentally an issuer-side reform, not an investor-side one,” said market veteran Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP.

“The compliance burden has clearly reduced for issuers below Rs 5,000 crore of outstanding debt. Earlier, the threshold was Rs 1,000 crore; now those issuers get breathing space. From that perspective, it is a very good move,” he said.

Srinivasan said the easing of norms could bring hesitant issuers back to the market. “Some borrowers stayed away earlier because the compliance was heavy. With that eased, even issuers who were not regular participants may now be willing to tap the bond market,” he said, adding that wider issuance and improved market liquidity are likely outcomes.

Sachin Shardul, Senior Vice President at YES Securities, explained, “If a corporate house feels it’s easier to raise money via this route, more will come to the bond market. That leads to more supply-- and as supply comes in, investors will have more options to choose from.”

Yet, Srinivasan was careful to separate issuance volume from pricing outcomes, saying, “I don’t think this will automatically change pricing.” He added, “Yields are driven by supply and demand. If supply increases without matching demand, yields can go up. We have to wait and watch how many issuers actually come forward.”

BFSI sector to benefit most

Market participants believe that the benefits will be concentrated on the BFSI (banking, financial services and insurance) ecosystem, which dominates India’s corporate bond market.

“Most issuances (public or private) come from the BFS sector,” Srinivasan said. This change, he explained, primarily helps private sector BFS entities below Rs 5,000 crore, while large public sector issuers are anyway above the threshold and already compliant.

Crucially, market participants flagged that interest in lower-rated papers may remain structurally constrained, despite regulatory incentives. Large institutional buyers such as provident funds, pension funds and insurers operate under strict rating and exposure norms, limiting participation beyond top-rated bonds. As a result, demand for sub-AAA paper continues to be concentrated among select credit funds and high-risk debt strategies.

Shardul also added perspective on investor behaviour, “For Indian investors, equity, gold, and real estate still dominate. Debt, as an asset class, will gain momentum only as investors go through market cycles and realise asset allocation is critical — but that takes time.”

Srinivasan also pointed to the broader rate and liquidity backdrop. Despite multiple rate cuts, yields remain elevated. “After nearly 25 months of easing, government bond yields have actually moved up,” he said, citing heavy supply of ultra-long government and state bonds, weak currency dynamics, uncertain US tariff outcomes and limited foreign inflows. “Domestic factors are supportive, but external factors are still negative,” he added.

In the near term, he expects issuance momentum to remain strong. “For December and January, I expect overall listed bond issuances to cross Rs 1 lakh crore each month,” Srinivasan said. This will be driven by pension and provident fund demand, aggressive pricing in select AAA issuances, and banks tapping bond markets as deposit growth moderates.

Adding another layer to the issuer incentive framework, Srinivasan highlighted the latest regulatory change allowing zero-coupon bonds to be issued via private placement, subject to merchant banker appointment (previously restricted to coupon-bearing instruments). “Issuers who prefer zero-coupon structures now have that flexibility as well,” he said, noting that the move could further diversify issuance strategies, particularly for balance sheet-driven borrowers.