Planned reduction in face value of NCDs may boost liquidity of lower-rated bonds: Experts

Bonds

The debt market is set to become less rarefied. A proposed reduction in the face value of non-convertible debentures (NCDs) is likely to increase liquidity of lower-rated bonds due to diversifying investment in more companies for lowering risks and gaining higher returns by retail investors, experts said.

Usually, lower-rated bonds offer higher returns than those rated AA and above, but the associated risks are higher compared to the latter. But a lower face value will allow retail investors to diversify their investment in more companies with the same capital and lower risk and, consequently, liquidity of these entities bonds will increase, experts added.

“We have already seen that the early regulatory steps have built the investors' trust and given a positive nudge to retail investors as the reduced ticket size leads to easy access and increased liquidity,” said Anshul Gupta, co-founder and chief investment officer, Wint Wealth, a Bengaluru-based debt trading platform.

Tirth Shah, founder, Thefixedincome .com, which is also an online bond platform, agreed, saying that lowering the face value to Rs 10,000 will increase retail investor appetite exponentially for listed debt instruments as an alternative investment.

Last week, the Securities and Exchange Board of India (SEBI) proposed allowing companies to issue NCDs and non-convertible redeemable preference shares (NCRPS) with the face value of Rs 10,000 from the present minimum value of Rs 1 lakh.

This is because non-institutional investors consider the high ticket size as a deterrent that restricts their ability to access the market and acts as an entry barrier for such investors to participate in the corporate bonds market, SEBI said in a consultation paper.

The market regulator further said that the regulatory framework for online bond platforms helped increase participation of retail investors.

Also read: Explained | Why the RBI barred lenders from investing in AIFs linked to borrower companies

Impact on online bond platforms

It is axiomatic that the number of retail investors is expected to increase with bonds of a lower face value. This is because with the Rs 1-lakh ticket size for privately placed bonds, retail investors need at least Rs 5-6 lakh for meaningful diversification in debt. Only those with total portfolios of Rs 50 lakh or more can afford to do so. When the ticket size reduces to Rs 10,000, more investors can access these bonds with a smaller investment, explained Gupta from Wint Wealth.

“Reduction of face value to Rs 10,000 will increase retail investor appetite exponentially for listed debt instruments as an alternate investment,” Shah said.

SEBI in its consultation paper said from July to September 2023, it was observed that non-institutional investors subscribed to 4 percent of the total amount raised compared with the general average of less than 1 percent.

The said increase in non-institutional investor participation may be attributed to the reduction in face value from Rs 10 lakh to Rs 1 lakh made in October 2022 and the mainstreaming of online bond platforms (OBPs). Between July and September 2023, the total volume of trades undertaken on OBPs aggregated to around Rs 333 crore by 1,974 users (investors).

Shah added that the proportion of retail investors’ investments can be expected to further increase to 9-11 percent of total issuance amount in the medium to long term, considering the potential of an entire new class of retail investors who were earlier limited to just the public debt issuance options.

Also read: RBI bars lenders from investing in AIFs linked to borrowing companies

Will this change pricing of lower-rated bonds?

Some experts are of the view that the pricing of these bonds will not change immediately, but a marginal change could occur later.

“To support that, demand needs to be boosted and this should be welcomed by the market. But I am not of the opinion that this will help below AA-rated paper in terms of pricing,” said Mataprasad Pandey, vice president, Arete Capital Service, a Mumbai-based investment advisory firm.

However, some believe that once the reduction of face value comes into force, more retail investors will come into the market and long-term coupons of lower-rated bonds will come down.

“We don't expect a short-term change in coupon rates, but it will start coming down in the mid to long term (3-5 years) when a large number of retail investors are interested and able to invest in the limited supply of corporate bonds,” Gupta said.