Rs 1 lakh lot securities will add to Bond St buzz but may not move yields much: Experts

A bond’s face value refers to how much a bond will be worth on its maturity date. Simply put, it’s the value the bondholder will receive when their investment fully matures. For instance, if the face value is Rs 1 lakh then investors will receive the same amount at maturity.

The case for reduction

"The private placement primary bond issuance restricts direct retail participation, and the investor segment continues to remain the same as on date. It will help to increase the bond market liquidity in the secondary market trading," said Venkatakrishnan Srinivasan, founder and managing partner at debt advisory firm Rockfort Fincap.

T Rabi Sankar, Deputy Governor, Reserve Bank of India, in his keynote address at the Bombay Chamber of Commerce & Industry function on August 24, had said the outstanding stock of corporate bonds has increased fourfold from Rs 10.51 lakh crore as at end of FY2012 to Rs 40.20 lakh crore as at end of FY2022. Annual issuances during this period have increased from Rs 3.80 lakh crore to close to Rs 6 lakh crore.

"We believe it opens up a direct market for good quality credits as a direct competition to Fixed Deposits with potentially better returns. The liquidity part may also get a boost with people directly trading in granular lots," said Ajay Manglunia, managing director and head of Investment Grade Group at JM Financial.

What does the Sebi circular say?

SEBI, in a circular on October 28, announced the reduction in the face value of debt security and non-convertible redeemable preference share 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 as a deterrent which restricts their ability to access the market for corporate bonds. If the face value and trading lot is reduced, more investors can participate, which in turn will enhance the liquidity in the corporate bond market," the SEBI circular said.

The provisions of this circular shall be applicable to all issues of debt securities and non-convertible redeemable preference shares on a private placement basis, through new ISINs, on or after January 1, 2023, it added.

Subordinated and perpetual debt, Srinivasan said, are not considered as pure debt securities and also have a face value of Rs 1 crore. Unlike redeemable preference shares, SEBI didn’t specifically mention them and hence these instruments should be considered out of the purview of the circular, he said.

Impact on yields

Market participants remained unclear as of now on the yield movement but some experts expect the impact to be limited.

Market yield movement is usually based on investment from large institutional investors, so it is expected to not largely impact the pricing based on Rs 1 lakh lot size. However, it will surely help to trade quickly in the secondary market, a dealer said.

"As the lower face value will increase the number of investors, the demand for the debt security will increase. The increase in demand will cause a rise in prices of the debt security. Considering the supply remains constant, the yield might get reduced. However, a shift in the supply of the debt security would ensure parity and, in that case, yields might not get impacted," Gupta added.