Corporate Bond Market: What It Is, And How It Is shaping Up

Though there are various options to buy them, the issue with the corporate bond market is that there is not much liquidity. A regulatory framework, proposed by SEBI, enumerates many areas of improvement. As the market and issuers grow, corporate bonds will be a good investment avenue.

Corporate bonds are one of the investment avenues for bonds, apart from debt mutual funds (MFs). There are a variety of bonds available.

There are the plain-vanilla bonds, tax-free AAA-rated PSU bonds, and perpetual bonds that offer relatively higher returns. Bonds are available across credit quality, carrying a rating of ‘AAA’ and below, across maturities, i.e., short to long maturity, and offering a range of returns.

What are the buying options?

One, you can subscribe to primary issues, but they are floated mostly through private placements and public issues are occasional.

The second option is through bond houses or other intermediaries. They would show you the available inventory of corporate bonds, where deals happen in sizes appropriate for HNIs (high net worth individuals) or the mass affluent segment.

The third way is to buy bonds from the exchanges (NSE/BSE) through a broker. But there are issues about liquidity, availability and understanding the effective returns, i.e., yield to maturity (YTM) at that price.

The fourth option is online bond platforms. They showcase the available inventory of corporate bonds, where certain aspects have been flagged off in a Proposed Regulatory Framework by the Securities and Exchange Board of India (SEBI), in July 2022.

There is a platform for retail participation in Government Securities (G-Secs), which is the RBI Retail Direct Gilt (RBI-RDG) from the central bank itself, but we are discussing corporate bonds here.

Liquidity issues

The issue with the corporate bond market is that there is not much liquidity. If the magnitude of transactions in the equity market or the G-Secs market is the benchmark, traded volumes in the corporate bond market is much on the lower side.

On top of that, transactions take place in large lot sizes. The reason is that ‘big boys’ like banks, MFs, and insurance companies are the participants here and not individuals.

Dealing houses source the bonds from the wholesale market in larger lots and make bonds available in lot sizes appropriate for HNIs or the mass affluent segment.

Given that there is not much liquidity even for bonds listed at the exchanges (NSE/BSE), screen-based trades are limited. Traffic flows through telephonic conversations, in known circles, as the market is confined mostly to a few square kilometres in Mumbai.

With the benefit of technology, nowadays there are online bond dealing platforms floated by bond houses or associates. Being online, you can open an account anywhere, anytime.

Minimum lot size

The minimum lot size for the deals is usually Rs 2 lakh.

The rationale for the minimum deal size is that bond deals are usually settled through the bond reporting and settlement platform of the BSE, called the Indian Clearing Corporation Ltd (ICCL). ICCL accepts payments only through RTGS, which has a threshold of Rs 2 lakh.

The Proposed Regulatory Framework by SEBI, mentioned earlier, enumerates certain areas of improvement in the context of online bond platforms. Post public comments and post further analysis, the final guidelines would be issued.

Not to say the structure is weak now, but the proposed developments would make the structure more robust. The SEBI paper mentions that in certain cases the role of clearing corporations (NSE/BSE settlement platforms) was played by these bond platforms by directly accepting funds from clients and processing settlements off-market.

These instances were also observed in cases where the bonds are unlisted and/or the value of the transaction is below Rs 2 lakh in view of the RTGS threshold. The regulators can take the initiative, and if the clearing platforms accept NEFT payments, it will pave the way for supervised settlement of smaller trades as well.

If the regulator pushes all bond market participants towards executing trades through the exchange debt segment (for listed securities) or exchange clearing platforms (including unlisted), the system will be uniform.

Investors would be assured that the deal settlement is monitored by a third party. The SEBI paper also mentions that only listed debt securities can be offered by online bond platforms. Market participants and issuers of bonds may be nudged towards listed ones.

However, if the issuance of the bond is happening through private placement and if it is not a public issue, it requires a minimum face value of Rs 10 lakh per bond, and Rs 1 crore for perpetual bonds. The high face value is a reason to float unlisted bonds. Not all unlisted bonds are of inferior quality, but to make it available at any face value, even for less than Rs 10 lakh, would be convenient for retail investors in secondary market transactions.

Net-net, with the expansion of the market, the number of issuers, the investor base and fleet-footed intermediaries, corporate bonds are offering an avenue to you. You can diversify your portfolio as per your needs and suitability.


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