Securities and Exchanges Board of India on July 3, 2024, made a significant cut on the permitted face value of debt securities from Rs 1 lakh to Rs 10,000 issued on a private placement basis. The move is aimed to boost the participation of retail investors in the corporate bond market.
In a circular, Sebi said, "The issuer may issue debt security or non-convertible redeemable preference shares on a private placement basis at a face value of Rs 10,000."
Market participants had intimated to Sebi that lower ticket sizes of debt securities may bring more non-institutional investors into the corporate bond market which in turn may also enhance liquidity.
The upcoming change is in line with global practices, as smaller denominations are common worldwide, and this will further integrate the Indian bond market with international standards. However, this relaxation comes with certain conditions. For example, the issuer must appoint at least one merchant banker to conduct due diligence for such issuances.
Further, such debt security or non-convertible redeemable preference share shall be interest or dividend-bearing security paying coupon or dividend at regular intervals with a fixed maturity without any structured obligations.
Simply put, the bonds should have straightforward features providing regular payments. However, it allows for 6 types of credit enhancements but with necessary checks and balances such as verification by Credit Rating Agencies (CRAs) on support considerations.
How Will This Impact the Debt Market?
Says Nikhil Aggarwal, Founder & CEO of bond investment platform, Grip Invest, "This is a defining moment for the bond market akin to the launch of the zero-brokerage model in equity which transformed retail participation. As much as 98 per cent of all bond issuances amounting to Rs 8.4 lakh cr in FY24 were privately placed and only 2 per cent were public offers."
"By reducing the face value to Rs 10,000, Sebi has improved retail investor accessibility into the bond market, providing them with more options in terms of issuers, ratings, tenure and return on bonds. Lower face value will help increase trading volume and hence enhance the liquidity in the market. Coming on the heel of India's inclusion in JP Morgan GBI EM index, FY 25 is proving to be the year of bonds."
Earlier this week in the SEBI Board meeting, the regulator reduced the period for seeking public comments on the draft offer documents from seven days to one day for issuers whose specified securities are already listed. Further, the minimum subscription period and listing timeline have been cut down significantly to improve ease of business.
