Increased involvement of individual investors in bonds with poor credit ratings

Increased involvement of individual investors in bonds with poor credit ratings

India's Corporate Bond Market: A Growing Trend with Increased Retail Participation

The corporate bond market in India is witnessing a significant surge, with a 28% increase in issuance during FY25, reaching a historic high of nearly ₹9.9 lakh crore ($1.24 trillion) [2][3]. This growth is partly driven by regulatory reforms from the Securities and Exchange Board of India (SEBI), which have improved market accessibility, lowered minimum investment amounts, and facilitated digital platforms [1].

Despite this rapid growth, retail participation remains relatively low compared to institutional investors [2][3]. However, retail investors are increasingly attracted to corporate bonds, particularly those offering potentially higher yields compared to traditional fixed deposits, especially in a declining interest rate environment [1].

Rising Interest in Low-Rated Corporate Bonds: A Double-Edged Sword

Recent trends show a growing interest in low-rated corporate bonds, posing concerns about credit risk. These bonds carry a higher risk of default, and retail investors, who may lack expertise in bond credit assessment, could face challenges [4]. The risk is heightened by the increasing corporate leverage and the shift of companies from bank loans to corporate bonds for cheaper and flexible capital, raising questions about credit quality and financial stability [4].

SEBI's Role in Protecting Retail Investors and Improving Market Depth

Regulatory bodies like SEBI play a critical role in this evolving landscape. They aim to protect retail investors and improve market depth through reforms such as reducing ticket sizes to sub-lakh denominations, enhancing disclosure norms, and enabling digital investment platforms [1]. SEBI's interventions have been instrumental in broadening access, yet they continue to monitor and tighten regulations to mitigate risks related to transparency and credit quality to safeguard smaller investors.

The Way Forward: Balancing Growth and Risk

As the corporate bond market gradually democratizes, there is a clear need for continued regulatory vigilance and investor education to address risks, especially those related to low-rated corporate bonds. Investors are advised to consider various elements such as bond's credit rating, the issuer's track record in timely repayments, the liquidity of the instrument, settlement timelines, and the tax implications of the investments [5].

In the high-yield segment, investors should be cautious about the issuer's underwriting quality, liquidity, profitability, and exposure to sectoral headwinds [6]. Defaults in the NBFC space are often driven by liquidity issues and promoter-related concerns, as seen in the recent default by TruCap Finance [7].

Notable Developments

• Lenskart has filed for an IPO, with Softbank and founders leading the share sale.
• The rating agency downgraded the long-term bank facilities and NCDs of TruCap Finance to 'D' from 'BB+'.
• Retail participation in low-rated corporate bonds has jumped to 5.8% in the first quarter of FY26, compared to 3.8% in FY24.
• The advisory also asks investors to verify if the platform is a Sebi-registered Online Bond Platform Provider (OBPP).
• The Reserve Bank of India increased the risk weight on bank loans to NBFCs in November 2023, leading many NBFCs to resort to raising money from the bond market at higher rates.
• The stock exchanges have issued an advisory, cautioning investors about trading in bonds and highlighting the risks and costs associated with fixed income instruments.
• The corporate bond market has received a fillip due to SEBI reducing the entry barrier for retail investors.
• The total traded bonds on online bond platforms in FY25 were primarily from companies with ratings of A- and BBB.
• C S S Nikhil Bhargav, vice president of INRBonds, warns that defaults in the NBFC space are often driven by liquidity issues and promoter-related concerns.
• In FY25, the total traded bonds on online bond platforms amounted to Rs 3,800 crore, with 75% being below AA rated bonds.

[1] SEBI's regulatory reforms broaden access to the corporate bond market

[2] India's corporate bond market posts record growth

[3] India's corporate bond market: A closer look

[4] Credit risk in low-rated corporate bonds

[5] SEBI advisory on trading in bonds

[6] Investing in high-yield corporate bonds

[7] TruCap Finance defaults on interest and principal amount on its NCDs

1. Retail investors are increasingly investing in corporate bonds, attracted by potentially higher yields compared to traditional fixed deposits, mostly due to regulatory reforms by SEBI that have improved market accessibility and lowered minimum investment amounts.
2. Considering the growth in the corporate bond market, investors should be cognizant of varying elements such as credit rating, issuer's track record, liquidity, settlement timelines, and tax implications when making investments.
3. The interest in low-rated corporate bonds poses some concerns about credit risk, given retail investors' possible lack of expertise in bond credit assessment, and the increasing corporate leverage that could raise questions about credit quality and financial stability.
4. As the corporate bond market gradually democratizes, regulatory bodies like SEBI are working to protect retail investors and improve market depth through reforms such as reducing ticket sizes, enhancing disclosure norms, and enabling digital investment platforms.
5. In the high-yield segment, investors should be cautious about the issuer's underwriting quality, liquidity, profitability, and potential exposure to sectoral headwinds.
6. With regulatory reforms serving to reduce entry barriers for retail investors, the corporate bond market has received a significant boost, resulting in substantial traded bonds on online bond platforms, mainly from companies with moderate credit ratings like A- and BBB.

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