In recent years, the concept of “sachetization” has been gaining momentum in India’s financial markets. Commenting on this trend, Madhabi Puri Buch, chairperson of Securities and Exchange Board of India (Sebi), recently said “We know the entire story about how the shampoo market in India exploded when it moved from bottles to sachets and people could afford to buy a ₹1 sachet or ₹2 sachet of shampoo, but could never have afforded to buy ₹100 bottle, the market just exploded”. Its heartening to see what happened in consumer goods is now getting replicated in financial markets as well. The new entrant in this trend are—bonds.
In its meeting on 30 April, the board of Sebi approved the proposal to reduce the minimum ticket size for privately placed listed bonds to only Rs10,000 from Rs1 lakh earlier. Let us understand why it was done and what implications this has for investors, bond market, and issuers.
Uday Kotak, founder of Kotak Mahindra Bank, recently pointed out that it will be a one-legged race for Indian growth story unless debt markets grow. The implication being that India cannot grow if only equity markets are developed and bond markets are left behind.
For Indian debt markets to grow, retail participation is imperative. However, till now, the minimum ticket size for privately placed listed bonds, which constitute 98% of the bond market, had been kept at Rs1 lakh. This high entry barrier was a deterrent for a majority of the retail investors. Furthermore, in view of this high price, an ordinary investor would not have been able to opt for more than one issuer, thereby leading to very high concentration in that investor’s portfolio. This made the asset class unattractive from risk-adjusted return point of view for the investor. The decision to bring this ticket size down to Rs10,000 democratizes bond investing, opening doors for retail investors.
But what does this evolution entail for the broader financial landscape? For retail investors, incorporating bonds into their investment portfolios offers a range of benefits that complement traditional equity investments. Bonds provide stability, predictable returns, lower risk compared to stocks and inflation-beating returns making them an attractive option for investors seeking to preserve capital and generate income. Presently, high rated bonds in A and AA category are giving 10-11% fixed returns to the investors. Post the removal of taxation arbitrage that debt mutual funds enjoyed, bonds have become the favoured debt instrument for many investors.
For bond issuers on the other hand, the sachetization of the market presents an opportunity to tap into a larger investor base. Most of the Indian companies including non-bank finance companies (NBFCs) have been overly dependent on banks. In fact, the Reserve Bank of India governor has been cautioning banks to go slow on NBFC lending and simultaneously nudging NBFCs to diversify their funding away from banks. With retail investors now able to participate more easily, issuers can diversify their investor pool and also lower their cost of capital. This could incentivize more issuers to enter the bond market, thereby deepening it further and setting a virtuous cycle.
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The entry of retail investors would also make the secondary bond market much more vibrant leading to more liquidity for the participants. This, in turn, will lower the liquidity premium that bonds presently carry and reduce the cost of borrowing for Indian corporates leading to more capital formation.
The market regulator has played a crucial role in fostering trust and legitimacy in the bond market. The creation of Online Bond Platform (OBP) platforms to take bond investment to the masses, coupled with stringent regulations on unlisted bonds, demonstrated the regulator’s commitment to grow the market while ensuring investor protection. The phased reduction in minimum investment sizes, from Rs10 lakh to Rs1 lakh and finally to Rs10,000, reflects a thoughtful approach aimed at balancing accessibility with prudence.
As we stand at the cusp of a revolution in bond investment in India, it’s evident that sachetization marks a significant milestone in mainstreaming bond investments in India. With the regulator’s intent clear and investor education on the rise, the stage is set for a transformative journey in the years to come. As a participant in this exciting evolution, I look forward to witnessing this journey.
Anshul Gupta is chief investment officer at Wint Wealth.