Face value of debt securities cut to Rs 10k to boost retail participation

If you want to benefit from high interest rates over a long period, now is a great opportunity for investment. Market regulator SEBI has taken a big step towards increasing retail investors’ participation in corporate bonds. Under this, the face value of corporate bonds, which is the nominal value, has been reduced from ₹1 lakh to ₹10,000. So far, ordinary people have not been able to benefit from investing in corporate bonds due to their high value.

Companies issue bonds to raise funds from the market to meet their needs, known as corporate bonds. The government also raises loans from the market from time to time by issuing bonds.

Usually, corporate bonds are short-term, ranging from 1 to 4 years. Long-term bonds are issued for periods ranging from 5 to 20 years. Companies determine the interest rates when issuing bonds. This way, investors receive a fixed interest rate throughout the bond’s term.

SEBI has said in its new guidelines that companies can now issue bonds and non-convertible debentures (NCDs) with a face value of ₹10,000. However, this will require compliance with certain conditions. Companies will need to appoint at least one merchant banker for this facility.

SEBI has not reduced the ticket size of bonds for the first time. The regulator had reduced the face value of corporate bonds from ₹10 lakh to ₹1 lakh in October 2022. It has now been reduced to ₹10,000. Bonds worth ₹8.4 trillion were issued in the domestic market in the financial year 2023-24. Of these, private companies held 98% bonds,  while public sector held 2%.

Why has SEBI taken this step? What will be its benefit?

SEBI-registered investment advisor Jitendra Solanki says that SEBI’s new initiative will benefit both companies and investors. So far, there hasn’t been much investment in the bond market, which has led to a liquidity shortage in the market. Reducing the ticket size will increase the participation of small investors, thereby increasing investment.

Corporate bonds are usually long-term and have predetermined interest rates. These returns are affected by prevailing interest rates. During periods of high interest rates, new corporate bonds will also yield higher interest.

This is an investment category where investors can get better returns in comparison to bank fixed deposits (FDs). For those investors who want fixed income with high interest rates over a long period, now is a great opportunity to invest in corporate bonds. You can include 20-25% of your investment portfolio in corporate bonds.

There are several ways to buy and sell corporate bonds in the market. One way is to buy them directly when a company issues bonds. In addition, you can buy bonds from a registered stock broker. Many fintech apps also provide the facility to invest in bonds.

Now you can start investing in bonds with as little as ₹10,000. You can invest millions in bonds as well. The income from corporate bonds is included in your annual income and tax is levied based on the slab.

With SEBI’s new rules, just like the stock market, there is hope that small investors’ participation and trading volume in corporate bonds will increase. However, remember that higher the expected return in an investment, higher the associated risk. This mantra applies to corporate bonds as well. Therefore, before investing in corporate bonds, understand the risks associated with them thoroughly.