When one speaks of bond investments in India, the subject of government securities occupies the better part of the conversation. At the outset, this seems justified, since an overwhelming majority of the total bond investments in the country are constituted by investments in government securities, and not in the corporate sector. Indeed, it is known that the bond market pertaining to the corporate sector is largely underdeveloped in the country. Even as investments in direct equities and mutual funds have soared in the last two decades, the growth pertaining to corporate bonds haven’t undergone a similar trajectory of growth. However, even these contentions contain the admission that investments in corporate bonds have seen a gradual, if not rapid, upturn in the same period.
If you’re an investor who is closely considering the option of bond investments, what must you know about corporate bonds in India before arriving at a decision?
HOW THINGS STAND
As already discussed, the corporate bond market in the country has advanced noticeably. For instance, corporate bond issuances doubled between FY12 and FY22, as a jump from a total value of Rs. 3 lakh crores to Rs. 6 lakh crores indicate. In the same period, the stock value of outstanding corporate bonds rose from 10.5 lakh crores to 39.6 lakh crores, nearly four times the value at the start of the decade. While these figures establish the reality of growth, they also delineate the restricted rate of growth pertaining to the corporate bond market. However, while considering these limitations, it would be certainly wise to also acknowledge the prospects of a better future. At this juncture, it is useful to conduct a relevant analysis by focusing on the following factors:
Cost of Borrowing
Essentially, corporate bonds are issued by corporations with a view to borrow funds at a reasonable rate of interest. However, high quotients of yields mean that this route of borrowing often costs more than bank loans. Since organisations with high creditworthiness are naturally reasonable borrowers in the eyes of banks and other lending institutions, the need for bond issuances on the part of such corporations is not felt pronouncedly. All in all, this limits the investors’ pool of choices pertaining to the corporate bond market.
In this respect, the RBI’s Long-Term Repo Operations (LTROs), which allow banks to borrow long-term loans at the prevailing repo rate, have demonstrably led to positive consequences. One significant effect of the same has been an enhancement affiliated with corporate bond yields. Since LTROs essentially reduce the cost of borrowing for corporations, a steady uptick in bond issuances has been observed since its launch. Notably, the peak value of bond issuances, amounting to Rs. 7.8 lakh crores in FY21, was largely attributed to the facilitation of LTROs.
Issues Concerning Liquidity
Flowing from the same, LTROs also aim at creating a ripple effect in the corporate bond market and solve the interconnected issue of liquidity. Since LTROs inject liquidity into banks and the markets at large, while also incentivizing corporations to issue bonds, investor participation also soars in the period, thereby further developing the corporate bond market.
Having said that, it is important as an investor to stay true to ground realities pertaining to the current times. At present, since a majority of the corporate bonds are privately placed and the rest of the offerings also form part of an underdeveloped market, no appropriate secondary market for corporate bonds prevails. Thus, since the absence of secondary market liquidity makes it difficult to buy and sell bonds in the open market with ease, it makes corporate bonds altogether unattractive for investors, especially those with low-risk profiles.
Ease of Access
To add precision to a point already made, it is worthwhile to mention that as per available estimates, over 95% of the corporate bonds in India are privately placed. In other words, 95% of the dealings in corporate bond investments are dominantly issued to a select few institutional investors like banks, other reputed financial companies, et al. Thus, for individual/retail investors, access to the corporate bond market has proved to be elusive.
With the advent and growth of Bond IPOs, however, the scenario has witnessed a few changes. With companies like Indiabulls Housing Finance and Rural Electrification Corporation (REC) choosing the Bond IPO route, more firms can be expected to follow suit. Since Bond IPOs allow for greater participation of the public at large and a minimum investment amount that is as low as Rs. 10000, the investor base stands to be subsequently broadened. However, the tedious regulatory norms that precede the issuances act as a deterrent for companies aiming to facilitate Bond IPOs, thereby leading to a limited number of additional options for bond investors in this respect.
Conclusion
While the corporate bond market could definitely blow up in the years to come, as the above paragraphs explain, a number of uncertainties also prevail. Veritably then, investors must consider the present scenario and their preferred investment horizons, their expectations concerning liquidity and their risk profiles to understand if corporate bonds aptly fit the bill for them.
Disclaimer: The contents of this article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.