More retail participation likely if corporate bonds' face value reduced to Rs 10,000, says Zerodha's Nithin Kamath

Zerodha CEO Nithin Kamath said the latest consultation proposal by SEBI to reduce corporate bonds' face value to Rs 10,000 can lead to greater retail participation in the bond markets.

He said corporate bonds are better for retail investors who just entered markets because equities are volatile and one bad market phase will permanently throw these investors out of the markets. 

"I think for the majority of our country, i.e. beyond the top 5 to 10% of the country yet to start investing, equities may not be the right instruments because they can be scary because of the volatility. A bad market phase or losses when they start will end with investors permanently leaving the markets," said Kamath on X platform (formerly Twitter).

He also said what the ideal corporate bonds could be for retail investors. 

"Maybe the right product are government bonds and relatively safe corporate bonds from quality issuers like PSUs and AAA-rated entities. That is instruments with a lower risk profile than stocks but higher returns than banks FDs. These are good instruments for them to accumulate some savings and then invest in equity mutual funds and direct equities," said Kamath. 

He also explained the roadblocks involved in lack of retail participation in corporate bonds and urged companies to "think of small investors as potential investors". 

"Corporate bonds in India haven’t been popular among retail investors because most of them are issued through private placements with face values of Rs 10 lakh+. This was reduced to Rs 1 lakh last year. In yesterday's consultation paper, SEBI is proposing to bring this down to Rs 10,000. This makes them affordable for retail investors. Hopefully, companies think of small investors as potential investors. If holding a company's stock can help improve brand awareness, maybe having bonds can also do that?" said Kamath. 

"In order to further enhance participation of the non-institutional investors in the corporate bond market coupled with mitigation and management of risk to safeguard and protect the interest of such non-institutional investors, it is proposed to permit issuer to issue NCDs or NCRPS with the face  value of Rs 10,000. However, in such cases, the issuer shall appoint merchant banker who shall carry  out due diligence for issuance of such privately placed NCDs or NCRPS and disclosures in the private placement memorandum. Further, such NCDs and NCRPS shall be plain vanilla, interest/dividend  bearing instruments with a simple  structure (i.e. without any credit enhancements or structured obligations)," stated SEBI's consultation proposal.

Netizens concurred with Kamath and backed SEBI's proposal.

"If holding stocks boosts brand awareness, imagine the impact of bonds in the hands of small investors. It's not just about financial gains; it's a brand-building opportunity. Companies, get ready for a diverse army of bondholders spreading the word about your success," said one X user. 

"Bonds will still have to compete with FDs. Unless there's a rate differential and people are able to sell their bonds as and when they want, many will still go for FDs," said another X user.