The evolution of bond investment in India: Sachetization and its implications

livemint.com:

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.