Bond portals grow in grey area

IFR Asia 1240 - 11 Jun 2022 - 17 Jun 2022
7 min read
Emerging Markets, Asia
Krishna Merchant

Indian fintech start-ups and arrangers are launching bond portals which offer rupee bonds to retail investors seeking higher yields, but the lack of regulation in the sector is raising some concerns.

A dozen bond portals have mushroomed mostly in the past two years as investors look for alternate debt assets, away from the slender returns offered by fixed deposits.

Some portals, such as Wint Wealth, GoldenPi, AltiFi, Harmoney, CredAvenue, INR Bonds and BondsIndia, were launched by start-ups. Others, such as The Fixed Income, Bondskart, IndiaBonds and YIELD, by financial services firms with existing DCM businesses – respectively, Tipsons, JM Financial, AK Capital and Axis Bank.

"It is inevitable that bonds will form an important part of people’s investment portfolio and technology is the means to achieve efficient execution,” said Aditi Mittal, co-founder and director at IndiaBonds, and a director at AK Group.

A precipitous fall in fixed deposit rates to an all-time low of 5%–5.6% below three years, while retail inflation has hovered in the range of 6.3%–7.8% in the past year, has eroded returns, forcing retail investors to look at alternative debt products.

"Bond portals offer retail investors an investment avenue which gives them inflation-adjusted returns," said Arjun Parthasarathy, founder and CEO of INR Bonds.

"The net returns for investors who buy corporate bonds directly on the bond portals are 200–400 basis points more than the fixed deposit rates," said Ankit Gupta, co-founder and director at Bonds India, and formerly an executive director at AK Group unit.

The portals are seen as the preferred investment route for some investors who are questioning whether it is worthwhile putting money in managed credit funds.

"Investors lost faith in debt mutual funds, especially credit funds, after dismal performance and disruption in some of the funds," said Mittal at IndiaBonds. "They feel it is best to directly buy the bonds through portals and via the public issue of bonds as information becomes more accessible."

Muted returns

Credit funds have seen muted flows and many suffered mark-to-market losses in the past few years, especially since the credit crisis at non-banking financial companies began in 2018. Fund house Franklin Templeton shut six Indian credit schemes in April 2020 and shocked investors by preventing them from making withdrawals when it found many of its bonds were illiquid, though it has since repaid 103.5% of the assets under management when the funds were frozen.

Bond portals offer a way to deepen the bond market by selling rupee bonds directly to non-institutional investors for primary and secondary bond offerings, while also helping issuers diversify their investor base.

For example, the recent primary bond offering of non-bank lender Navi Finserv, rated A (stable) by India Ratings, closed eight days earlier than the planned closing date of June 2. It was sold to retail investors through portals and raised Rs5.07bn versus the base issue size of Rs3bn after the deal was subscribed 5.12 times.

Most of the portals make a profit on the buy and sell spread.

“We book positions and sell to the clients," said Tirth Jitendra Shah, co-founder of The Fixed Income. "The difference between the buy and sell rate is what we earn.”

Some market participants feel that portals are earning huge intermediation fees. “The investor does not know the difference between the selling and buying price of the bond,” said a chief investment officer at a domestic mutual fund.

Some portals also take commissions upfront from the issuers, especially unlisted, low-rated small companies, according to a DCM banker.

Many portals have been trying to educate investors about bonds through webinars with the national exchanges. Some provide resources like bond calculators and assess the risk metrics of the clients before selling them bonds. Some display the prospectus and information memorandum for each deal.

The Securities and Exchange Board of India, which regulates the corporate bond market, does not oversee portals and they are not required to register with it. Nor are there guidelines for the bond offerings.

The lack of regulation is raising concerns that some may not be doing proper due diligence or explaining risks to investors.

No regulation

The main concern is that portals are offering all types of bonds, including structured products, without understanding the risk appetite of investors, said Soumyajit Niyogi, director in the core analytical group at India Ratings, a Fitch Group firm.

"There are risks such as some portals are just focusing on acquiring customers, without giving them enough information about the junk or high-yield bonds," said Parthasarathy at INR Bonds.

Under current rules, transactions of a minimum Rs200,000 (US$2,571) in value are settled through the clearing corporations NSE Clearing (formerly known as National Securities Clearing Corp) and Indian Clearing Corp (ICCL), owned by the BSE. That gives institutions confidence that transactions will be completed even if one of the intermediaries runs into financial difficulties.

Retail bonds sold through regulated public offers on exchanges have a minimum application size of Rs10,000. Some portals, however, are slicing up bonds and offering fractional amounts in denominations as low as Rs100 with a minimum total transaction value of Rs1,000 from the secondary market, without settling through clearing corporations.

"There is a counterparty risk for bond portals which are selling bonds that are not settled through clearing corporations,” said Niyogi at India Ratings. "There could be a risk that investors may not get their money if the portal shuts."

Liquidity is an issue. There was Rs40.7trn in principal amount of corporate bonds outstanding as of March 31, but the average daily trading volume that month was around 0.2% of this, according to data from Sebi.

"Investors may not be able to sell the bonds when they want. They may have to sell at a discount or wait for a buyer, although portals say they will buy the bonds," added Niyogi.

Some portals have promised they will buy back any bonds, but it is not clear whether they will do so in stressed market conditions, or what price they will pay if they do.

“The biggest concern and question which needs to be addressed by the market regulator is: is the right selling and right buying happening through portals?” asked the fund manager.

Market participants are hoping that Sebi will announce common rules for all the portals so that they can continue to grow, and the bond market can grow in a healthy way.

"The Corporate Bonds and Securitization Advisory Committee of the Securities and Exchange Board of India is working on a paper to regulate the bond portals," said Gupta at BondsIndia.

Sebi did not respond to questions from IFR.