Sachetization of Bonds

The concept of making products available in small and affordable sizes

The practice of Sachetization has been long present in the Indian Economy and is even a quite popular one among FMCGs. The FMCGs understood that the economic landscape indicated the need to cater to a very large consumer group who could not afford large packs of products due to high relative outflow at once. So, the idea of delivering the same products in smaller quantities helped the companies tap into a large market and drive both growth and customer satisfaction. The large impact of these small sachets can be derived from the fact that around 70% of sales of shampoos in the country are attributable to packs priced between ₹ 2 and ₹5.

Having revolutionized the consumer industry, sachetization has lately been transforming the financial landscape. This has opened new avenues for investment to investors with limited capital. Investors can now invest small amounts in securities of their choice in minimal denominations through ETFs and other managed funds. There has been development of sachetization in MSME loans which has made financing for MSMEs easier. The regulators are even proposing sachetizing mutual funds by proposing players accept SIPs for as low as ₹250 a month.

Drawing from the same, looking to make bond investing alluring for retail investors, the RBI recently reduced the minimum investment amount for privately placed listed bonds / Non-Convertible Debentures (NCDs) and Non-Convertible Redeemable Preference Shares (NCRPS) from ₹1 lakh to just ₹10,000. This move looks forward to making bond investing more accessible to average retail investors who previously found the threshold to be too high. This move will help in reforming the markets and making them more mainstream. The only requirement is the appointment of a merchant banker. Such NCDs and NCRPS must be plain vanilla or interest/dividend-bearing instruments and credit enhancements are allowed on them.

This democratization will be helpful towards the attainment of:

  1. Increased Liquidity: Lowering of minimum ticket size will drive retail participation in the bond market which is expected to drive volumes resulting in the narrowing of the bid/ask spread.
  2. Growth of Bond Market: Wider market participation may lead to the emergence of a lively secondary market which reflects better price discovery and lowering of borrowing costs for issuers.
  3. Diversification: Investors will now have a new investment avenue that will improve portfolio stability and weather volatile markets. Even issuers will be able to diversify their loan portfolio as they can tap into a large pool of resources unlike traditionally relying on banks for their funding needs.

The sachetization of bonds is a great step towards increasing financial inclusion in the country. This step will create a positive feedback loop in the economy as investments increase through bonds, and more companies will be looking to raise funds through them. These measures coupled with the inclusion of Indian bonds in global indices such as JP Morgan and Bloomberg Index, will help us to move towards the development of a more robust fixed-income market in the country that is liquid, reflects the truer price of securities, and ensures higher market discipline. As this process welcomes new investors, stringent rules and measures around the same also will need to be developed by the regulators. SEBI needs to regulate the Online Bond Platforms (OBP) and unlisted bond markets and take measures to ensure transparency and a safe environment to maintain investor confidence.

Contributor: Team Leveraged Growth