Here is a look at how investors can buy and sell bonds on online bond platforms, the limitations they are likely to face, and other options for investors.
Let’s look at OBPs first.
OBPs: Buying and selling
Sebi has stipulated that OBPs use exchanges’ request for quote (RFQ) facility for investors to place buy or sell orders, which will be subsequently settled by the respective clearing corporations of the exchanges. In most cases, OBPs require investors to have a pre-existing demat account.
The RFQ is an electronic system that facilitates requesting and receiving of quotes for debt securities transactions. In this mechanism orders are matched with an OBP or bond seller depending on the quantity and price bid.
Technically, investors can sell their bonds on an OBP and take a premature exit, but it is not as straightforward as buying.
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“To exit, the investor needs to apply through an RFQ. We are one of the few OBPs that facilitate buying from clients, as well as offer OTM (one-to-many) RFQ to them when they are looking to sell,” said Vishal Goenka, founder of IndiaBonds, which offers one of the largest basket of live bonds among OBPs.
Most OBPs offer only one-to-one RFQ mode as they are usually the buyer of the bond when an investor wants to exit. However, this doesn’t necessarily lead to best-price discovery, and exit is not guaranteed if the OBP doesn’t want to buy the bond.
Clean vs dirty price
OBPs are required to state the dirty price of a bond along with the clean price.
In the bond market, the dirty price is the total cost for the buyer, which includes the clean price and accrued interest.
The clean price shows a bond’s worth based on current interest rates and does not factor in any interest built up since the last coupon payment. The clean price changes with market interest rates. If rates go down, bond prices go up, and if rates go up, bond prices go down.
For instance, a bond with a 10% coupon rate and a face value of ₹1,000 might sell for a higher price (like ₹1,050) if yields fall to 9%, or for a lower price ( ₹950) if yields rise to 11%. When the yield matches the coupon rate, the clean price equals the face value.
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Accrued interest is the interest that has built up from the last date of coupon payment to the date of the transaction, providing compensation to the seller for holding the bond.
Exchanges quote the dirty price only. But without the clean price, a buyer or seller cannot see a bond’s yield to maturity. Yield and bond prices (clean) are inversely correlated, which helps to track a bond’s performance and against other bonds, too.
OBPs: Order flow
The RFQ mechanism has automated order-matching and reporting of bond transactions.
Through RFQ, a transaction is reported automatically to the reporting platform or respective exchanges—Corporate Bond Reporting and Integrated Clearing System (CBRICS) for NSE and NDS-RST for BSE.
After this, the investor needs to transfer the investment amount in the clearing account of the respective exchange’s clearing corporations—Indian Clearing Corporation Ltd (ICCL) for BSE and NSE Clearing Ltd (NSECL) for NSE.
Once the amount and bid bond quantity are tallied, the investment amount is transferred to the seller, and bonds are transferred to the buyer’s demat account.
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The ₹10,000 bonds
The bond platform industry expects a surge in retail participation after Sebi cut the minimum face value of listed bonds from ₹1 lakh to ₹10,000, significantly reducing the minimum ticket size for transacting on OBPs.
Anshul Gupta, founder of Wint Wealth, said the market is growing. “ ₹1 lakh was like semi-HNI (high net worth individual) category; ₹10,000 is pure retail category. At least 80-90% of the new bonds that we have listed on our platform are with ₹10,000 face value,” he said.
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Gupta added that this is a good ticket size for first-time investors to test the waters.
“At this ticket size, retail investors can also build a diversified portfolio. At ₹1 lakh, he or she could only get exposure to a single bond. At ₹10,000 of minimum ticket size, the investor can technically buy 10 bonds of varying maturities or issuers to get a more diversified portfolio for a more nuanced bond investment strategy,” Gupta said.
Other players
As mentioned earlier, OBPs are required to register as brokers in the debt segment of the market. But what about the brokers already operating in the debt market?
To show both clean and dirty prices using exchange data, brokers using the capital market segment need to have backend systems that can calculate clean prices in real time.
“We have created a system wherein investors can see both clean and dirty price of all these bonds and then punch in their buy or sell orders,” said Suresh Darak, founder of BondBazaar.
As bonds are not all actively traded in the bond markets, exiting a bond at a fair valuation is challenging across platforms. However, market-making—or liquidity-enhancing activity by providing two-way quotes—can address this problem to some extent.
Mint’s view
Bond platforms want to create an ecosystem to allow easier bond transactions and get more retail investors to participate in the bond market. But the system is not yet perfect.
In the offline market, there are still unregulated distributors that take advantage of the inefficiencies in the system to sell bonds at higher prices to investors. But the introduction of market-making under a regulated framework can help develop the market, allowing easier exits for retail investors on either platform.
The regulations as drafted by Sebi right now don’t have a provision for online bond platforms to offer market-making to its clients.
