OBPPs pitch investor protection mechanism for retail bond investors

Online Bond Platform Providers (OBPPs) have proposed the establishment of an investor protection mechanism for retail bond investors. This fund or insurance-like structure would bolster confidence and stimulate broader participation in the corporate bond market. Small investors could be safeguarded up to a predetermined limit, and there was a suggestion for a deposit insurance-like system for bonds.

Harish Reddy, co-founder at Stable Money, emphasized a concept akin to the DICGC insurance on bonds, stating it could be highly beneficial. Industry participants explored the idea of a universal premium, possibly linked to credit risk, which could be as low as 0.20-0.3 percent given the low default rates and secured nature of many retail bonds.

Such a mechanism would promote diversification and potentially lower the cost of capital for issuers. OBPPs would likely be more effective if applied universally rather than being optional, to avoid adverse selection. The necessity for this mechanism was underscored by an incident where an NBFC defaulted on bonds totaling around Rs 150 crore after a rating downgrade and liquidity stress.

Despite this, the company repaid investors entirely within four months. This discussion comes as regulators aim to expand retail involvement in corporate bonds, with Sebi working on measures to enhance retail access, risk disclosure, and OBPP operations. A color-coded Credit Risk-o-Meter is proposed to aid investors in understanding credit risks.

OBPPs would serve as gatekeepers, ensuring retail investors comprehend bond risks instead of solely pursuing higher yields. Liquidity could also improve with a larger retail investor base, offering various investment horizons and liquidity needs. However, a potential liquidity challenge might arise if an issuer faces stress or a downgrade, as platforms might struggle to hold such bonds.