India’s corporate bond market has long been hamstrung by low liquidity, locking investors into their holdings until maturity and discouraging retail participation. While institutional investors dominate, retail investors—wary of the illiquid secondary market—have stayed on the sidelines.
The Securities and Exchange Board of India (Sebi) has unveiled a new liquidity window that offers retail investors guaranteed exits through pre-determined buybacks. If successful, the move could deepen the bond market, unlock broader participation, and serve as a blueprint for other emerging markets grappling with similar challenges.
The liquidity problem: A barrier to market growth
Unlike equities, which enjoy high trading volumes and easy exits, corporate bonds are plagued by illiquidity—particularly for mid-sized and lower-rated companies. Investors often find themselves trapped, with no viable exit until maturity. This structural weakness has left the market skewed toward institutional investors, with retail participation lagging.
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Sebi’s liquidity window tackles this head-on by allowing investors to sell their bonds back to the issuer at regular intervals through a put option. This assured exit strategy is designed to build confidence among retail investors, addressing a core market weakness and removing one of the largest barriers to retail participation.
How the Sebi’s framework stacks up
Sebi’s liquidity framework stands out from global practices by focusing on retail investors, a segment often overlooked in other markets.
US: Liquidity interventions like the Federal Reserve’s Primary and Secondary Market Corporate Credit Facilities (PMCCF, SMCCF) were crisis-driven, aimed at institutional investors during the COVID-19 pandemic.
European Union: The European Central Bank’s Corporate Sector Purchase Programme (CSPP) supports market liquidity but prioritizes institutional markets and monetary policy objectives, with little direct benefit to retail investors.
UK and Australia: Puttable bonds offer some liquidity, but they remain largely limited to institutional players or specific contracts.
Sebi’s liquidity window, by contrast, is universal. It ensures guaranteed exits for all listed corporate bonds and is targeted directly at retail investors—an underserved segment in other markets.
Why Sebi’s liquidity window is perfect for India
India’s corporate bond market faces unique hurdles—thin trading volumes, a lack of buyers, and minimal retail participation. Sebi’s framework bypasses the traditional barriers by ensuring liquidity through the issuer, even in a low-volume market.
Historically, retail investors have avoided corporate bonds over fears of being unable to sell before maturity. Sebi’s put-option mechanism addresses this directly, giving smaller investors confidence that they can exit their positions without waiting for maturity or incurring heavy losses. As participation grows, liquidity will deepen, setting off a positive feedback loop.
As more investors enter the market, liquidity will likely improve, creating a virtuous cycle. Additionally, the liquidity window aligns with Sebi’s broader goal of financial inclusion, offering an accessible and reliable investment option to a wider audience.
A tailored solution with long-term potential
Sebi’s liquidity window is more than a temporary fix—it offers a long-term, retail-friendly solution that addresses one of the Indian bond market’s biggest challenges. By creating a reliable exit route, Sebi is setting the stage for deeper retail participation and a stronger, more inclusive bond market.
Unlike other countries’ liquidity measures, which focus on institutional players, Sebi’s retail-first approach fits India’s market landscape, where small investors remain cautious. If it succeeds, it could inspire similar strategies across other developing economies struggling with illiquidity.
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As retail investors gain confidence and liquidity improves, Sebi’s intervention is likely to drive market expansion, supporting the growth of India’s broader financial ecosystem.
Simarjeet Singh is assistant professor at Great Lakes Institute of Management, Gurgaon, while Hardeep Singh Mundi holds the same position at IMT, Ghaziabad.
