OBPPs see slow uptake for proposed bond expansion

The Securities and Exchange Board of India (SEBI) on May 5 released a consultation paper, released on May 5, which proposes allowing OBPPs to distribute securities regulated by the International Financial Services Centres Authority (IFSCA). These include overseas-listed debt instruments, and capital gains tax-saving bonds issued under Section 54EC of the Income Tax Act by govt-owned entities like the Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC), and REC.

SEBI also seeks to align compliance officer requirements for OBPPs with those applicable to stockbrokers, as part of a broader push to ease doing business.

The proposal comes at a time when retail participation in the bond market has been on the rise, especially since equity market performance has been tepid during the year. The industry registered record trade volume on May 4, reaching more than 34,500 trades on the day, as per data from NSE’s Request for Quote (RFQ) platform. 

According to industry estimates, retail bond distribution now stands at around Rs 1,500 crore a month, up from Rs 500 crore a year ago.

Dollar-Denominated Bonds

Among these, the proposal to offer dollar-denominated bonds has generated the most interest among players. Platforms expect the move to gradually expand investor participation in global fixed income, though adoption is expected to be slow initially.

Nikhil Aggarwal, founder and CEO of Grip Invest, said retail investors are still far more comfortable with domestic assets, and offshore debt will likely follow the same trajectory as international equities, where participation remains limited vs domestic equities. 

He added that investors will need to understand how dollar appreciation impacts yields before volumes pick up meaningfully. While headline yields on US bonds may appear lower than domestic debt, returns can be competitive when adjusted for rupee depreciation.

“Such products are interesting for high-net-worth individuals (HNIs) who have a higher level of financial understanding, so this move is great towards building debt market infrastructure,” he said.

Wint Wealth’s co-founder Anshul Gupta agrees that the market for such bonds is nascent. “While the product offers currency diversification, it is largely relevant for HNIs and unlikely to materially impact platform volumes in the near term,” he added.

However, Accel-backed online bond platform Jiraaf, expects relatively stronger early traction among its affluent users, particularly those already utilising the Liberalised Remittance Scheme (LRS). The scheme allows resident individuals to remit up to $250,000 per financial year for personal purposes such as foreign investments, education, or medical treatment.

Many investors want to use their LRS limit but aren’t sure where to invest that money, says Saurav Ghosh, co-founder of Jiraaf. Dollar-denominated bonds would offer them an avenue to park those funds making them especially useful for HNIs who regularly invest overseas, he added. 

Ghosh expects 15-20% of the platform’s customers to participate in dollar bonds, particularly those actively seeking dollar exposure as uncertainty around rupee persists.

Digital Access

On tax-saving bonds, industry executives said that while the proposal improves accessibility, it still addresses a narrow use case. These bonds are typically used by investors looking to offset capital gains tax, often arising from real estate transactions, and are not a regular investment product.

Demand for 54EC bonds is linked to specific tax events, with relatively limited supply and lower returns compared to corporate bonds, they added.

Jiraaf’s Ghosh noted that while such bonds were previously accessible largely through offline channels, bringing them onto online platforms could broaden access, especially for smaller investors with moderate capital gains who may not have wealth managers.