bond market: How will higher anchor investor allocation impact lower rated bond market?

Mumbai: NBFCs and other borrowers with credit rating below A- are expected to benefit from the the Securities and Exchange Board of India’s (Sebi) move that would allow them to allocate up to 50% of the bond issue size to anchor investors. “Anchor investors, which also include arrangers, play an important role in ensuring the bond issue receives enough subscription,” said Anil Gupta, senior VP & co-group head, financial sector ratings, ICRA.

“However, in lower rated issues, the investor interest for such papers could be limited. In such a situation, arrangers can now take the exposure and then down-sell to other investors looking at higher yields,” Gupta said. “The higher allocation to anchor investors can reduce the number of cases of under subscription.”

The capital markets regulator has introduced a credit-rating based quota for allocating limits for anchor investors, according to a circular issued on Friday. Earlier, the anchor allocation was capped at 30% of the base size.
For BBB and below rated bonds, issuers can allot up to 50% of the base issue size to anchor investors and 40% in case of papers rated between A+ to A-.

Issuers are also mandated to disclose anchor investor participation in placement memorandums and get electronic confirmations by T-1 day, with unconfirmed amounts reverting to the base issue size.

Sebi has also made it mandatory for all debt private placement issues with size of ₹20 crore and above to be priced on the electronic book provider or EBP platform. The earlier threshold was ₹50 crore.These norms, which will kick in phased manner over next 3-6 months, are expected to boost transparency and plug information asymmetry in the corporate bond market.

According to rating agency ICRA, EBP accounted for 87% of total debt private placements in FY25. Around 450 unique issuers raised a total ₹8,650 crore in FY25 outside EBP. Each of these unique issuers are those who raised below ₹50 crore in last fiscal year.

Industry executives said based on the previous year’s trend, the lowering of the threshold would lead to at least 30-35% more companies using EBP for bond sales. The move is also expected to improve price discovery, thereby benefiting companies.

“With threshold coming down, smaller issuers will now compulsorily put out the issue on the EBP, which in turn is expected to increase disclosure in terms of financial details. Because of the increased disclosure, more participants would now know about a particular deal. Increased participation would then bring efficiency in pricing,” Vishal Goenka, co-founder, IndiaBonds.com.