[Sharnam Agarwal and Siddhant Samaiya are 3rd year students at National Law Institute University, Bhopal]
Last month, the board of the Securities and Exchange Board of India (“SEBI”) approved a proposed amendment relating to public debt offerings, following its October 2025 consultation paper. The amendment permits issuers to provide higher coupons or issue-price discounts to specific investor classes, including senior citizens, women, armed forces personnel, and retail investors. This amendment seeks to deepen retail participation in debt securities and revive interest in public debt issuances, drawing parallels with similar preferential treatments permitted in equity offer-for-sale transactions and in the banking sector for fixed deposits.
This proposal marks a significant regulatory shift in a debt market that has expanded from about ₹68 trillion in 2014 to over ₹226 trillion in 2024, with corporates raising a record ₹9.9 trillion through bonds in the financial year 2024-25. Yet this type of fundraising continues to witness limited retail participation.
This post examines SEBI’s proposal by, first, analysing the earlier regulatory framework governing incentives and its deficiencies; second, assessing the implications of and challenges surrounding the proposed regime; third, considering targeted safeguards to address these concerns; and finally, evaluating the coherence and market-readiness of SEBI’s approach.
The Pre-Existing Framework and its Deficiencies
SEBI’s approach to incentives in public debt issuances originates in its 2011 circular, which prohibited incentives to curb broker-level commission rebates that distorted subscription behaviour and increased issuers’ costs. The prohibition targeted intermediary conduct and was not intended to regulate issuer-level pricing.
When incorporated into regulation 31 of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021(“NCS Regulations”), the provision’s overly broad phrasing blurred the line between intermediary inducements and issuer-driven economic terms. This ambiguity persisted in practice, with issuers such as Kosamattam Finance Limitedand Muthoottu Mini Financiers Limited disclosing category-specific pricing in draft prospectuses. This issue reached a turning point in 2024, when SEBI issued show-cause notices treating differentiated coupons as prohibited incentives, effectively freezing such offerings. The 2025 consultation paper seeks to correct this overbreadth by carving out a limited exception for issuer-level incentives while preserving the original anti-rebate objective of the 2011 framework.
Analysis
SEBI’s objective behind modest incentives, whether in the form of a slightly higher coupon or an issue-price discount, is to make public debt a little more attractive to retail investors who typically gravitate toward fixed deposits offered by banks for their familiarity and perceived safety. Even a marginal adjustment in yield can help bridge the gap between corporate bonds and these entrenched alternatives. Over time, this could encourage more frequent public issuances, broaden the supply of tradable bonds, and create healthier conditions for secondary-market liquidity and price formation.
That said, the differential yield structure would effectively assign multiple valuations to a security carrying the same International Securities Identification Number (“ISIN”), depending on whether the holder bought it directly through the issue or in the secondary market. The consequences of this variation may decrease the demand for such debt securities. The resulting friction may culminate as an expansion of the bid-ask spread, i.e., the difference between the highest price a buyer is willing to pay for a security (bid price) and the lowest price a seller is willing to accept. This leads to elevated transaction costs and an overall impairment of the price discovery mechanism, thereby obscuring the true intrinsic market value of the underlying asset.
Operationally, the depositories, stock exchanges, and settlement systems would need system upgrades to identify eligible investors, track incentive-linked holdings, and ensure accurate application or withdrawal of benefits across transfers. If the incentives remain confined only to original allottees, secondary buyers may discount the instrument, creating a cycle of mispricing and potential illiquidity.
There is also a consumer-protection dimension; retail investors, particularly senior citizens, may struggle to understand how these incentives work, or how they interact with secondary-market trades. Without clear, accessible disclosure, the risk of misunderstanding or even inadvertent mis-selling cannot be dismissed.
A further concern arises on the governance front; if eligibility rules are not watertight, issuers or affiliates could attempt to route discounted securities to connected parties under the guise of retail incentives. The proposed framework entails a risk of down-selling of non-convertible debentures, by pushing lower-rated or riskier debentures to retail investors under the guise of higher-than-market returns. Ultimately, without adequate disclosure of the instrument’s credit quality, it poses a direct threat to vulnerable investors such as senior citizens.
Implications on Various Stakeholders
The proposal has important implications for issuers, both in terms of pricing strategy and compliance costs. Allowing category-specific coupons or issue-price discounts introduces a degree of pricing complexity that has not traditionally existed in public debt issuances, as issuers may now need to manage multiple effective yields for the same series depending on investor category. This complicates valuation, book-building and marketing strategies. Whether such complexity is commercially justified will vary across sectors. Highly rated public sector issuers, which already enjoy low-cost access to institutional capital, may find limited marginal benefit in offering incentives.
In contrast, non-banking financial companies and housing finance companies, which account for a large share of retail public bond issuances, may attract stronger retail participation, but at the cost of a higher weighted-average cost of funds. This proposed amendment is particularly relevant given the sharp contraction in the public debt issues from ₹19,168 crore in FY 2023–24 to ₹8,149 crore in FY 2024–25, as noted in the SEBI Annual Report 2024-25. Against this backdrop, the absence of clear limits on permissible differentials creates regulatory uncertainty regarding how far issuers can go before such pricing is viewed as an impermissible incentive.
The proposal also acknowledges that reviving the public debt market is a supply-side challenge, where issuers must be willing to choose the public issuance route. SEBI has identified the compliance burden on High-Value Debt Listed Entities (“HVDLEs”) as a key deterrent to wider participation in the corporate bond market. Under the existing framework, entities with listed non-convertible debt of ₹1,000 crore or more are classified as HVDLEs and are subject to corporate governance norms broadly aligned with equity-listed companies. To address this issue, recently the SEBI board has approved the proposed amendment to raise this threshold to ₹5,000 crore. This recalibration could reduce the number of HVDLEs from 137 to 48, nearly a 64% decline and could substantially lower the cost of accessing the public bond market.
The proposal also has indirect implications for individual investors that issuers and their distribution channels cannot ignore. Category-specific coupons mean that two investors holding the same bond could earn different returns purely based on personal characteristics, with the higher coupon remaining personal to the original allottee and disappearing upon transfer. This shifts part of the bond’s value from the issuer’s credit profile to the identity of the holder and may appear unfair to investors who narrowly fall outside the prescribed categories.
More importantly, higher coupons risk encouraging yield-chasing behaviour. Experience, including the mis-selling of Yes Bank’s AT-1 bonds, later penalised by SEBI through an adjudication order, shows how higher returns can overshadow risk disclosure, particularly for senior citizens. Retail participation in the corporate bond market remains in the low single digits, with market commentators placing it below 4%. Regulatory and academic analyses also suggest how sales incentive schemes and aggressive sales targets can lead intermediaries to prioritise volume over suitability, increasing the likelihood that individuals place their savings in issuers they do not fully understand.
Suggestions and Policy Considerations
For this proposal to succeed without compromising market integrity, SEBI’s framework must evolve beyond simple incentives into a holistic ecosystem of safeguards. A primary step would be to institute a definitive cap on yield differentials, perhaps between 50 to 75 basis points. This would eliminate regulatory ambiguity regarding how far issuers can go before such pricing is viewed as an impermissible incentive under regulation 31 of the NCS Regulations. The fixed cap would preserve secondary market liquidity, ensuring that bonds remain readily tradable, while also ensuring that elevated incentives do not obscure the company’s actual ability to repay its debt.
At the heart of these reforms lies a commitment to transparency and consumer protection. Disclosures should be provided in a simplified and concise manner in offer documents that clearly illustrate the risk involved, incentives, and how the step-down mechanism works once a bond changes hands. This is particularly vital for safeguarding senior citizens and retail investors from yield-chasing traps.
To ensure these incentives reach their intended audience, the framework should incorporate structural barriers against exploitation. Introducing a short 90-day lock-in period would prevent investors from quickly selling just to make a fast profit, ensuring these benefits reach the long-term investors they were meant for. Further, since this framework represents a departure from conventional pricing practices, a biennial review would be appropriate to evaluate its effectiveness and its impact on overall market stability. Such an assessment would enable the regulator to determine whether the increased complexity is truly translating into a more vibrant, liquid public debt market or whether it is merely raising the cost of capital for issuers without a meaningful fillip to the retail participation.
Conclusion
SEBI’s proposal to permit limited incentives in public debt issuances reflects a conscious attempt to adapt regulation to evolving market conditions. By recognising both the demand-side challenge of attracting retail investors and the supply-side burden faced by issuers, the consultation paper and approval by SEBI’s board signal a shift from an exclusively restrictive framework towards a more facilitative regulatory approach. At the same time, the proposal raises genuine concerns about consistent pricing, market liquidity, investor protection, and the proper role of securities regulation.
Whether this framework succeeds will depend less on the idea of incentives itself and more on the manner of its implementation. Clear limits on differential pricing, coupled with robust disclosure standards, safeguards against mis-selling, and a commitment to review outcomes empirically, are essential to ensure that incentives enhance participation without undermining market integrity. Without these safeguards in place, SEBI’s proposal may add complexity and risk without achieving sustained retail engagement.
– Sharnam Agarwal & Siddhant Samaiya
Leave a comment