Urban Infrastructure Financing in India: Challenges and Solutions for a Deeper Municipal Bond Market

Posted on October 16, 2025October 16, 2025 by Auburn Solutions

Urban Infrastructure Financing in India: Challenges and Solutions for a Deeper Municipal Bond Market

A World Bank report on ‘Financing India’s urban infrastructure needs’ estimates that India’s cities will require, till 2036, about USD 840 billion to build out the infrastructure required for the burgeoning urban population.1 This funding will be required mainly for water supply, sewage, solid waste, and mass transit projects. The report estimates that the total capital expenditure in urban infrastructure in the last decade, by all Indian cities, was just 0.6% of GDP as compared to 2.8% of GDP in China. India needs to invest a significant amount in urban infrastructure, and the current dependence of the Urban Local Bodies (ULBs) on their own tax and non-tax revenue, as well as transfers and grants from the government, will not suffice.

The funding gap will necessarily need to be bridged by market borrowings. For this, a vibrant municipal bond market has to develop.

As per the RBI Report on Municipal Finance (Nov 2024),2 the total estimated borrowings by ULBs from financial institutions were just ₹3,364 crores. This is less than 0.05% of GDP and constitutes just 5% of the total municipal receipts. As per SEBI data, the total municipal bond issuance for the period 2017 to 2025 is a mere ₹2,833.90 crores.3 The SEBI municipal bond dashboard indicates that as of 30th April, 2025, there are only 18 Municipal Bonds with outstanding maturity, across 37 ISINs. These 18 bonds have been issued by 13 ULBs. Of them, 4 are from Gujarat and 3 from Uttar Pradesh. Trading data on municipal bond trades, as put out by the National Stock Exchange, indicates very low liquidity in the secondary market.4 In 2024, the total traded volume was ₹281.45 crores, with just 4 bonds traded, and in 2023, the total traded volume was ₹193 crores, with just 4 bonds traded.

This data tells us that (i) ULBs have not resorted to either traditional bank financing or financing from the capital markets, and (ii) both the primary market and secondary market for Municipal Bonds are very shallow. The Municipal Bond market has not developed in India, as there are no real incentives for Urban Local Bodies (ULBs) to access the market at scale. External funding options like municipal bonds are not preferred, as the extent of capex funding from the Central Government and State Governments is very high. ULBs, almost entirely, rely on government-subsidized funding and grants, rather than accessing the capital markets, to meet their funding gaps. This reliance reduces the need for ULBs to build independent creditworthiness or establish robust financial management practices.

The big challenge will be to shift the financial landscape so that reliance on central and state funds does not completely undercut local initiatives. While central funds have been critical in driving infrastructure growth, they inadvertently reduce the pressure on ULBs to diversify their funding sources. This, in turn, does not push the ULBs to build a reputation for fiscal integrity. The broader conversation, therefore, has to be about balancing centralized funding with decentralized fiscal responsibility. It is therefore imperative that we find answers to what needs to be done to develop the municipal bond market.

Some possible initiatives and solutions are discussed below:

1. Push ULBS to reduce their dependence on grants Unless ULBs are pushed to reduce their dependence on grants, they will not feel the need to access the capital markets. The policy direction should be towards gradually shifting from grant funding to performance-linked funding and nudging ULBs towards self-reliance. Unless ULBs feel the need to tap into other sources of finance, they are unlikely to develop the required institutional, technical, and financial capacity. A reduced dependence on grants will incentivize them to improve revenue generation, reduce inefficiencies, and invest in capacity building. The Urban Challenge Fund is a step in this direction.5 The Union Budget (2025-26) has proposed the setting up of an Urban Challenge Fund of ₹1 lakh crores. This fund will meet the funding requirements of urban infrastructure projects to the extent of 25% of the project cost. The ULBs will be required to fund at least 50% of the project cost through municipal bonds, bank borrowings, or public-private partnerships.

2. Robust financial reporting and financial management ULBs must be mandated to develop robust financial reporting systems, follow standard accounting practices, undergo regular audits, and make public disclosures of their financials. In the long run, the avoidance of financial discipline will be detrimental to the health of ULBs. ULBs must also improve their financial management by increasing revenue generation and better control of expenditure. All this will lead to higher transparency and better governance, and improve the credit ratings of ULBs

3. Bankable projects Capacity-building programs through public-private partnerships must be implemented to support ULBs in preparing bankable projects and developing internal expertise in project management. There is a need to set up a dedicated municipal finance advisory body to support ULBs in managing bond issuances and navigating the capital market effectively. Investors and lenders will only put their money into projects that are financially viable, technically sound, socially acceptable, and have manageable risks.

4. Retail investor participation Retail investor participation will be key to the growth of the municipal bond market. Increased retail participation is key to a more liquid secondary market. To increase retail participation, the perceived risk inherent in these bonds needs to be reduced. This can be done through credit enhancement. Central and State governments could offer partial credit guarantee or viability gap funding for ULBs issuing bonds. Giving municipal bonds tax-free status will boost retail participation. Lower ticket sizes also help in higher retail participation. SEBI has reduced the face value of municipal bonds from ₹1 lakh to ₹10,000, which is bound to increase retail participation.

5. Address concerns of Institutional investors The concerns of the institutional investors also need to be addressed. Insurance Funds and Pension Funds, which are long-term investors, are constrained because their investment guidelines restrict their exposure to lower-rated bonds, and most ULBs have lower credit ratings. There is a need to consider whether, for such institutional investors, municipal bonds can be treated as “approved investments” or considered as part of their mandated infrastructure exposure. The small size of these bond issues, given that most ULBs have come out with ₹200 crore bond issuances, is also a dampener. There is a need to aggregate projects across ULBs through pooled financing and increase the issue size to levels acceptable to institutional investors.

6. Innovative financial instruments Financial innovations such as green bonds, pooled funds, and public-private partnership (PPP) bonds can play a transformative role in the municipal bond market by enhancing governance, service delivery, and institutional responsiveness. These instruments do more than finance projects; they embed accountability, transparency, and adaptive learning into the institutional framework. Green bonds are earmarked for environmentally focused projects, requiring compliance with frameworks like SEBI’s Green Debt Guidelines. Issuers must prepare detailed project reports, disclose use-of-proceeds, and conduct environmental impact reporting. Green- labelled bonds attract lower borrowing costs than conventional bonds and also will encourage ULBs to align their financing with environmental and social outcomes. Pooled funds, especially those with multi- stakeholder oversight, promote shared decision- making and resource accountability. Pooled municipal bond funds result in standardization across ULBs, such as adopting uniform financial practices. By aggregating resources, pooled funds allow smaller cities to undertake larger infrastructure or service delivery projects that would otherwise be unaffordable. Public-Private Partnership (PPP) bonds, when structured with clear performance metrics and transparent contracts, reduce corruption risks and strengthen administrative accountability. PPPs leverage private sector expertise, innovation, and cost-efficiency to improve infrastructure and public services in sectors like transport, sanitation, and healthcare.

7. Insolvency framework Specific statutes governing the insolvency of ULBs need to be introduced. Without clear recourse mechanisms in case of default, investors will view Municipal Bonds as high-risk. Statutory insolvency frameworks act as a deterrent against financial mismanagement. To make ULBs creditworthy, accountable, and investment-ready, we need a dedicated legal framework for municipal insolvency.
Half of India will be living in its cities in the next few decades. India will need to build out urban infrastructure in a big way, for which the capital requirements will be huge. Without doubt, India needs a well-developed municipal bond market.

The opinions expressed in this article are solely those of the author and do not reflect the opinions or views of NISM.

Ather S, White R, Goyal H. Financing India’s Urban Infrastructure Need. World Bank Report 2022.
Reserve Bank of India. Report on Municipal Finances. Reserve Bank of India Bulletin 2024 Nov.
Securities and Exchange Board of India. Statistics on Municipal Bonds. SEBI. Available from: https://www.sebi.gov.in/statistics/municipalbonds.
India Municipal Bonds. IndiaMunicipalBonds.com. Available from: https://www.indiamunicipalbonds.com/
Sitharaman N. Budget 2025–2026: Speech of the Minister of Finance. Government of India. Available from: https://www.indiabudget.gov.in/doc/ budget_speech.pdf
Securities and Exchange Board of India. Circular No.: SEBI/HO/DDHS/DDHS-PoD-1/P/CIR/2024/94. SEBI 2024 Jul 03.

Author:
Mr. Sashi Krishnan – Director NISM

Fixed Income investments: strategic and tactical

Posted on October 16, 2025October 16, 2025 by Auburn Solutions

Fixed Income investments: strategic and tactical

Investments can be bucketed as per your time horizon; sometimes you may do a tactical allocation

The USP of the fixed income allocation of the portfolio is stability in overall portfolio performance, leading to better risk-adjusted returns. Depending on your objectives, risk appetite and investment horizon, you allocate to fixed income. The allocation may be on the lower side, say 20 percent of your portfolio, for young investors with a long horizon or on the higher side, say 80 percent, for retired senior citizens.

That is the strategic allocation to fixed income. Tactical allocation is tweaking the allocation little higher or lower as per the market situation. Sometimes there is a mispricing in the market or there is a certain view on interest rate movement, based on which you can tweak your allocation.

Strategic allocation – bucketing

There is a structure in fixed income investments, with the help of which you can dovetail your investments as per you cash flow timings. Bonds have a defined maturity, which is not the case with equity stocks. On the maturity of a bond, you get the contracted amount, irrespective of market movement at that point of time. When you are investing in a bond of say 2 years or 5 years maturity, and you require the cash flow after 2 or 5 years, it is called laddering. You can construct a portfolio with bonds of various maturities to suit your requirements.

Laddering can be done through Mutual Funds as well. In an open-ended MF scheme, the fund is perpetual, unlike the maturity of bonds. However, there is a portfolio maturity of the fund, which is the weighted average maturity of all the bonds / instruments in the portfolio. The portfolio maturity of the fund gives you a ballpark idea on the appropriate investment horizon. There are 16 debt fund categories as defined by SEBI. All these funds have their portfolio maturity range either as defined by SEBI or as mandated by the AMC itself within the guidelines.

For purposes of understanding this concept of matching your time horizon with the portfolio maturity of the fund, as an illustration, in Liquid Funds, the maturity is less than three months; you can come in for a time horizon of one week to two-three months. Ultra Short Term Funds have portfolio maturity in the range of three to six months; your horizon can be three to six months. At the other end of the spectrum, there are Gilt Funds. The portfolio maturity in Government Security Funds is the longest; your horizon should be at least five years, preferably ten years. The portfolio maturity of the debt fund you are looking at, can be found in the monthly factsheets. The factsheets are published every month, on the website of Mutual Funds.

Tactical allocation

The concept of tactical allocation is, marginally increasing or decreasing the allocation to an asset class e.g. equity or debt, as per the prevailing market conditions. The meaning of market condition is, in case or equity, valuation levels. In case of debt, it means expected movement of interest rates and prevailing yield levels. Prevailing yield level means the yield levels on various bonds or instruments in the market at that point of time.

Bullish view or positive view on interest rates implies interest rates / yield levels coming down; bond yields and prices move inversely. If the call comes correct, you benefit as prices of your existing holdings move up. Bearish view is when interest rates are expected to move up; you may pare your debt exposure at the margin. Sometimes, there are mis-pricings and yield levels on certain instruments may be attractive. That makes a case of increasing your allocation a little bit.

Current situation

Yield level on government bonds have moved up, even after the RBI having reduced repo rate by 1 percentage point. 10-year benchmark G-Sec yield has moved from 6.25 percent in May 2025 to 6.5 percent now. Yield on longer-dated G-Secs, say 20 or 30 year maturity, have moved up much more over the last few months than shorter-dated ones, say one-year maturity.

The salient aspect of the current situation is yield on State Government Securities (SGS) / State Development Loans (SDLs). SGS are sovereign instruments, as defined by the Reserve Bank of India (RBI). Yield level on SDLs are higher than that of Central Government Securities, as the fiscal profile of States are weaker than the Centre. Nonetheless, yield level of SGS are usually lower than AAA rated corporate bonds, as these are sovereign at the end of the day. Currently, due to some technical reason, yields on SDLs have moved up, and are even higher than good quality AAA rated corporate bonds. This is a mispricing you can avail of.

Yields on corporate bonds have inched up recently, again due to technical reasons. Hence if you are entering corporate bonds now, you have a relatively better entry level than a few months ago.

View going forward

The rate cut cycle of the RBI seems to have come to an end; there is a small chance of one last rate cut if inflation gives a positive surprise. From that perspective, not much of rally is expected in bonds. Having said that, on a sudden positive news-flow or some technical reason, yields can potentially trace back. Any which way, if your yield level at the time of entry is relatively higher, you are that much better off.

Methods of entry

There are multiple ways you can take exposure; broadly two means: direct and through an investment vehicle. For direct investment in Government Securities and SGS, there is RBI Retail Direct (RBI RD), which can be accessed at https://rbiretaildirect.org.in/. You can invest in Central Government Securities and State Government Securities. This facility is available only to individuals, not corporates. You just have to open your account there, rest all the process requirements (demat, banking etc.) are taken care of by RBI itself. For direct entry into corporate bonds, there Online Bond Platform Providers (OBPPs), who make their inventory of bonds available on their website.

There are investment vehicles like Mutual Funds (MFs), Portfolio Management Services (PMSs) and Alternative Investment Funds (AIFs). The more popular vehicle is MFs, due to low ticket size, accessibility and liquidity. The particular mis-pricing opportunity mentioned earlier – SGS / SDL – can be availed of either directly through RBI RD or through MFs. If you want liquidity, MFs are better; you have to identify the particular funds that have exposure to SDLs. There are Target Maturity Funds that have exposure to SDLs, and certain other funds with SDL-oriented portfolios.

You can compare the rate offered by leading Banks on fixed deposits with the yields available on Central or State Government Securities, which are a better credit than Banks.

Originally Published in Outlook Money October 2025 Issue.

Author: Mr Joydeep Sen, Corporate Trainer

Numbers Tell a Story: Why Asset Diversification Matters

Posted on October 15, 2025October 16, 2025 by Auburn Solutions

Numbers Tell a Story: Why Asset Diversification Matters

Numbers have a way of bringing perspective to investing. They cut through opinions and reveal what performance truly looks like. In India, most investment conversations still revolve around equities — stock picks, index levels, and daily market momentum dominate the narrative. Bonds, on the other hand, often stay in the background. Yet, when data speaks, it clearly shows why this “quiet” asset class is so critical for balanced investing.

A Look at the Last Year

Over the past 12 months, the contrast between equity and bond returns has been hard to ignore. Based on NSE data, the Nifty 50 delivered a negative return of –3.72%, while a 10% corporate bond (rated AA–/A+) offered a steady +10% return.

Asset Class	Value at Start (Oct ’24)	Value after 1 Year (Oct ’25)	Total Return
Nifty 50	25,796.9	24,836.3	–3.72%
10% Corporate Bond	100	110	+10%

While equities saw short-term volatility and downward corrections, bond investors enjoyed consistent growth. It’s a reminder that stability often wins when markets turn uncertain — and that steady compounding can quietly outperform speculation.

A Longer Lens: The 4-Year Comparison

Zooming out gives a clearer picture of how asset classes behave across cycles. Over the last four years, both equities and bonds have delivered strong returns, but the journey to those returns has been very different.

Asset Class	Value at Start (Oct ’21)	Value after 4 Years (Oct ’25)	Total Return
Nifty 50	17,532.05	24,836.3	+41.6%
10% Corporate Bond	100	146.41	+46.4%

(Bond returns assume reinvested coupons; taxes and costs excluded.)

Even over a four-year period, high-quality corporate bonds have not only kept pace with equities but slightly outperformed them — and with significantly lower volatility with peace of mind. The equity curve shows sharp peaks and dips, while bond returns move upward in a straight, predictable line. This steadiness helps investors stay invested through market cycles instead of reacting to every correction

Putting Returns in Context

Equities remain an important engine for long-term growth, but their journey is rarely smooth. In contrast, high-quality corporate bonds offer predictable income and lower price volatility, allowing investors to stay invested without panic or second-guessing the market.

Consider this:

1-Year Returns: Nifty 50 –3.72% vs. Corporate Bond +10%
4-Year Returns: Nifty 50 +41.6% vs. Corporate Bond +46.4%

These numbers reinforce one fundamental investing truth — diversification matters more than timing and it’s not about choosing one over the other. A blend of growth-oriented equities and income-generating bonds creates resilience through changing market phases.m

Role of Bonds in a Balanced Portfolio

For a long time, investing in bonds in India meant navigating complex paperwork or limited options. That has changed. Today, Online Bond Platform Providers (OBPPs) have made it possible to invest in bonds digitally with transparent pricing, quick settlement & easy access.

This accessibility has brought fixed income into the mainstream, allowing retail investors to enjoy what institutions have known for decades: bonds are essential for wealth preservation and portfolio balance.

Globally, bonds and equities are seen as complementary pillars. When one faces volatility, the other cushions it. That’s how long-term portfolios survive cycles and keep compounding steadily.

In summary: Numbers don’t lie — they remind investors that balance beats extremes. The past year shows how bonds quietly delivered positive returns while equities saw short-term dips. As India’s financial ecosystem matures, investors have more opportunities than ever to diversify intelligently.

A Bond in Every Hand.

Author: Mr. Vishal Goenka – Co-Founder IndiaBonds

India’s Capital Markets 3.0 – Opportunities and Way Forward

Posted on October 15, 2025October 16, 2025 by Auburn Solutions

India’s Capital Markets 3.0 – Opportunities and Way Forward

India’s capital markets have entered a new phase of development, building on decades of rapid evolution. Over the past thirty years, the market has progressed through distinct phases – from the foundational digitization of trading in the 1990s (Capital Markets 1.0), to broad-based growth and product expansion in the 2000s and 2010s (Capital Markets 2.0), and now into an emerging era that we might call Capital Markets 3.0. This latest phase is characterized by greater institutional participation, deeper global integration, and the rise of new platforms and instruments that are reshaping how capital is raised and traded.

This article traces the journey from Capital Markets 1.0 and 2.0 into today’s 3.0 landscape. It examines key trends such as the surge in retail investors and demat accounts, the boom in derivatives trading and the regulatory responses it spurred, and the promise and pitfalls in the small and medium enterprise (SME) segment. It also outlines upcoming structural shifts – including the inclusion of Indian bonds in global indices, the expanding role of long-term domestic institutions, and the emergence of innovative avenues for fundraising and risk management. Finally, the discussion places India’s market development in a global context by comparing key metrics with peers like the United States, China, the United Kingdom, and Singapore. The article concludes with recommendations for policymakers and regulators to foster balanced, robust growth of the capital market ecosystem.

Capital Markets 1.0: Laying the Digital Foundations

In the early 1990s, India’s capital markets underwent a fundamental transformation that laid the groundwork for modern trading. Before this period, stock trading was largely manual and confined to regional exchange floors, with paper share certificates and lengthy settlement cycles. The introduction of electronic trading and centralized depository systems revolutionized this landscape. The launch of the National Stock Exchange (NSE) in 1994, with its fully automated trading platform, introduced unprecedented transparency and speed to the market, challenging the traditional broker-run exchanges. Around the same time, the Securities and Exchange Board of India (SEBI) was empowered with statutory authority (in 1992), bolstering regulation and investor protection. A cornerstone of Capital Markets 1.0 was the dematerialization of securities – moving from paper certificates to electronic records. By the late 1990s, the establishment of depositories (NSDL in 1996, followed by CDSL) enabled investors to hold stocks and bonds in dematerialized form, eliminating problems such as lost certificates and delayed transfers. Settlement cycles, which once took weeks, were gradually shortened to a few days. These developments greatly improved market efficiency and connectivity. Nationwide trading networks and internet-based platforms allowed investors across the country to participate in markets remotely. By the early 2000s, India had built a modern market infrastructure – a stark contrast to the earlier era of open-outcry trading – setting the stage for the next phase of growth.

Capital Markets 2.0: Broadening Participation and Product

Expansion With digital infrastructure in place, the 2000s and 2010s ushered in an era of rapid market expansion and innovation. Capital Markets 2.0 was defined by a sharp rise in participation, especially among retail investors, and the introduction of new products and segments that added depth to the market. A pivotal development was the launch of exchange-traded derivatives. NSE introduced equity index futures in 2000, followed by options and singlestock futures. These instruments gained traction quickly, providing new avenues for speculation and hedging. Over the next two decades, India’s derivatives segment exploded in volume, eventually making the country one of the world’s largest derivatives markets by number of contracts traded.

This era also saw steady growth in direct retail investing, aided by rising household incomes and easier access through online brokerages. Demat accounts grew into the tens of millions, and a new generation of techsavvy investors joined the fray, attracted by the ease of trading and periods of strong returns in equities. The primary market experienced cycles of boom and lull: robust IPO issuance in mid-2000s and again around 2016–2018 and 2020–2021, interspersed with quieter periods during economic downturns. A dedicated SME exchange platform was launched in 2012 (BSE SME and NSE Emerge) to enable smaller companies to tap equity markets. Though uptake was initially modest, it laid the groundwork for the flurry of SME offerings that would come in the next decade.

Domestic institutional participation also increased in 2.0, with mutual funds channelling more household savings and foreign portfolio investors (FPIs) becoming significant market drivers after capital account liberalization. Episodes of volatility – such as the global financial crisis of 2008 – tested the market’s resilience, prompting regulators to tighten risk management norms and improve transparency. By around 2020, India’s capital markets had expanded significantly in scale and scope compared to the turn of the century, laying the foundation for the next chapter of evolution.

Capital Markets 3.0: Integration, Institutions, and Innovation

By the mid-2020s, India’s capital markets have entered a new phase – what we can call Capital Markets 3.0 – marked by deeper institutionalization and greater global integration. In this phase, institutional investors are playing a larger role alongside retail. Domestic pools of capital – such as pension funds, insurance companies, and mutual funds – have grown substantially and now provide a more stable base of demand for equities and bonds, often counterbalancing the influence of FPIs. At the same time, foreign investor interest remains high, extending beyond equities into debt as well.

Global connectivity is a defining feature of 3.0. A landmark development is the inclusion of Indian government bonds in major global bond indices, which is set to attract significant foreign inflows and integrate India’s debt markets with global capital. Additionally, the emergence of GIFT City as an international financial center reflects India’s intent to bring offshore financial activities onshore. GIFT City’s exchanges allow trading of certain securities in foreign currency and have become a platform for international investors to access Indian markets with fewer frictions.

Innovation continues to define this era. New tools for fundraising and investment have emerged – from Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), which unlock capital in real assets, to green bonds and other thematic debt issuances that fund sustainable projects. The regulatory environment has also evolved to enable more sophisticated risk management tools, such as frameworks for credit default swaps and interest rate derivatives, for eligible participants. Essentially, Capital Markets 3.0 involves expanding and deepening the market, making it more diverse in terms of participants and products, and aligning it better with global standards. While this progress offers significant opportunities, it also requires careful oversight to ensure the market develops in a balanced and stable way.

Key Trends Shaping India’s Capital Market Landscape

Surge in Retail Investors and Demat Account Proliferation:Retail investor participation in India has seen a significant surge in recent years. By early 2025, the number of demat accounts is projected to reach approximately 200 million, marking a rapid expansion driven by several key factors. Technological advancements such as the widespread adoption of e-KYC processes, user-friendly mobile applications, and digital platforms have simplified the account opening process. Additionally, favorable economic conditions, such as low interest rates and increased financial inclusion efforts, have made investment more accessible to the general population.Currently, over 100 million individual investors are active in the Indian retail market, forming a substantial and growing segment. These investors are drawn to positive market trends, the prospect of wealth creation, and the convenience of simplified account setups. Despite this growth, there are inherent challenges. Many new investors lack sufficient experience, which makes them vulnerable to misinformation and impulsive decisions. Consequently, investor education becomes crucial, alongside robust regulatory frameworks to ensure investor protection and maintain market integrity.

The Rise and Regulation of Equity Derivatives Trading India’s retail trading boom has propelled the rapid growth of its equity derivatives market, led by the NSE, making it one of the world’s busiest exchanges by contracts traded. Driven by retail investors attracted to high leverage and low entry barriers in index options and futures, daily turnover often surpasses underlying cash market activity. However, this surge has raised concerns, as studies reveal many retail traders incur net losses, with losses increasing as volumes grow. Regulators have responded by tightening oversight: increasing margin requirements, raising contract lot sizes, limiting short-term expiries, and mandating clearer risk disclosures from brokerages. These measures have tempered trading volumes somewhat but the market remains highly active. The key challenge now is balancing liquidity and price discovery with retail investor protection, ensuring sustainable growth without undermining confidence. The evolving, data-driven regulatory approach aims to mitigate risks while fostering a resilient derivatives environment.

SME Listings: High Hopes and Growing Pains The recent surge in SME IPOs, driven by investor enthusiasm and a strong market environment, highlights both opportunities and risks in small business financing. After 2012, SME-specific exchanges experienced low activity until 2023-24, when a speculative craze led to dozens of companies, even those with regional operations or limited earnings history, being oversubscribed by 100 times or more. Such enthusiasm, often driven by social media hype, created a misleading belief of quick, certain profits. However, actual post-listing results showed liquidity shortages and volatile prices, leaving many investors stranded. Recognizing these risks, regulators have implemented measures such as price movement caps and discussions on more extended lock-in periods to reduce extreme volatility and encourage serious, long-term investment. This trend highlights that increasing access to capital must go hand in hand with strict safeguards, good governance, and investor education to ensure the SME platform remains a true engine for growth rather than a bubble.

Structural Changes and Opportunities on the Horizon

Global Bond Index Inclusion: A New Chapter for Debt Markets

India’s inclusion in global bond indices marks a pivotal milestone. By 2024-25, Indian sovereign bonds could constitute around 10% of emerging-market benchmarks, unlocking an influx of over $30 billion in portfolio investments. This development validates reforms like enhanced market infrastructure and the “Fully Accessible Route,” boosting foreign participation. As passive and active funds realign, liquidity and depth in India’s debt market are expected to improve, potentially lowering borrowing costs and fostering the development of derivatives markets. However, increased foreign exposure may heighten sensitivity to global risk shifts, requiring vigilant macroeconomic management. Overall, this strategic move not only broadens capital access but also accelerates maturity in India’s bond market, supporting economic growth and financial stability. It’s a critical step toward integrating India more deeply into the global financial system.

Expanding Domestic Institutional Participation

The evolving landscape of the Indian market highlights the increasing influence of domestic institutional investors such as the NPS, provident funds, life insurance companies, and mutual funds. Traditionally driven by foreign portfolio inflows that set market trends, the market now benefits from the growing dominance of local investors, who provide stability and serve as a counterbalance during global volatility. These institutions, with significant surpluses allocated to equities and bonds, have become consistent net buyers, even amid FPI exits, helping to stabilize prices and support long-term growth. This change reduces reliance on foreign sentiment, making markets less vulnerable to sharp swings. For policymakers, promoting domestic institutional investment through favorable regulations, relaxed limits, and greater transparency is essential. Ultimately, a strong domestic institutional presence will deepen liquidity, improve corporate governance, and support sustainable market development.

New Instruments and Platforms for Growth

India’s capital markets are diversifying with innovative instruments like REITs and InvITs, providing developers alternate avenues to unlock asset-based capital and offering investors steady income and exposure to real estate and infrastructure. These vehicles, initially met with skepticism, are now well-established, attracting both institutional and retail participants, and shaping a new fundraising landscape. Concurrently, reforms aim to invigorate the corporate bond market by relaxing trading and face value norms, and broadening participation through credit default swaps. Municipal bonds, though nascent, highlight local government financing potential. On risk management, derivatives such as currency and interest rate futures are gradually expanding, helping stakeholders hedge against market fluctuations. Collectively, these innovations strengthen the ecosystem, boosting market capacity and efficiency. The key challenge remains scaling these products, ensuring liquidity, and educating investors on associated risks and returns, to fully realize the transformative potential of India’s evolving capital markets.

India’s Capital Markets in Global Perspective

India’s capital market, valued at over $3 trillion, ranks among the top five globally, reflecting significant financial development. However, relative to its vast economy, market-based financing remains underdeveloped, with Indian firms predominantly relying on bank loans rather than equity or bond markets. This dependence limits potential growth avenues and market efficiency. Household participation is also relatively low; few retail investors directly engage in equities or bonds, constraining domestic investor base expansion. Enhancing financial literacy and promoting inclusion are critical to broadening participation, which could unlock substantial growth opportunities. An increasing number of young Indians entering the investing sphere signals a future where the market could play a crucial role in funding national development. Strengthening regulatory frameworks, encouraging innovative financial products, and deepening market infrastructure will be vital in harnessing this potential. As investor confidence and participation grow, India’s capital market could become a more robust engine for economic growth and development, aligning with its aspirations as a leading global financial hub.India’s financial markets exhibit notable differences when compared to advanced economies. Its equity market capitalization roughly equals its GDP, similar to developed nations, but its corporate bond market remains small—around 20% of GDP—lagging behind the US, Europe, and China, limiting funding options and investment opportunities. Recent initiatives to include Indian bonds in global indices aim to bridge this gap. While India has expanded its financial product offerings— such as derivatives, commodities, and REITs—there’s still room for growth in asset-backed securities and long-term hedging instruments. As the market evolves, these gaps are expected to narrow, fostering a more robust and diverse financial ecosystem.In summary, India’s capital markets are large and dynamic, but they still have considerable potential when compared to peers. Recent macroeconomic stability and reforms have built a solid foundation. Continuing to expand participation, deepen the debt markets, and diversify instruments will help India approach the scale and efficiency of more established global markets, while supporting higher investment and growth home.

Way Forward: Ensuring Balanced Market Development

To seize the opportunities of Capital Markets 3.0 while managing risks, stakeholders must adopt a proactive and balanced approach. Key recommendations include:

Strengthen Market Infrastructure and Resilience: As trading volumes and complexity increase, exchanges and clearing corporations should consistently upgrade their technology and risk management systems. Reliable trading platforms with backup systems and robust clearing safeguards— such as sufficient margins, stress testing, and default funds—will help maintain stability even during periods of volatility. Regulators and market institutions must collaborate on surveillance and data analysis to identify and resolve vulnerabilities promptly.

Deepen and Diversify the Bond Market: Reducing over-reliance on bank credit requires a vibrant corporate bond market. Policymakers should promote greater public bond issuance by simplifying regulations and offering credit enhancements to lower-rated issuers, thereby facilitating their access to markets. Allowing institutional investors, like insurers and pension funds, greater flexibility to invest in a broader range of debt instruments with proper risk controls can direct more long-term funds into corporate bonds. A more developed debt market will give companies alternative ways to raise funds and provide investors with more fixed-income options.

Enhance Investor Protection and Literacy: With millions of new retail participants, investor education becomes crucial. Regulators and exchanges should expand financial literacy programs that cover the basics of investing, risk management, and fraud prevention. At the same time, they should enforce strict disclosure and suitability rules, ensuring complex or high-risk products are only sold to investors who understand them. Vigorous enforcement against malpractices, such as insider trading and mis-selling, along with transparent communication about market risks, will help preserve trust as the investor base expands.

Facilitate Innovation with Safeguards: Embrace financial innovation by enabling new products and fintech platforms to develop within regulatory sandboxes or pilot frameworks. Whether it involves new digital trading mechanisms or innovative instruments, a proactive approach can help keep Indian markets competitive. However, pair innovation with clear guardrails, such as closely monitoring algorithmic and high-frequency trading for fairness and requiring thorough risk assessments for complex derivatives. This way, efficiency gains can be achieved without compromising market integrity.

Promote Balanced Growth and Consistent Policies: Policymakers should promote balanced development across all parts of the capital market. This involves preventing any single segment (such as short-term speculative trading) from overshadowing the primary roles of capital formation and long-term investment. Specific measures, such as updating SME listing standards and increasing oversight when necessary, will help new segments grow on a healthy foundation. Lastly, maintaining a stable and predictable regulatory and tax environment, especially for foreign investors, is essential. Consistent policies will attract steady, long-term capital, both domestic and foreign, and reduce disruptive changes, supporting a healthy, broad-based market evolution.

Originally Published in The PRIME Directory-2025.

Author: Dr. V. Shunmugam – Partner MCQube

How REITs & InvITs can now tap into more retail money

Posted on October 15, 2025October 16, 2025 by Auburn Solutions

SEBI has reclassified Real Estate Investment Trusts (REITs) as ‘equity,’ while Infrastructure Investment Trusts (InvITs) remain in the hybrid category.

The markets regulator has changed how mutual funds can treat investments in real estate assets. Real Estate Investment Trusts now get the ‘equity’ tag but Infrastructure Investment Trusts remain in the hybrid category. For investors, this means more choices within mutual funds, explains V Shunmugam

How do REITs and InvITs work as investment vehicles?

SHARES OF REAL estate developers offer exposure to gains from rising property prices, but Real Estate Investment Trusts (REITs) go further—they channel rental income from offices, malls, and warehouses directly into your portfolio. This means you’re not only betting on property valuations; you’re also sharing in the steady income those properties produce.

Infrastructure Investment Trusts (InvITs) expand this concept to infrastructure by pooling money into highways, power lines, and renewable projects, allowing investors to access tolls, usage charges, and contracted revenues—cash flows that were previously available only to operators.

With the Securities and Exchange Board of India (Sebi) changing the rules, REITs are now classified as part of the equity category and may soon enter equity indices, while InvITs remain in the hybrid category but benefit from their full ‘10% NAV’ headroom. Together, they bring investors closer to the tl

Market capitalisation of REITs and InvITs

The total market capitalisation of REITs across the four listed trusts as of mid-2025 exceeded Rs 1 lakh crore. That amounts to over Rs 2.25 lakh crore in assets under management, with steady rents, high occupancy, and regular payouts to investors. Meanwhile, InvITs have also expanded — with 17 listed InvITs, the combined market cap of REITs and InvITs is about Rs 9 lakh crore.

Started in 2019, these instruments are no longer experiments. They’re becoming substantial enough to behave like equities in many ways: they trade, they yield, they attract investor attention. And now, with Sebi’s change in classification, there’s more room for InvITs investments to grow, and for REITs to benefit from being part of equity indices and equity-oriented portfolios.rue value of India’s property and infrastructure assets.

What’s in it for the investor

FOR INVESTORS, THE benefit is straightforward: more choices within the mutual funds they already know. A regular equity scheme can now include REITs, giving investors not just exposure to property prices but also a share of the rental income from offices, malls, and warehouses — almost like owning real estate without the hassle. InvITs take this idea to infrastructure by pooling money into highways, power networks, and renewable projects, passing on part of the steady tolls and contracted revenues to investors.

Mutual funds & their investment buckets to benefit

PREVIOUSLY, REITs AND InvITs shared a common investment cap within mutual funds. If a fund manager wanted to allocate more to REITs, it would reduce the amount of funds available for InvITs, and vice versa. Now, REITs are fully placed in the equity bucket, leaving InvITs with the entire space under the hybrid category. This change simplifies portfolio design for fund managers in asset management companies. They can now use REITs to strengthen the equity portion with stable rental income while also increasing the InvIT exposure, enabling long-term infrastructure cash flows.

Impact on stock market indices

THE RECLASSIFICATION ALLOWS REITs to be included in equity indexes. Once that occurs, index funds and ETFs tracking those benchmarks will automatically invest in REITs. This will increase visibility, liquidity, and investor participation in the real estate sector. Meanwhile, InvITs continue to provide stable income options within hybrid and solution-focused funds. Together, these changes strengthen the connection between household savings and India’s real asset sectors, benefiting both investors and the broader economy.

With REITs moving into the equity bucket, InvITs now get the full 10% NAV headroom under hybrids, giving them more space to grow. This shift directs larger pools of capital into both real estate and infrastructure, strengthening two pillars of India’s growth story. As institutional investors step in, trading volumes are likely to rise, making price discovery in these markets more transparent and efficient.

Entry of new strategic investors

SEBI HAS ALSO expanded the strategic investor category under the REIT and InvIT framework to include pension funds, insurance companies, provident funds, large NBFCs, family trusts, and major financial institutions. Their inclusion brings stable, long-term capital and supports early demand in primary issuances. For retail investors, this means increased confidence, improved liquidity, and more accurate price discovery in real estate and infrastructure markets.

Author: Dr V Shunmugum, Partner – MCQube

This article was originally published in the Financial Express (https://www.financialexpress.com/business/how-reits-amp-invits-can-now-tap-into-more-retail-money-3982059/)

Retirement Planning: Solving Finance’s “Nastiest Problem”

Posted on October 3, 2025 by Auburn Solutions

There is an old Yiddish proverb that says “Man Plans, God laughs”. This proverb beautifully sums up the dilemmas we face when we plan for retirement. As William Sharpe, the Nobel Laureate, famously said – “retirement is the nastiest, hardest, problem in finance”. Simply because there are multiple layers of uncertainty around inflation, life expectancy, investment returns and lifestyle choices, the problem is strictly not solvable. There will always be risks you cannot eliminate. There will always be circumstances you cannot anticipate.

Inflation is the biggest unknown. It is next to impossible to estimate the amount of income you will need during retirement because inflation will erode your purchasing power over time. For example, if we assume that long term inflation is 4%, the amount of money you need to spend to maintain your standard of living will double every 18 years. So, if you retire at 60 and are spending Rs.10 lakhs per annum, by the time you are 78 you will need Rs.20 lakhs and by the time you are 96 you will need Rs.30 lakhs. However, if you assume an inflation rate of 6% instead of 4%, you will need Rs.30 lakhs by the time you are 84, a full 12 years earlier! The best option, therefore, is to assume a higher rate of inflation in your calculations. The next big problem is on making assumptions on how long you will live. For India, the Life Tables indicate that the average remaining life expectancy at 60 is 17.5 years for men and
19.2 years for women – an average of 18.3 years for Indians. But this does not make any sense for an individual because you cannot be 50% dead at 78 – you are either dead or alive! Your individual lifespan has no statistical validity. The sensible assumption would be to plan for a 100 -year life.

The investment return question is also a complex one. The answer derives from your asset allocation choices. The danger in investing for the long term in fixed income is that you sacrifice the ability to preserve purchasing power because your portfolio returns may not be able to keep up with inflation. On the other hand, if your portfolio is overweight equity, you risk losing your principle. This require you to do a fine balancing act of not being overweight fixed income and having a reasonable exposure to equity at all times.

Your lifestyle choices will determine how long into retirement your money will last. Spending is normally higher in the early active retirement years, lower mid-retirement and then increases again mainly because of healthcare costs. The assumption you make should not be just a multiple of your spending but must be determined by your understanding of what you need to lead a more fulfilling life.

Hopefully, this approach will make the retirement problem a little less nasty!

Author: Mr. Shashi Krishnan, Director – NISM

Your simple guide to the Indian debt market & how to learn more

Posted on September 30, 2025October 16, 2025 by Auburn Solutions

If you’ve ever put money in a fixed deposit or a PPF (Public Provident Fund) account, you’ve already participated in the debt market. But this market is much more exciting than that and has a lot more instruments.

The Indian debt market has undergone a quiet revolution. From a relatively small market a decade ago, it has expanded dramatically. The total market size has grown more than threefold, from about ₹68 trillion in 2014 to over ₹226 trillion (over $2.6 trillion) by the end of 2024. This growth has been fuelled by economic reforms, regulatory changes, and increasing participation from both Indian and global investors.

This blog will tell you how you can be a part of this growth opportunity, and I will talk to you about a course that can help you in your investing journey.

The three pillars of the Indian debt market

The debt market can be broadly divided into three main segments, each serving a different purpose.

Money Market: This is where short-term borrowing and lending happen, for periods up to one year. It helps banks, companies, and the government manage their daily cash flow needs. Some of the key instruments are i) Treasury Bills (popularly known as T-Bills), ii) Commercial Papers (CPs), iii) Certificates of Deposit (CDs), etc.
Government Debt Market: This is the oldest and largest segment (accounting for nearly 60%) of the market. It consists of Government Securities (popularly known as G-Secs). These are bonds issued by the Reserve Bank of India (RBI) on behalf of the central and state governments. They are considered risk-free from default because they are backed by the Indian government.
Corporate Debt Market: This is where companies borrow money directly from investors by issuing bonds and debentures. This market has seen explosive growth in the recent past. According to RBI Financial Stability report, June 2025, in the financial year 2024-25, Indian companies raised a record ₹9.9 trillion through corporate bonds. These bonds typically offer higher returns than government bonds to compensate investors for the higher risk.

How can you, as an Investor participate in this market

Gone are the days when bonds were considered as an investment instrument only for institutions. Today, thanks to regulatory changes and technology, it’s easier for retail investors like you and me to participate.

The table below shows some common debt instruments and their characteristics.

Instrument	Typical Yield	Risk Profile	Liquidity
Government Securities (G-Secs)	6 – 7%	Very Low (Risk Free)	Moderate
Corporate Bonds (AAA Rated)	7 – 8.5%	Moderate	Moderate
Fixed Deposits (FDs)	6 – 7.5%	Low	Low
Debt Mutual Funds	7 – 9%	Low to High	High

*The information provided in the above table is indicative and for educational purposes only. Please consult a SEBI registered investment advisor before making any decisions.

You can participate in the Indian debt market through the RBI Retail Direct Scheme. Its a platform that allows you to directly invest in government securities. Online bond platforms are another medium which allow you to browse and buy bonds with ease, much like stocks. Check SEBI’s list of registered online bond platform providers here. Another way to invest in Indian debt instruments is debt mutual funds which are managed by professionals.

Understand the Indian debt market with this NISM & FIMMDA Course

The “Overview of Indian Debt Markets” course, jointly developed by the NISM and the Fixed Income Money Market and Derivatives Association of India (FIMMDA), is designed to provide a comprehensive understanding of the Indian debt market.

The course is structured into three modules that is same as the three pillars of Indian debt market we discussed.

Money Market: Explains various instruments, trading mechanism, and benchmarks
Government Debt Market: Explains types of instruments and how they are issued
Corporate Debt Market: Explains corporate bonds and their issuance process

The course is entirely online, giving you the flexibility to learn over a period of 30 days. It has around 3 hours of learning content including interactive quizzes. The course fee is ₹2000/- plus taxes. And when you successfully complete the course, you will receive a joint certificate issued by NISM and FIMMDA.

Whether you’re a student, a professional in banking, or an investor, the course will help you build a solid foundation in the Indian debt market. Explore the course details and feel free to reach out (elearning@nism.ac.in) if you have any questions.

These are some of the other courses jointly offered by NISM and FIMMDA, covering various aspects of the fixed income securities market.

Introduction to Fixed Income Securities

Introduction to Fixed Income Mathematics

Introduction to Interest Rate Derivatives

Happy learning!

Author: Sandeep K Biswal, Deputy General Manager – CCC, NISM

Do you want to move beyond fixed deposits and explore other debt market products?

Posted on September 29, 2025September 30, 2025 by Auburn Solutions

Do you want to move beyond fixed deposits and explore other debt market products?

For many Indians, their go-to for safe investing has been the trusted Fixed Deposit. It’s familiar, and it feels secure. But have you ever wondered what else is out there in fixed income securities world? A world that offers potential for better returns than a standard FD, but requires a bit more knowledge. Maybe you’ve heard terms like “government bonds,” “corporate bonds,” or “debentures,” and curious to know more. Let us understand what exactly is this “Fixed Income Securities” World and can they play a role in helping you meet your financial goals.

So, what exactly is this “Fixed Income Securities” World all about?

When we talk about investing, most people instantly think of the stock market. Investing in shares of listed companies hoping their value will go up. But there’s a whole other World of investing out there known as Fixed Income Securities (FIS). This world is generally considered as more stable, in comparison to stocks.

The simplest way I can explain you about fixed income securities is, think of you as the bank. You lend your money to the Government or a corporate. In return, they promise to pay you regular interest (the “fixed income” part) and give you your original investment (principal) back after a period, as agreed.

This market is the backbone of the Indian financial system in terms of government raising money for infrastructure and development projects. It’s also where corporates raise capital to fund new projects. While the stock market gets all the headlines, the fixed income securities market is where the steady money flows.

As an investor, you need to understand the different types of fixed income securities (based on issuer, maturity, coupon rates), and the risks involved. Yes, it’s generally considered safer than equities, but you still face risks, such as:

Interest Rate Risk: When interest rates go up, bond prices go down.
Credit Risk: Probability that the issuer might not be able to pay you back.
Liquidity Risk: Can you easily sell your bond if you need cash?
And other risks like inflation and reinvestment risk.

Understanding the fixed income securities market is important. Whether you’re an investor, working in the financial sector, or a student. This foundational knowledge is exactly what the “Introduction to Fixed Income Securities” eLearning course provides.

Introduction to Fixed Income Securities eLearning course

This course comes has some serious credibility as both NISM and FIMMDA have jointly developed this for professionals working in banks, broking houses, asset management companies, and students aspiring to enter the financial sector. But let me tell you, course will prove incredibly valuable for anyone having an interest to understand where a large part of India’s money moves.

NISM offers more than 60 eLearning courses

As I have already said, this is a foundational course, and so the course modules include

An overview of the Indian fixed income securities market where you’ll learn about the ecosystem, the role of regulators like SEBI and the RBI, and how monetary policy affects this market.
Types of fixed income securities where you’ll learn about various categories of securities in terms of issuer, maturity, coupon type, and more.
Risks associated with investing in fixed income securities where you’ll learn about different types of risks involved and how to manage them.

This being an eLearning course, you can learn at your own pace, on your own schedule. The course has around 3 hours of learning content including interactive quizzes. Once you register, you get 30 days of access, which is a comfortable amount of time to complete the course. The course fee is ₹2000/- plus taxes. And when you successfully complete the course, you receive a joint certificate issued by NISM and FIMMDA.

Now should you register? Whether you’re a student aspiring to join the Indian financial sector, a professional looking to build upon your existing skills, or an investor who wants to move beyond fixed deposits, understanding about various fixed income securities, the risks involved, and how to manage those risks will definitely give you an edge. I hope this course proves to be a smart choice for you.

In addition to this, NISM and FIMMDA jointly offer the following courses covering various aspects of the fixed income securities market. You may like to have a look.

Overview of Indian Debt Markets

Introduction to Fixed Income Mathematics

Introduction to Interest Rate Derivatives

Happy learning!

Author: Sandeep K Biswal, Deputy General Manager – CCC, NISM

The Buyback Mirage – How EPS Gets a Cosmetic Lift – Real EPS Growth vs. Finance Magic

Posted on September 25, 2025September 25, 2025 by Auburn Solutions

The Buyback Mirage – How EPS Gets a Cosmetic Lift – Real EPS Growth vs. Finance Magic

Corporate share buybacks are back in the headlines. In 2025, U.S. companies announced buybacks exceeding about $1 trillion by August, led by technology and financial majors. India has seen activity too: listed firms repurchased roughly ₹48,000–49,000 crore (~$5.8 billion) in 2023 and about ₹13,500 crore (~$1.6 billion) in 2024, with large, cash-rich companies like Infosys undertaking repeated programmes. These figures sound impressive, and buybacks often lift stock prices in the short run. But the finance behind them is subtle. This note explains, in simple terms, why buybacks can create an artificial sense of earnings growth, why valuations sometimes rise on optics rather than economics, and why reinvestment, especially in growing markets like India, usually drives superior long-term results.

What a buyback actually does

When a company buys back its own shares, it reduces the number of shares outstanding. Mathematically, earnings per share (EPS) increase even if total profit does not change. If a firm earns ₹10,000 crore and has 1,000 crore shares, EPS is ₹10. After a 5% buyback (share count falls to 950 crore), EPS becomes ~₹10.53 without any improvement in sales, margins or cash flows. Price/earnings (P/E) can appear cheaper, and the stock may rise. But the operating engine is unchanged.

From a corporate-finance lens, this is a payout decision just like a dividend, but executed by purchasing shares rather than sending cash to bank accounts. Under the famous Modigliani–Miller logic (perfect markets, no taxes, no frictions), payout form does not create value; only positive-NPV investments do. In the real world, taxes, signalling and market microstructure matter, so buybacks can have effects—but these are essentially distribution mechanics, not value creation by themselves.

EPS growth vs economic growth

Analysts should separate accounting ratios from economic value:

Economic value rises when the company adds future free cash flows by launching products, expanding capacity, improving productivity or building moats.
EPS rises in a buyback because the denominator (share count) shrinks. This is arithmetic. It can be helpful, but it is not the same as growing the enterprise.

A cleaner lens is the value growth equation:

Long-run growth (g) ≈ Reinvestment Rate × Incremental ROIC (return on invested capital).

If a company stops reinvesting and returns most cash via buybacks, its reinvestment rate falls. Unless incremental ROIC was low or opportunities were absent, that decision lowers g. If the market valuation still assumes high growth (say 10–12%), the P/E today embeds reinvestment that may never materialise. In time, the share may face a de-rating when reality catches up.

Why buybacks can appear to “work”

Three forces make buybacks look powerful:

Float reduction and index mechanics. Reducing free float creates scarcity and can increase a company’s weight in indices, attracting passive flows. Prices rise because supply falls, not because future cash flows increase.
Tax preference. In the U.S., capital gains tax is deferred until sale, whereas dividends are taxed when paid. This pushes boards to favour buybacks. (Tax treatment differs by country and can change.)
Low-rate funding (last decade). When borrowing costs were very low, some firms levered up to buy back stock, which boosted EPS faster than organic growth could, especially in the U.S.

None of these forces guarantees sustainable value creation. They improve per-share optics and sometimes short-term returns, but they do not, by themselves, expand the company’s productive capacity.

India’s context: a reinvestment market

India remains a growth market, with opportunities arising from formalisation, infrastructure, manufacturing, digitisation, and rising consumption, where incremental ROIC can exceed 15-20%. In such an environment, every rupee retained and reinvested in the core business can compound intrinsic value faster than a rupee spent on buybacks, especially when share valuations are already rich.

The local data are instructive. Buyback totals of about ₹48,000–49,000 crore (~$5.8bn) in 2023 and ₹13,500 crore (~$1.6bn) in 2024 are meaningful, yet small relative to India’s capex cycle and funding needs. Several large firms have conducted repeated buybacks; cumulatively, some programmes (e.g., in IT services) run into tens of thousands of crores (~$4-5bn). These are legitimate ways to return cash, but for high-ROE/high-ROIC businesses with a long runway, reinvestment usually dominates over time.

When buybacks make sense and when they don’t

In corporate-finance terms, capital allocation follows a hierarchy:

Fund all positive-NPV projects in the core business (organic capex, R&D, product development).
Consider M&A only if it passes strategy and return hurdles.
Return surplus cash via dividends or buybacks only after (1) and (2) are satisfied.
Price discipline for buybacks is critical: repurchases add value only when the stock trades below intrinsic value. Buying at 35–40× earnings in a high-ROE firm can be value destructive relative to reinvesting at 18–20% ROIC.
Avoid debt-funded buybacks unless leverage remains conservative under stress. Raising debt to retire equity reduces equity cushion and can increase risk if rates rise or cash flows weaken.

For beginners: think in NPV. If the IRR on reinvestment is comfortably above the cost of capital, keep building. If not, return cash, and if buying back, ensure the repurchase price < intrinsic value. EPS accretion is not the test; per-share intrinsic value accretion is.

The valuation illusion

High-quality businesses often command premium multiples because investors expect sustained reinvestment at high incremental returns. If management instead runs large buybacks year after year, the company’s reinvestment rate quietly falls. Growth slows from, say, 12% to 4-5%, yet the stock might still trade at a multiple that assumes 12%. For a while, the EPS still rises (because share count falls), and valuation holds up. Eventually, the market notices the slower engine and the multiple compressions. The earlier outperformance then looks artificial, driven by accounting arithmetic and multiple support, not by true expansion of cash flows.

How other markets compare

United States: The world’s most buyback-heavy market. Large, consistent programmes have contributed materially to per-share EPS growth and index performance over the past decade. Supportive factors were tax treatment, deep credit markets, and abundant passive flows.
Europe: Buybacks have grown, but are more varied by country and sector, with banks and consumer firms increasingly active in recent years.
Japan: Reforms in corporate governance and pressure to improve capital efficiency have encouraged rising buybacks and cancellations, alongside higher dividends.
Emerging markets (ex-India): Activity is uneven; many companies still focus on capex-led growth and balance sheet strengthening.

The common theme is that buybacks are most celebrated in situations where mature businesses generate cash faster than they can find high-return projects. In younger, faster-growing economies, reinvestment typically delivers better compounding.

High-ROE is not a licence to repurchase

A frequent misconception is: “Our ROE is 20%+, so buybacks must be great.” Not necessarily.

Buybacks can inflate ROE because the equity base (denominator) shrinks. Profit may be flat, yet ROE rises.
Opportunity cost matters: if you can deploy ₹1,000 crore at 18–20% incremental ROIC, that beats retiring shares at 40× earnings (a 2.5% earnings yield).
Resilience matters: cash used today is unavailable for downturns, platform investments, or strategic acquisitions tomorrow.

The correct question is not, “Will the buyback raise EPS?” It is, “Does the buyback raise intrinsic value per share more than the next best use of cash?”

A simple checklist for investors and students

Track the drivers: Are revenue, operating profit and free cash flow growing, or is EPS doing all the heavy lifting?
Estimate organic growth using g = Reinvestment Rate × Incremental ROIC. If buybacks are large, ask whether g is being diluted.
Check price discipline: At what multiple is the company repurchasing? A buyback above intrinsic value transfers wealth from continuing to selling shareholders.
Watch leverage and interest cover when buybacks are debt-funded.
Could you read the capital-allocation framework in annual reports and investor letters? Good managers explain the order of cash uses and the hurdles for each.

India’s edge: compounding through reinvestment

For India, the message is clear. We are in a multi-year cycle of capex, formalisation and productivity gains. Many companies can still reinvest retained earnings at attractive rates. That makes reinvestment the first call on cash, not buybacks. Of course, if a stock is trading well below intrinsic value, a measured buyback can be value-accretive after growth projects are funded and balance sheet strength is preserved.

The message behind the scenes

Buybacks are a tool, not a strategy. They are excellent when they transfer cash to shareholders at the right price and after funding high-return growth. But they do not create new cash flows by themselves. Markets that rely heavily on buybacks may show strong per-share optics and higher valuations. Yet, part of that return is manufactured by arithmetic and scarcity, not by expansion of the economic engine. Markets that prioritise reinvestment at high incremental returns—like India today—tend to deliver truer, more durable compounding.

Invest where the next rupee earns more than the last. EPS can be engineered; intrinsic value must be built.

Author:
Mr. Biharilal Deora, Director @ Abakkus Asset Manager

85% of Bonds Below 5% Yield – What It Means for Global Markets and India

Posted on September 25, 2025September 25, 2025 by Auburn Solutions

The global bond markets are a significant indicator of the current financial landscape. With nearly 85% of outstanding bonds now trading at yields below 5%, it’s clear that we’re witnessing profound structural shifts in global credit, corporate balance sheets, and investment cycles. This low-yield environment carries significant consequences for companies, policymakers, and investors, and it’s crucial to understand its implications.

When interest rates remain compressed, firms with outstanding borrowings find it much easier to refinance. Instead of paying 6-7% on old loans, they can now roll them over at 3–4%. The advantages are obvious: a lower interest bill that directly boosts profitability, and longer debt maturities that strengthen financial resilience. In other words, low yields quietly act as a tailwind, reducing financing pressure without the need for revenue growth.

Another hallmark of this cycle is the exceptionally low level of defaults. S&P Global data shows that global corporate defaults in 2024 were around 2%, well below the long-term average of 4-5%. A significant factor contributing to this is the deleveraging that occurred following the COVID years. Global corporate leverage, measured by Net Debt to EBITDA, has improved from about 3.2x in 2020 to roughly 2.6x in 2025. US companies alone reduced net debt by more than $500 billion between 2021 and 2023, while European corporates also cut leverage to multi-year lows. With stronger balance sheets and fewer defaults, creditors are more willing to lend, and companies are in a better position to pursue new projects with less risk.

Normally, such conditions would trigger a fresh borrowing and investment cycle. With capital available at 3-4%, project hurdle rates drop, and more projects become viable. We saw something similar in the early 2000s, when low post-2001 rates led to a surge in global capex and strong emerging-market growth. Yet today, the pattern is slightly different. Despite cheap debt, many multinational companies are funding growth using equity and internal accruals instead of piling on leverage. The scars of past excesses are still visible, and corporates appear far more disciplined this time around.

For India, this global backdrop is especially encouraging. Indian corporates already rank among the least leveraged in the world. Net Debt to EBITDA for NSE India Nifty 500 companies has fallen sharply to ~1.2x in FY25, compared with over 2.5x just ten years ago. Leading groups such as Reliance, Tata, and Aditya Birla are consciously financing expansion through equity, retained earnings, and strategic partnerships rather than relying solely on bank borrowings. In FY25, corporate capex crossed ₹11 trillion (about $126 billion), and a large share of this was equity-financed. This approach ensures that Indian corporates can continue investing aggressively while keeping their balance sheets healthy.

When we look at the past 15 years, the contrast becomes even clearer. Globally, leverage has only fallen modestly, from ~3.2x in 2020 to ~2.6x today. Indian companies, on the other hand, have almost halved their leverage over the last decade. This unique position of India, entering a capex upcycle from a position of balance-sheet strength, is a reason for optimism about India’s financial future.

The last time yields were this low on a global scale was after 2008, during the era of quantitative easing. That phase was marked by heavy debt issuance but also unsustainable leverage. The present environment is different. Corporates are refinancing with caution, not over-borrowing. Indian firms are expanding with limited leverage, and equity-funded capex is reducing systemic risks while still driving growth.

For investors, the implications are straightforward. Fixed-income returns are compressed, encouraging greater flows into equities and alternatives. India, in particular, stands out. Strong corporate balance sheets and disciplined financing underpin growth here. The combination of deleveraging and rising capex is rare and history shows that such a backdrop often precedes multi-year equity market cycles.

The global low-yield environment, therefore, presents a rare alignment: cheaper refinancing, low defaults, and healthier balance sheets. For India, the alignment is even stronger. With corporates already deleveraged and capex mainly funded through equity, the country could be on the verge of its most sustainable growth phase in decades. For investors, the lesson is clear: when debt is cheap and balance sheets are strong, growth cycles tend to follow and India is exceptionally well placed to benefit.

Author:
Biharilal Deora, Director @ Abakkus Asset Manager