Informist, Saturday, Dec 31, 2022

By Subhana Shaikh

MUMBAI – For corporate bonds, the theme for the year 2022 was regulatory changes. For the coming year, it will be about how these will alter the landscape of a market that has traditionally struggled with issues such as lack of depth and limited participation.

In 2022, the Securities and Exchange Board of India came up with a series of regulatory announcements aimed at increasing participation and boosting liquidity. Some of these guidelines are scheduled to kick in from next year. Even those that have already been implemented are likely to make their full impact only in 2023.

These measures include registration of bond platforms with SEBI, a shorter lag between issue closure and listing of debt securities, consolidating the number of outstanding securities, and a new framework for green bonds. These will directionally work towards deepening the corporate bond market, but the changes will be gradual and incremental.

However, all together, the measures give the market much to look forward to in 2023.

SEBI-REGISTERED BOND PLATFORMS

The securities market regulator has allowed online bond platform providers, which sell listed debt securities to investors, especially non-institutional ones, to register as stockbrokers with itself under the debt segment of the bourses.

Since the last two-three years, Indian financial technology companies and debt arrangers have been launching bond platforms that offer bonds to non-institutional investors seeking higher yields. Some of these are The Fixed Income by Tipsons Financial Services, Bondskart backed by JM Financial Ltd, and IndiaBonds by AK Capital Services.

However, so far, these platforms have garnered limited participation, especially from retail investors, mostly because of the market's opacity and lack of trust surrounding the hitherto unregulated bond platforms. SEBI's new regulatory framework, which came into effect last month, is expected to change all this.

"…there are obviously long-term benefits to this, given the standardisation of offerings… exchange settlements, listed bonds under regulations will bring in transparency to retail offerings and improve the faith in these platforms," said Ajay Manglunia, managing director of JM Financial.

"This (SEBI's new regulatory framework) has helped in clarifying and streamlining the processes around eligibility, registration, operations, grievance redressal mechanisms, and marketing of online platforms," said Tirth Shah, co-founder of The Fixed Income.

While the new framework has, so far, been well received by bond platform providers, it does come with its own set of challenges. Since the new norms look to regulate bond platforms in minute detail, some sections of the market have warned about these having a potentially stifling effect on the operations of these entities, which are still in nascent stages of development.

OPERATIONAL TWEAKS

Two key operational changes will come into effect from the new calendar year. One is the reduction in face value of each listed debt security issued on a private placement basis to 100,000 rupees from 1 mln rupees earlier. The other is a shorter timeline for listing of debt securities. It will now be three days from the issue closure date as against the four days currently.

Securities with a small face value will make the primary market more accessible to investors with relatively smaller books. "This was meant to increase the reach of bonds to a wider set of investors from the usual institutional segments, thereby opening doors for retail and high net worth direct investments," Manglunia said.

The second measure of a three-day timeframe for listing is already in practice by reputed issuers. However, a formal market-wide guideline will strengthen secondary market activities. A shorter gap between issue closure and listing of securities reduces the duration for which investors are vulnerable to the risk of an abrupt change in market conditions while being unable to trade the security.

However, some merchant bankers pointed out a potential negative fallout of the measure, especially for corporates looking to refinance through secured issuances. This is because the regulatory procedures for listing these typically take longer than the stipulated three days. The new norms may, therefore, prompt such refinance to be sought through unsecured bonds rather than secured issuances.

MARKET CONSOLIDATION

One of the reasons behind the lack of liquidity in the corporate bond market is the low floating stock of individual securities because even heavy borrowers have been traditionally averse to reissuing their bonds.

To prevent issuers from scattering their debt across an inordinately large number of securities, SEBI has now capped the number of international securities' identification numbers per borrower to a maximum of 14 for debt securities maturing in a financial year. Earlier, the cap was 17. The 12-character ISIN code is a unique identifier tagged to each security, including stocks, bonds, warrants and commercial papers. 

For corporates, the reissuance of securities would require better planning of their liabilities as their debt repayments could turn lumpy. The cap of 14 papers per year does not pose a challenge as of now, but a downward revision of this limit could prove to be a problem as corporate balance sheets need to have a staggered debt maturity profile.

GREEN BONDS

SEBI's latest regulatory initiative is the new framework for green bonds, a step towards promoting sustainable finance and investing. The framework also introduces the concept of blue and yellow bonds as new modes of sustainable finance. It aims to support India's commitment towards clean energy and pave the way for higher issuances of green bonds in 2023. 

"The introduction of pricing benefits for investors would further aid the demand to kickstart the market for these issuances," said Nagesh Chauhan, head of debt capital markets at Tipsons Financial Services.

However, investors remain ambivalent towards such instruments, and a lot more needs to be done to stimulate investor appetite and make the market more conducive for issuing green bonds. The new framework also does little to increase the pool of capital that would be invested in green bonds. "Investors don't care about the colour of the bond as long as it gives them yield," a senior treasury official at a private bank said. "If there is no pool of capital available, even if you come out with a framework for a green/blue/yellow bond, investments may not appreciate and issuer may not get the benefit."

Calls and emails to SEBI's spokesperson for comments remained unanswered till the time of filing this story.

PERFECT TIMING

SEBI's initiatives to promote market efficiency and ease of operations come at a time when the corporate bond market is seen poised for an increase in issuances as the wedge between bank loan rates and bond yields continues to narrow.

After a volatile 2022, market conditions are likely to turn relatively favourable as the interest rate hike cycle is seen nearing its peak. "With inflation moderating and a mixed view on growth, rates will remain stable with some spurts of volatility led by geopolitical tensions," Manglunia said.

If the new regulatory norms have the intended effect, the secondary market for corporate bonds may witness increased volumes mostly from non-traditional pockets such as retail, alternative investment funds and high net worth individuals.

One risk that the SEBI currently runs in its enthusiasm to shake things up is that of over-regulation. Time and again, there have been instances of an overkill of regulatory initiatives getting in the way of free market forces. These ultimately end up curbing participation. In short, doing the opposite of what they were intended to achieve.

However, the market has taken heart from the open-to-dialogue approach that the SEBI has been adopting in the introduction of recent regulations.

Following is a list of regulatory initiatives by SEBI for the corporate bond market in 2022: 

End

Edited by Namrata Rao

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2022. All rights reserved.