Sebi Mulls “Market Makers” to deepen the corporate bond segment
In order to develop and strengthen the corporate bond segment, the regulator Securities and Exchange Board of India (Sebi) is considering the creation of a set of “market makers“. These are entities that quote both a purchase price and a sale price for corporate bonds in order to create liquidity on the secondary market for these bonds. In addition, the regulator is in the process of finalizing the modalities for setting up a support mechanism for the purchase of corporate bonds. .
In order to develop and strengthen the corporate bond segment, the regulator Securities and Exchange Board of India (Sebi) is considering the creation of a set of “market makers“. These are entities that quote both a purchase price and a sale price for corporate bonds in order to create liquidity on the secondary market for these bonds.
In addition, the regulator is in the process of finalizing the procedures for setting up a backstop facility for the purchase of corporate bonds. In addition, Sebi plans to revamp the corporate bond database which is accessible to all investors, Sebi said in its annual report for 2020-21.
This database will make more detailed information on debt covenants available to investors in the debt market, he added. Recognizing the need to diversify sources of financing for the country’s infrastructure needs, Sebi has focused its attention on creating a vibrant secondary market for high quality corporate bonds.
The regulator has deployed several measures in the recent past to facilitate liquidity in the secondary market. “A proposed additional step aims to create a set of market makers who will be present in the market most of the time on both the buy-side and the sell-side of investment-grade corporate bonds,” the regulator said.
Sebi said it is developing appropriate eligibility criteria for such market makers to ensure that financially sound entities with the required expertise are encouraged to participate. Simultaneously, the problems of funding the cost of holding inventory for these entities through a variety of mechanisms – by putting in place a back-to-back arrangement with issuers, creating a repo market for corporate bonds that can fund holding stocks of market makers, among others, are also examined.
Regarding the support facility, Sebi and other stakeholders, including the Ministry of Finance and the mutual fund industry, are in the process of finalizing the modalities for setting up the facility. Based on a proposal from Sebi, an announcement in the Union budget for 2021-2022 was made regarding the creation of a support facility that would purchase investment-grade debt both in times of crisis and in normal times and would contribute to the development of the bond market.
The proposed support facility will operate as a standby entity and is envisioned to facilitate liquidity in the corporate bond market and to respond quickly to stress situations, similar to mechanisms available in developed markets globally, a noted Sebi. The facility will contribute to bringing liquidity and stability to the corporate debt market, to combating risk aversion in times of crisis, in particular for securities rated below AAA, to strengthening the confidence of players of the market in the secondary market and to create liquidity options for investors in general.
Additionally, the regulator mentioned the pipeline of other proposals being developed to increase confidence in the corporate bond market. In his report, Sebi said mutual fund asset management companies (AMCs) are in the process of creating an entity for recognition as a Limited Purpose Clearing Corporation (LPCC) for the clearing and settlement of repo transactions on corporate debt securities. The regulator has already published the framework of the LPCC which included the contribution of Rs 150 crore to the share capital of the LPCC proposed by the AMCs.
“The entity formed by the AMCs for pension clearing is expected to be functional soon,” Sebi said. With a view to further developing and deepening the corporate bond market, Sebi plans to revamp the existing rules relating to the issuance and listing of debt securities by removing redundant provisions, easing the issuance process debt securities and adding provisions on investor protection and transparency. .
The regulator is also seeking to strengthen continuous listing requirements for publicly traded entities to improve the granularity of information relating to financial statements, material events, including credit events, corporate governance information business, including related party transactions.