Corporate bonds are a crucial funding.

 

 

 

My comments on “Introduction of Liquidity Window facility for investors in debt securities through Stock Exchange mechanism

The recent proposal from the Securities and Exchange Board of India (SEBI) of the Introduction of a Liquidity Window facility for investors in debt securities through the Stock Exchange mechanism order for corporate bond issuers to create separate issues explicitly tailored for retail investors has significant implications for the liquidity and accessibility of the corporate bond market is compulsion. This initiative aims to bolster retail investor participation by incorporating features such as put and call options, strengthening their position in this critical financing avenue. There are some initiatives by SEBI that have failed in the past due to a lack of cooperation among stakeholders and serious minds. Its success may reach its maximum if SEBI considers the following suggestions.

Corporate bonds are a crucial funding source for Indian corporations, enabling expansion through market-driven interest rates that outperform bank financing. However, retail investor participation remains limited due to a lack of tailored products. To address this, SEBI is encouraging corporate bond issuers to incorporate put and call options, thereby enhancing the attractiveness of bonds for retail investors and providing them with greater flexibility and control over their investments.

At a critical juncture in the Indian economy, increasing liquidity in the corporate bond market is essential for sustaining growth. Introducing bond issues aimed at retail investors could promote active market participation. The inclusion, though already in use, of put options would allow investors to sell the bond back to the issuer at a predetermined price, reducing risk, while call options would enable companies to repurchase bonds when interest rates decline, optimising their capital structure.

Supporting this initiative could benefit the Reserve Bank of India (RBI) in maintaining the stability and efficiency of the financial system. While the RBI formulates monetary policy and registers primary dealers for corporate bonds, these dealers can enhance liquidity and attract retail investors.

Primary dealers, traditionally linked to government securities, can facilitate trading in new bond issues, promoting market efficiency. By engaging in continuous market-making for corporate bonds, they can offer competitive rates, allowing retail investors to access a more active and liquid marketplace.To address corporate market maker liquidity challenges, implementing a concessional corporate bond repo lending facility could provide primary dealers with essential liquidity support until they achieve sustainable operating income.  Authorised to market corporate bonds, these dealers could receive liquidity assistance from the RBI against their bond holdings at favourable rates.

Moreover, risk management practices (the absence of three bond risks and the investing in coupon-based securities not so consistent as bank FD) are crucial in underpinning this proposed initiative. By providing robust risk assessment tools, primary dealers can guide retail investors in navigating the complexities of credit and interest rate risks inherent in the corporate bond market. This support will protect investor portfolios and contribute to an increase in overall market confidence.

In conclusion, SEBI's initiative to require corporate bond issuers to create separate issues for retail investors, complemented by the incorporation of put and call options, represents a significant step towards enhancing liquidity and increasing retail participation in the corporate bond market.

Coupled with the support of primary dealers for market making and effective risk management practices, this proposal can potentially create a more dynamic and accessible corporate bond market, benefiting issuers and investors alike. As the landscape of corporate financing evolves, prioritising retail investor interests will play a crucial role in fostering a more inclusive financial ecosystem.

 Here footnote details

Lack of Cooperation:

1.        There is insufficient cooperation among RBI, IRDAI, and SEBI. These bodies supervise sectors with overlapping borrowing entities like banks, NBFCs, and insurance companies. This disconnect may impede efforts to improve corporate bond market liquidity in India.

 

2.       SEBI's Broader Role: SEBI primarily focuses on investor protection and capital market regulation, but must recognize that the largest borrowers are in the BFSI sectors overseen by RBI. Given RBI's critical functions in monetary policy and interest rate setting, enhanced collaboration between SEBI and RBI is essential for market stability and investor confidence.

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