SEBI Introduces Liquidity Window Facility To Enhance Liquidity In Corporate Bond Market

The Securities and Exchange Board of India (“SEBI”) has introduced a new framework to enhance liquidity in the corporate bond market by establishing a Liquidity Window Facility.[1] This initiative aims to address the long-standing issue of illiquidity in the secondary market for corporate bonds, particularly for retail investors. By implementing a systematic approach using “put options” exercisable on pre-specified dates, SEBI seeks to encourage broader participation and transparency in the debt securities market.

Background and Need for the Framework

The corporate bond market is an essential channel for issuers seeking funding and provides investors with a diversified investment option. However, the market has been hampered by low secondary market activity due to many institutional investors holding bonds until maturity. This lack of liquidity creates barriers for retail investors and discourages participation.

To address these challenges, SEBI has already introduced measures such as the Electronic Book Provider Platform for private placement of large issues, the Request for Quote (“RFQ”) Platform for secondary transactions, and frameworks for Online Bond Platforms and corporate bond repo operations. Building on these initiatives, the introduction of the Liquidity Window Facility is a significant step forward.

Key Features

Issuer Discretion and Applicability

• Issuers may choose to provide the Liquidity Window Facility for new debt securities (issued via public or private placement) on an ISIN basis.
• This facility is optional and can be offered to all investors or limited to retail investors holding securities with a face value not exceeding INR 2 lakh.

Authorizations and Oversight

• The facility requires prior approval from the issuer’s Board of Directors.
• Its implementation must be monitored by the Stakeholders Relationship Committee (“SRC”) or a designated board-level committee for entities not required to have an SRC.
• It must be objective, transparent, and non-discriminatory, ensuring no compromise in market integrity or asset-liability management.

Conditions for Offering the Facility

• Debt securities must have completed at least one year from the date of issuance before becoming eligible.
• ISINs with this facility will be exempt from the regulatory cap on maximum ISINs.
• Valuation and redemption amounts must follow predefined guidelines to ensure fairness and consistency.

Liquidity Window Operations

• The liquidity window can be operated on a monthly or quarterly basis, open for three working days.
• Investors can exercise the “put option” during trading hours by blocking securities in their demat accounts.
• The issuer must notify investors in advance of the schedule, ensuring transparency.

Sub-Limits and Proportional Acceptance

• Issuers can specify a minimum of 10% of the issue size for the Liquidity Window Facility.
• Sub-limits for each window ensure orderly processing. In case of oversubscription, acceptances will be on a proportionate basis.

Valuation and Settlement

• Securities are valued on the day before the window opens, with the price displayed prominently.
• Payment must be settled within one working day of window closure, while securities are transferred on a T+4 basis.

Post-Exercise Management

• Debt securities repurchased through the facility must be dealt with within 45 days through resale, extinguishment, or sale on platforms like RFQ or Online Bond Platforms.

Reporting and Disclosure Requirements

• Issuers are required to submit detailed reports to stock exchanges and disclose relevant information on their websites.
• Regular updates must be shared with depositories, stock exchanges, and debenture trustees for enhanced market transparency.

Implementation Timeline

• The Liquidity Window Facility will be effective from November 1, 2024, and applies to prospective issuances of debt securities.

Benefits for Issuers

The Liquidity Window facility can benefit issuers by attracting a wider investor base, improving credit ratings, and aiding in risk management. By offering a more liquid investment option, issuers can attract a broader range of investors, including retail investors. Enhanced liquidity can positively impact an issuer’s credit rating, leading to lower borrowing costs. The facility can help issuers manage funding needs and liquidity risks more effectively.

Conclusion

SEBI’s introduction of the Liquidity Window Facility marks a pivotal step in addressing the liquidity challenges of the corporate bond market, particularly benefiting retail investors. By allowing issuers to offer structured exit options through “put mechanisms,” this framework fosters greater participation, transparency, and trust in the debt securities market. It builds on SEBI’s previous initiatives while ensuring that market integrity and issuer accountability remain uncompromised.

[1] https://www.sebi.gov.in/legal/circulars/oct-2024/introduction-of-liquidity-window-facility-for-investors-in-debt-securities-through-stock-exchange-mechanism_87674.html.