The Securities and Exchange Board of India (SEBI) has been consistently taking various measures to widen the investor base, encourage transparency, and increase participation in the corporate bond market. Some of the initiatives taken include the introduction of the Electronic Book Provider (EBP) platform, the Request for Quote (RFQ) platform for secondary market transactions, and a corporate bond repo platform. In continuation of its efforts, SEBI has now introduced the concept of a Liquidity Window facility for investors in debt securities through the stock exchange mechanism.
The Need for Liquidity
One of the significant hurdles preventing greater participation in the corporate bond market is the perceived lack of liquidity. Unlike equity markets, where trades occur frequently, corporate bonds are often held until maturity by institutional investors, leaving little room for active secondary trading. This illiquidity, especially for retail investors, can be a barrier to investment, as they might be unable to exit their positions easily if the need arises.
The introduction of the Liquidity Window facility addresses this challenge by providing investors, particularly retail investors, with the option to redeem their bonds before maturity through a standardized put option mechanism. This facility, backed by regulations, offers pre-specified dates or intervals for redemption, thereby enhancing market activity and investor confidence in debt securities.
SEBI’s Regulatory Framework
The Liquidity Window facility is introduced under Regulation 15 of SEBI’s Issue and Listing of Non-Convertible Securities Regulations, 2021. This regulation enables issuers of debt securities to offer a put option to investors, allowing them to redeem their bonds before maturity. The new framework sets out clear and uniform norms for issuers to adopt when offering this facility, aiming to create a more liquid and dynamic market for corporate bonds.
Key Features of the Liquidity Window Facility
Issuer’s Choice: The Liquidity Window facility is optional for issuers of debt securities, who can offer it at their discretion at the time of issuance. The facility can be made available on an ISIN basis, with the issuer determining eligible investors.
Eligibility: Issuers may offer this facility to all investors or limit it to retail investors. To participate, investors must hold the debt securities in a demat form.
Aggregate Limit: Issuers must set an aggregate limit for the exercise of the put option, which cannot be less than 10% of the total issue size of the debt securities. A sub-limit may also be imposed for each liquidity window session, ensuring that redemptions are managed in an orderly manner.
Designated Stock Exchange: Issuers must designate one stock exchange for operating the Liquidity Window, with the window being open for three working days on a monthly or quarterly basis.
Valuation and Payment: Debt securities will be valued on the first day of the Liquidity Window, with payments made to investors within one working day of the window closing. The settlement process will be completed within four working days.
Transparency and Disclosure: Issuers are required to maintain transparency by disclosing detailed information regarding the liquidity window schedule, outstanding amounts, and redemption activities on their websites and other relevant platforms.
