Strength in depth

UK Sinha, chairman of the Securities and Exchange Board of India, is pushing for a deeper, more efficient market for both debt and equity securities.

IFR: India’s corporate bond market still lacks depth and sophistication. What is Sebi doing about it?

Sinha: Sebi has recently taken a whole range of steps to develop and deepen the corporate bond market.

We have issued guidelines to set up dedicated debt segments on stock exchanges with separate platforms for retail and institutional investors. This has already been implemented by NSE, BSE and MCX-SX.

We have established a risk management framework for the dedicated debt segments of stock exchanges. This also codifies the DVP-3 (Delivery versus payment) settlement of corporate bonds by clearing corporations, thereby guaranteeing the settlement. This step is geared towards providing the guaranteed settlement facility which will help in attracting more investors to invest in such corporate bonds and thus lead to increased liquidity.

With a view to encouraging trading in corporate bonds by institutions, such as banks, insurance companies and others, Sebi asked the Ministry of Finance to mandate that such institutions trade a certain proportion (say 20%) of their trades in corporate bonds on the exchange platform. In the next three years, the entire trading by such institutions may be shifted to the debt segments of stock exchanges. This move is intended to bring the trading activity of these institutions which currently takes place over the counter onto the exchange debt platform.

“By increasing investor awareness and education programmes all over the country, we will continue our efforts to increase the trust of investors in the Indian securities market and thereby bring in more investors.

We have written to the Reserve Bank of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory and Development Authority and the Employees’ Provident Fund Organisation to rationalise the investment restrictions on the entities they regulate and to move towards the prudent investor regime, as envisioned under the recently released report of the Committee on Investment Pattern for Insurance and Pension Sector. This has been done to encourage these vast pools of capital to invest in the domestic bond markets across the entire rating curve.

We have amended the debt regulations to include a clause on consolidation and re-issuance of debt securities and right to early redemption by ways of issuing callable and puttable bonds. The enablement of consolidation and re-issuance is likely to avoid the fragmentation of the debt market and will help in creating large floating stocks, which could attract more investors to corporate bonds.

In last few years, the proportion of bond financing versus bank financing has gradually moved in favour of bond financing. During 2010-11, the proportion of bond financing to bank financing was around 23.5%, which has gradually increased to around 27% during 2015-16. This implies that more and more issuers are now tapping bond markets for their debt financing.

IFR: Is Sebi considering any action to ensure investors, including mutual funds, are aware of the risks in corporate bonds, especially after Amtek Auto defaulted on its bonds?

Sinha: Sebi believes that mutual funds and asset management companies are keeping a close look at their debt portfolio, even though there are no regulatory guidelines mandating in-house credit assessments. Nevertheless, Sebi has made clear to MFs/AMCs that they are expected to give special attention to internal exposure limits at single issuer level, at group level for sister entities and at sector level. We have also said that while external credit ratings may be a useful input, it is important to have a full internal appraisal of the credit risk (as well as other risks) when making investment decisions. This is even more so in respect of secondary market purchases.

IFR: Sebi is considering moving primary corporate bond deals to an electronic platform. What progress has been made on this front and what is the rationale behind it?

Sinha: Sebi recently proposed the introduction of an electronic platform for primary market debt offerings through private placement to the Corporate Bonds and Securitisation Advisory Committee (CoBoSAC). The committee accepted the proposal in principle and recommended a public consultation. Sebi is now drafting a consultation paper for public comments.

The aim is to provide another transparent and cost-effective mechanism for issuers to raise funds through the issuance of debt securities. To begin with, the electronic platform may not be made mandatory and will be provided as an option.

The transparency available via an electronic platform is likely to attract more investors to primary markets and may also help issuers to raise funds cost-effectively.

IFR: Indian rules allow banks to offer Basel III-compliant subordinated bonds to retail investors. Is Sebi planning to introduce any measures before retail investors start buying these riskier bonds?

Sinha: An ad-hoc advisory group has been formed to look into potential additional disclosure norms for retail issuance of Additional Tier 1 instruments by banks. The issue is currently under examination.

IFR: Sebi has provided an enabling regime for municipal bonds. Why are there no issuances as yet?

Sinha: The recent Sebi (Issue and Listing of Debt Securities by Municipalities) regulations provide another avenue to municipalities and urban local bodies to finance local infrastructure. The government has proposed setting up about 100 smart cities. These regulations provide a framework to fund the cities’ infrastructure by issuing debt in the market.

Sebi has put in place various conditions to the public issue of bonds by municipalities, to make sure that only those with proper accounting standards and a clean financial record can access the market.

Since the regulations have been notified recently, it may take some time for municipalities to align themselves such that they are able to raise funds by issuance of bonds.

IFR: Although the stock markets are touching record highs, primary market activity in India continues to disappoint. Why is there a lull in the primary market?

Sinha: To say the primary market is experiencing a lull is not correct. In the first five months of FY2015-16, there have been 45 issues for a total amount raised of US$1.95bn. This is near or more than the amount raised in each of the two previous full financial years. This shows the momentum of the primary market.

As of September 30, Sebi observations are valid for 23 offer documents for a cumulative amount of around US$1.88 bn. This indicates that there is a significant pipeline of capital raising activity for the rest of the financial year.

In addition, 20 further issues had been filed with Sebi as of September 30 are under consideration. These issues add up to a further US$1.8 bn and are also likely to feed the pipeline during the current financial year. This takes the potential pipeline to around US$3.68 bn.

IFR: Is Sebi considering any steps to contain volatility and protect minority investors when margin calls are triggered on bonds backed by shares?

Sinha: As part of the current disclosure regime, Sebi has mandated promoters to disclose the shares that have been pledged (along with the reasons for the pledge) or invoked. Thus, investors are already aware of companies whose shares have been pledged and why. Investors need to gauge the probable dilution based on the percentage of shares pledged out of total share capital and thereby the underlying volatility.

Any further disclosures with respect to debt raised, margin calls, etc, may have commercial implications for the companies.

IFR: What will Sebi’s key priorities be in 2016?

Sinha: One important development is the merger of the Forward Market Commission (FMC) with Sebi, bringing the regulation of commodity futures markets under the regulatory ambit of Sebi.

Our immediate aim is to provide some comfort to all market participants that the regulation of the commodities futures market is at least as robust as that of the securities market and that the market will be managed in the interest of all stakeholders.

Another priority will be the extensive and integrated use of technology to facilitate and further ease the investing process in the securities market. Further, by increasing investor awareness and education programmes all over the country, we will continue our efforts to increase the trust of investors in the Indian securities market and thereby bring in more investors.

Further, streamlining the enforcement process to ensure uniformity in approach and improve the efficiency of enforcement proceedings across the organisation would be a priority area.

Creating wider awareness of SME and ITP platforms amongst issuers and investors is another goal. Sebi would like to ensure smooth implementation of the public issue process to T+6 days. Sebi would also focus on monitoring disclosures and compliance with the Listing Regulations. On the policy front, Sebi would examine system-based disclosures, objectively defining control, public issuance of convertible securities, etc.