SEBI’s Liquidity Window: Will It Boost Retail Investor Confidence in India’s Bond Market?

The Securities and Exchange Board of India (SEBI) has introduced a Liquidity Window facility to improve participation in the corporate bond market, said a circular issued on Wednesday.

With this, issuers can provide investors with a series of PUT Options, targeted mainly for retail investors, that are exercisable on pre-specified dates or intervals at a discount to the prevailing market price. PUT Options allow investors to redeem debt securities before their maturity date.

According to SEBI, one factor that drives investor participation in a market is the availability of liquidity. Low levels of secondary market transactions in corporate bonds, partly due to a large number of institutional investors holding such bonds to maturity, have resulted in a perception that the corporate bond market is illiquid.

The liquidity window allows investors who own listed debt securities to utilize a put option to sell them back to the issuer on specified dates, guaranteeing liquidity.

According to SEBI’s circular, this feature will be of immense utility to investors, especially retail investors, and can serve to enhance their investment in such debt securities.

Under this new facility, the issuing entity can decide whether to provide a Liquidity Window and for which investors. Investors who want to avail of this facility will need to hold the securities in demat form, as per the circular.

“An entity issuing debt securities, which are proposed to be listed, may at its option/discretion provide the Liquidity Window facility as envisaged in this circular for the debt securities, on an ISIN basis, at the time of issuance of such debt securities and make such Liquidity Window facility available to the eligible investors,” the regulator said.

The liquidity window will be kept open for three working days. The liquidity window can be operated on a monthly/quarterly basis at the discretion of the Issuer.

“The schedule of liquidity window/s shall be disclosed upfront in the offer document. The notice/ intimation regarding the liquidity window through PUT option shall be made within five working days via SMS/ WhatsApp messaging from the start of each financial year regarding the Liquidity Window facility being available on a monthly/ quarterly basis in that respective financial year. Such notice/ intimation shall be treated as compliance with Regulation 15(6)4 of the NCS Regulations," SEBI said.

How the Liquidity Window Facility will impact the bond market?

Vishal Goenka, Co-Founder of IndiaBonds says the true effects of this policy will only be seen in a year’s time but it provides more confidence to retail investors which in turn will create more confidence in new/growth-stage issuers.

“More and more is being done to change the regulatory framework in India to establish a thriving corporate bond market. We welcome the innovative and progressive thinking here,” he said.

According to Goenka, the democratisation of bond markets continues to see regulatory tailwinds in India. For India's economy to grow to $7-8 trillion by 2030 - the capital/credit creation is bound to happen via capital markets and enabling retail.

Nikhil Aggarwal, founder and group CEO at Grip Invest says every other retail investment product from FD, MFs, Stocks and till recently P2P offers access to instant redemption and liquidity. SEBI’s latest guidelines for a liquidity window are a significant step in addressing this gap.

“However, it is yet to be seen how many issuers agree to offer this feature as it does put some pressure on their balance sheet and needs to be factored into their asset-liability matching," he said.

 According to SEBI, this feature must be approved by the board of directors and overseen by the Stakeholders Relationship Committee (SRC) or a similar committee at the board level. It should be fair, impartial and inclusive towards eligible investors. Any buyback can only be after at least one year post issuance date. Buyback window has to be open for at least 10 per cent of the outstanding issue size.

In addition, issuers can sell the bonds that they buyback again in the open market through exchanges or OBPP platforms, or even extinguish and reduce the outstanding amount.