Sebi Comes Out With New Guidelines On Electronic Book Mechanism To Address 'Fastest Finger First' Concern

In a bid to address the concern of 'fastest finger first', Sebi on Monday tweaked the electronic book building process for private debt placement to ensure that allocations are based on the 'best bid' rather than the bidder with the best technology for placing the fastest bid.      
    
In addition, the regulator has introduced the concept of anchor investor as an option, in order to enable issuers to assess the demand and receive assurance from certain prospective investors towards subscription, according to a circular.       
     
Also, the framework for existing Electronic Book Provider (EBP) like threshold limits for applicability, bidding limits for arrangers and penalty in case of default have been modified.       
     
This new framework comes amid reports of some of high-speed traders who are outsmarting traditional debt investors, including bond houses, asset managers and insurers, by allegedly using specialised software to obtain values ??in a 'fastest finger first' contest.       
     
"In order to address the concern of 'fastest finger first', it is essential to modify the book building process to ensure allocations based on the 'best bid' rather than the bidder with the best technology for placing the fastest bid," the Securities and Exchange Board of India (Sebi) said.       
     
The new framework will come into effect from January 1 next year.     
     
Sebi said the EBP mechanism is for all private placements of debt securities with an issue size of Rs 50 crore and above, inclusive of green shoe option, and stock exchanges are the electronic book providers.       
     
EBP will have to provide a facility to the eligible participants to define the range within which quotes may be placed, from its user interface, to avoid 'fat finger' errors.   
     
"Each eligible participant shall provide confirmation to the EBP that it is not using any software, algorithm, Bots or other automation tools, which would give unfair access for placing bids on the EBP platform," the regulator said.       
     
Each EBP will have to ensure that it does not provide any preferential access to any bidder on a selective basis.     
     
An eligible participant cannot bid for an amount more than Rs 100 crore or 5 per cent of the base issue size, whichever is lower, through arranger on the EBP platform. However, Foreign Portfolio Investors (FPIs) may bid through their custodians.      
     
An arranger can bid, on behalf of multiple participants, subject to the limits for each participant.      
     
For bids made by an arranger for any particular issue,  Sebi said that such arranger will have to disclose to the EBP at the time of bidding whether the bid is proprietary bid, a client bid or a consolidated bid.     
     
For consolidated bids, arranger will have to disclose breakup between proprietary bid and client bid. 
     
Further, for client bids, the arranger will have to disclose names of such eligible participants category (QIB or non-QIB) and quantum of bid of each eligible participant.      With regard to penalty, Sebi said in case of non-fulfilment of pay-in obligations by allottees and anchor investors, such allottees and anchor investors will be debarred from accessing the bidding platform across all EBPs for a period of 30 days from the date of such default.      
     
In case of three instances of non-fulfilment of pay-in obligations across all EBPs, by client for whom an arranger has bid, then such an arranger will be debarred from accessing the bidding platform on any EBP for seven days.       
     
Issuer will have an option to avail an 'anchor portion' within the base issue size. They will have the discretion to select the anchor investor for the anchor portion.
     
The quantum of allocation to the anchor investor will be at the discretion of the issuer, subject to total allocation to the anchor(s) not exceeding 30 per cent of the base issue size. There will be no bidding for anchor portion on the EBP platform.      
     
This came after Sebi received representations from various market participants requesting for review of the provisions pertaining to EBP platform.      
     
The issues were also discussed with market participants including issuers, arrangers, investors -- banks, mutual funds-- stock exchanges, depositories, and also at the Corporate Bonds and Securitization Advisory Committee meetings.