Sebi expected to deploy market-making framework to bolster bond markets

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Market regulator Sebi plans to roll out a market-making framework to help markets become more dynamic and funds cheaper. The development will take place given the fact that more than 98% of corporate bonds are private placements, while the public issuance of debentures currently only holds about 2% – leading to a shallow secondary market. Notably, over the years there has been a rapid increase in resource mobilization through the corporate bond channel.

Ashwani Bhatia, a full-time member of the Securities and Exchange Board (Sebi), said on Tuesday that “we should be releasing the framework very soon,” as reported by PTI. The Sebi framework is likely to be applicable to every listed issuer that has issued non-convertible debt securities and has outstanding private sector issued CRS in the amount of 500 crore or more.

Bhatia was speaking at the annual capital markets summit organized by industry lobby Ficci. However, he did not give further details.

Last month, T. Rabi Sankar, Deputy Governor of RBI, raised concerns about the mode of issuance of corporate bonds. He said “the vast majority of corporate bond issuance each year is through private placement rather than public issuance.”

According to RBI data, in FY22, the amount of funds raised through public issuances of corporate bonds stood at just 11,589 crore – roughly 2% of the amount of money raised through a private placement at 5.88 lakh crore.

“The benefits of a public offering in terms of transparency and efficient price discovery are well understood. SEBI has made efforts to make the private placement process more transparent and efficient, for example, through the introduction of the electronic bidding process on the scholarships,” the Deputy Governor of RBI had said.

Nonetheless, Sankar added, “there is an overwhelming preference for private placement. A thorough examination of the underlying issues, including why issuers prefer to avoid the public issuance process, may be needed.” .

RBI data further revealed that outstanding corporate bonds quadrupled from 10.51 lakh crore by the end of FY2012 40.20 lakh core by the end of FY22. Annual emissions during this period increased from 3.80 crore lakh to $6 million.

In addition, the total settled value of secondary market trades in FY11 was 4.50 lakh crore which rose to 14.37 lakh crore for FY22. Sankar said, “Obviously secondary trade has not increased in line with the size of the market.”

“Efforts should focus on improving complementary markets – repo and derivatives –, diversifying the investor base, domestic and global, and improving access for borrowers at the lower end of the credit spectrum. Beyond that, developing and improving the market will remain an ongoing task. While we need to take these steps, it will serve us well to temper our expectations about the degree of liquidity in the corporate bond secondary markets. Going by international experience, the best we can do may well be short of the liquidity we are used to in government bond markets or stock markets,” Sankar concluded.

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