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Developments
in the Corporate Bonds and Securitization Markets An Update (as on August 31, 2009) In December 2005, the High Level Expert Committee
on Corporate Bonds and Securitization submits
its report giving a plethora of recommendations for the
development of the corporate bond and securitization markets in In February 2006, Finance Minister in his Budget speech of 2006-07 announces that the Government has accepted
the recommendations of the Report of the High Level Expert Committee on
Corporate Bonds and Securitization and that steps would be taken to create a
single, unified exchange traded market for corporate bonds. In March 2006, Chairman, SEBI
constitutes an internal Committee to prepare an action plan for the purpose
of implementation of the Budget proposals on development of the corporate bond
market in In May 2006, the SEBI internal
Committee submits its report giving a broad plan for implementation of
budget proposals on development of the corporate bond market in In May 2006, a copy of the report of the SEBI internal Committee is
forwarded to RBI for their perusal and comments. In May 2006, in its Annual Policy Statement for the year 2006-07, RBI announces constitution of a Working Group to examine the relevant
recommendations of the High Level Expert Committee, having a bearing on Reserve
Bank�s responsibilities in regard to development of the corporate debt market
to suggest a roadmap for implementation. � In July 2006, RBI�s �Working
Group to examine recommendations of High Level Expert Committee on Corporate
Bonds and Securitization involving RBI and suggest a roadmap for
implementation� submits its Report. In December 2006, Government issues clarifications on regulatory jurisdiction over corporate bond
market as the confusion over the same was attributed to be a reason for slow
progress in implantation of the High Level Expert Committee�s recommendations
on corporate bonds and securitization. After hearing the views of RBI and SEBI
and perusing the provisions in SCRA, SEBI Act and the RBI Act, Finance Minister
desired that the necessary clarifications may be provided to RBI and SEBI so
that they could implement expeditiously the announcement in the Budget that
steps would be taken to create a single, unified exchange traded market for
corporate bonds. In December 2006, SEBI permits BSE
to set up a reporting platform from January 1, 2007� to capture all information related to trading
in corporate bonds as accurately and as close to execution as possible. SEBI
also announces
its intention to permit recognized stock exchanges having nationwide access to
set up corporate bond trading platform
to enable efficient price discovery and reliable clearing and settlement in a
gradual manner. Access to the platform for reporting was given to all market
intermediaries. Non-members of the Exchange were provided connectivity through
Virtual Private Network (VPN). �In
January 2007, Government discusses the relevant issues of regulatory jurisdiction and market
design further and decides as under: (a) Clarity on the agency responsible for different segments of the
corporate debt market (i)
SEBI will be responsible for primary market (public
issues as well as private placement by listed companies) for corporate debt; (ii)
RBI will be responsible for the market for
repo/reverse repo transactions in corporate debt. However. If it is traded on
exchanges, trading and settlement procedure would be determined by SEBI. (iii)
SEBI will be responsible for the secondary
market (OTC as well as Exchange) for the corporate debt; (iv)
The above framework would apply irrespective of
the parties (bank or non bank involved in a transaction; (v)
The views in respect of trading of unlisted
securities and derivatives on corporate debt (other than repo/reverse repo)
would be taken as and when the need arises. (b) The market design for the secondary market of corporate debt market (i)
OTC as well as exchange based transactions need
to be reported to reporting platforms(s); (ii)
All the eligible and willing national stock
exchanges need to be allowed to set up and maintain reporting platforms if� they approach SEBI for the same. SEBI needs
to coordinate among such reporting platforms and assign the job of coordination
to a third agency; (iii)
The trades executed on or reported to an
Exchange need not be reported to a reporting platform; (iv)
The participants must have a choice of platform.
They may trade on OTC or any exchange trading platform; (vi)
Existing exchanges could be used for trading of
corporate debts. NSE and BSE could provide trading platforms for this purpose.
There is no need to create a separate infrastructure; (vii)
There would be no separate trading platforms for
different kinds of investors. Institutional and retail investors would trade on
the same platform; (viii)
Only brokers would have access to trading
platform of an Exchange. Banks would have the option of becoming a broker or
trading through a broker. RBI, may if considered necessary restrict a bank to
trade only on proprietary account as a broker. In January 2007, BSE operationalises its reporting platform to
capture information related to trading in corporate bond market. In March 2007, SEBI permits NSE
also to set up and maintain a reporting platform on the lines of BSE.
It is also decided that BSE and NSE shall coordinate among themselves to ensure
that the information reported with BSE and NSE is aggregated, checked for
redundancy and disseminated on their websites in a homogenous manner. As an
integral part of development of a data base the two exchanges were advised to
provide data pertaining to corporate bonds comprising, issuer name, maturity
date, current coupon, last price traded, last amount traded, last yield
(annualized) traded, weighted average yield price, total amount traded and the
rating of the bond and any other additional information as the stock exchanges
think fit. In March 2007, the Fixed
Income Money Market and Derivatives Association of India (FIMMDA) proposes
to set up a reporting platform for corporate bonds and also provide value added
dissemination of information on corporate bonds as in the case of government
securities. SEBI decides that till such time that FIMMDA sets up such a
platform, it shall disseminate information made available on bond trading by
the two exchanges with appropriate value addition. In March 2007, SEBI rationalizes the provisions of continuous disclosures made by issuers who have
listed their debt securities and not their equity shares on the stock
exchanges. In March 2007, NSE
operationalises its reporting platform for corporate bonds and starts
disseminating information as desired by SEBI. In April 2007, SEBI permits both
BSE and NSE to have in place corporate bond trading platforms to enable
efficient price discovery and reliable clearing and settlement facility in a
gradual manner. To begin with, the trade matching platform shall be order
driven with essential features of OTC market. It is also announced that
eventually a system of anonymous order matching shall be established. BSE and
NSE were advised to make use of the existing infrastructure available with them
for operating the trade matching
platforms for corporate bonds with necessary modifications. The exchanges
were also advised that on stabilization of the trade matching system, they may
move to an anonymous order matching
system for trading of bonds within an appropriate period of time.
Accordingly, both the exchanges will indicate to SEBI an expected date on which
they could move to anonymous order matching system for trading in corporate
bonds. With the introduction of anonymous order matching platform, the clearing and settlement facility shall
be provided by BSE and NSE with a multilateral netting facility for trades
executed on the platform. It is also simultaneously decided that orders
executed through trading platforms of either BSE or NSE shall not be required
to be reported again on the reporting platforms. In April 2007, SEBI while permitting both the exchanges viz. BSE
and NSE to set up trading platforms advises them
that the stock exchanges may provide their services for clearing and settlement of corporate bonds traded or the entities
trading in listed corporate debt securities may settle their trades
bilaterally. In April 2007, SEBI decides to reduce the shut period in corporate bonds
to align it with that applicable for Government Securities. In April 2007, SEBI decides to reduce
tradable lots in corporate bonds in
respect of all entities including Qualified Institutional Investors to Rs.1
lakh and advises exchanges to have a limited segment for transactions in
similar market lots. In April 2007, SEBI decides to make
it mandatory for all new issues of corporate bonds to have an actual day count convention similar to
that followed in respect of dated Government Securities. In April 2007, SEBI makes
amendments to the listing agreement for
debentures to ensure that services of ECS (Electronic Clearing
Service), Direct Credit, RTGS (Real Time Gross Settlement) or NEFT (National
Electronic Funds Transfer), are used for payment of interest and redemption
amounts as per applicable norms of the RBI along with other existing
facilities. In April 2007, SEBI makes amendment
to the listing agreement for debentures to ensure that no material
modification shall be made to the structure of the debentures issued in terms
of coupon, conversion, redemption or otherwise without prior approval of the
stock exchanges where they are listed.�
The stock exchanges shall also ensure that such information relating to
modification or proposed modification is disseminated on the exchange website. In June 2007, SEBI puts up Draft Regulations for �Public Offer and Listing of Securitized
Debt Instruments� on its website for public comments. SEBI Draft
Regulations provide for a system of special purpose distinct entities which
could offer securitized debt instruments to the public or could seek listing of
such instruments. The Draft document�
also elaborates on� the
permissible structure for the special purpose distinct entity, conditions for
their assignment of debt or receivables from any originator, procedure for
launching of schemes, obligation to redeem securitized debt instruments, credit
enhancement and liquidity facilities which could be availed by the entity,
conditions for appointing servicers, procedure to be followed for public offer
of securitized debt instruments, their listing, rights of investors, inspection
and disciplinary proceedings and action in case of default. In July 2007, BSE and NSE trading
platforms become operational. Initially, trade matching platforms at BSE
and NSE are order driven with the essential features of OTC market. In August 2007, SEBI starts placing information on
secondary market trades (both exchange and OTC trades)on its website on
the basis of� data provided by the
two� Exchanges. � In August 2007, SEBI makes it
mandatory that the companies issuing
debentures and the respective debenture trustees/stock exchanges shall
disseminate all information regarding the debentures to the investors and
the general public by issuing a press release and also displaying the details
on their respective websites, in the event of: (i)
Default by issuer company to pay interest on
debentures or redemption amount; (ii)
Failure to create a charge on the assets; (iii)
Revision of rating assigned to the debentures. In August 2007, SEBI makes it
mandatory to make public, information/reports
on debentures issued including compliance reports filed by the companies
and the debenture trustees by placing them on websites of the companies and the
debenture trustees. The same is also required to be submitted to the stock
exchanges for dissemination through their websites. In August 2007, SEBI grants approval to FIMMDA for starting Corporate Bond Trade Reporting Platform. In September 2007, FIMMDA
reporting platform becomes operational as the third reporting platform
after BSE and NSE. Accordingly, for reporting of OTC trades the concerned
parties could opt to report their trades on any one of the three reporting
platforms. In September 2007, SEBI advises BSE and NSE to confirm their preparedness for going in for introduction
of repos in corporate bonds so that it could request RBI to issue
appropriate guidelines for the purpose as suggested by the High Level Expert
Committee on Bonds and Securitization. In October 2007, SEBI obtains confirmations from BSE and NSE on
their preparedness for introduction of
repos in corporate bonds. Since repos in corporate bonds falls under the
regulatory purview of RBI, SEBI has requested RBI to initiate action as
required. In November 2007, SEBI
issues letters indicating no objection to entities which had approached
SEBI for setting up of electronic systems to facilitate price discovery and
bringing about transparency into corporate bond trading. The systems will help
display of buy sell quotes of counter parties involved so that the buyers and
the sellers in the corporate bond market could strike deals at best prices
before they go in for order matching either at the exchange or bilaterally. In December 2007, SEBI vide circular dated
December 03, 2007 amends the provisions pertaining to issuances of
Corporate Bonds under the SEBI (Disclosure and Investor Protection) (DIP)
Guidelines, 2000. The Changes to the Guidelines are as below:
(a)
For public/ rights issues of debt instruments,
issuers now need to obtain rating from only one credit rating agency instead of
from two. This is with a view to reduce the cost of issuances.
(b)
In order to facilitate issuance of below
investment grade bonds to suit the risk/ return appetite of investors, the
stipulation that debt instruments issued through public/ rights issues shall be
of at least investment grade has been removed.
(c)
Further, in order to afford issuers with desired
flexibility in structuring of debt instruments, structural restrictions such as
those on maturity, put/call option, on conversion, etc have been done away
with. In January 2008, SEBI frames Draft Regulations on Issue and Listing of Debt Securities and the places on same on the SEBI website along with a consultative paper for Public Comments. Salient features of the draft regulations include rationalization of disclosure requirements, enhanced responsibilities of merchant bankers for exercising due diligence and mandatory listing of private placement of debt issued as per exemption under S.67(3) of the Companies Act. The paper also makes provisions for e-issuances of corporate debt and proposes introduction of rationalized listing requirements for debt of a listed issuer. In February 2008, In addition to the letters indicating no
objection communicated to three entities in November 2007, a similar letter
indicating no objection has been communicated to a fourth entity that
had approached SEBI for setting up a similar electronic system that will help
display buy sell quotes of counter parties involved so that the buyers and the
sellers in the corporate bond market could strike deals at best prices before
they go in for order matching either at the exchange or bilaterally. In February 2008, Finance Minister in his Budget
speech of 2008-09 announces that as announced in the Budget Speech of
2006 about taking steps to create an exchange-traded market for corporate
bonds, both BSE and NSE have created platforms for trading in corporate bonds. The
Finance Minister proposed to move forward by taking some more measures to
expand the market for corporate bonds such as: � take measures to develop the
bond, currency and derivatives markets that will include launching
exchange-traded currency and interest rate futures and developing a transparent
credit derivatives market with appropriate safeguards; � enhance the tradability of
domestic convertible bonds by putting in place a mechanism that will enable
investors to separate the embedded equity option from the convertible bond and
trade it separately; and � encourage the development of a
market-based system for classifying financial instruments based on their
complexity and implicit risks. The Finance Minister also
announced that supplementing the measures announced in respect of the corporate
debt market, it was proposed to exempt from TDS, corporate debt instruments
issued in demat form and listed on recognized stock exchanges. In March-April 2008, SEBI reviews a large number of public comments
received on the Draft Regulations on Issue and Listing of Debt Securities and
the consultative paper which were placed on the website in January 2008. The
draft regulations are being finalized. In April 2008, on the lines as proposed in the consultative paper
placed on the SEBI website in respect of draft Regulations for issue and
listing of debt securities, SEBI discussed with stock exchanges, BSE and NSE on
simplifying and rationalizing the listing agreement for debentures. The
underlying philosophy for the same is: (a)
where the equity of a company is listed, and such company wishes to issue debt
instruments (whether by way of public offering of private placement), as large
amount of company related information is already in public domain and material
developments are available as per the equity and listing agreement on a nearly
continuous basis minimal incremental disclosures are sufficient; and (b)
where the equity of the issuer is not listed, and such a company raises debt
capital (whether by way of public offering of private placement) detailed
disclosures, (fewer than equity securities disclosures though), are required In April-May 2008, SEBI discussed with the stock exchanges BSE and
NSE on introduction of mandatory clearing and settlement for trades in
corporate bonds. This is in line with the discussions had with RBI in December
2007 towards preparing the market for introduction of Repos. The policy is
under consideration of SEBI. In May 2008, SEBI receives a draft Listing Agreement for debt
securities prepared by BSE and NSE in consultation with SEBI. The draft is
presently under consideration at SEBI. The said draft listing agreement suggests
only one listing agreement for debt securities irrespective of whether the
equity of the issuer is already listed or not and whether debt securities have
been issued by way of a public issue or a private placement. The applicability
of clauses has been demarcated in the listing agreement as below: (a)� Part A of the debt listing agreement would be
applicable in case the issuer has equity shares already listed on the exchange
and has complied with the covenants appearing in the equity listing agreement.
In such a case, the issuer may comply with minimal disclosure requirements
specified in clauses 1 to 4 of the agreement. It is specified that in case the
equity of the issuer is delisted from the exchange at a later date, the issuer
is mandated to comply with Part B of the agreement. (b)
Part B of the debt listing agreement would be
applicable for issuers who do not have their equity listed on the stock
exchange or do not otherwise satisfy the requirements to make disclosures as
per Part A. Clauses 5 to 21 of the agreement would be applicable for such
issuers. In May 2008, SEBI gathers information from depositories NSDL and
CDSL on transfers in Corporate Bonds on a monthly summary basis and starts
placing the information on
transfers in corporate bonds at depositories on its website. In May 2008, SEBI sets up an Advisory Committee named �Corporate Bonds and Securitization Advisory Committee� (CoBoSAC) for making recommendations to SEBI on developing the market for corporate bonds and securitized debt instruments further. � In May 2008, the SEBI
(Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008
are notified in the Official Gazette dated In June 2008, the SEBI
(Issue and Listing of Debt Securities) Regulations, 2008 are notified in
the Official Gazette dated In July 2008, the first meeting of the newly set up Corporate Bond
and Securitization Advisory Committee (CoBoSAC) was convened under the
Chairmanship of Dr RH Patil. The Committee deliberated on streamlining
mechanisms for reporting, clearing and settlement and on developments in the
Corporate Bond Market to date. The Committee, after deliberation recommended
implementation of mandatory DvP-III clearing and settlement on exchanges with
RTGS. In the meantime, it was recommended to set up a sub-group that would look
into issues related to trade reporting. In August 2008, SEBI placed the draft simplified listing norms for �debt securities� as defined in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 prepared in consultation with BSE and NSE on the SEBI Website for public comments. In September 2008, SEBI discussed the public
comments received on the draft simplified listing agreement for debt
securities. Same are being incorporated into the agreement. Additional comments
received from issuers are also being examined. In October 2008, the second meeting of CoBoSAC
was convened, Inter alia, the Committee stressed on the importance of stock
exchanges having RTGS access in order to introduce clearing and settlement
through the stock exchange clearing houses. Also, the SEBI proposal on electronic
issuances was discussed in detail at the meeting. In December 2008, the third meeting of CoBoSAC was
convened. The committee, inter alia, discussed the analysis on privately placed
bonds, the report of the sub-group on reporting of corporate bond trades and
the policy clarifications that needed to be communicated to the merchant
bankers of the proposed issue by Tata Capital Limited. In December 2008, SEBI communicated its
clarifications on policy issues to the merchant bankers to the proposed public
issue by Tata Capital Limited who had sought clarifications under the recently
notified SEBI (Issue and Listing of Debt Securities) Regulations, 2009. In February 2009, the first public issue of
non-convertible debt securities under the Debt Regulations was made by Tata
Capital Limited. The issue opened on In May 2009, RBI sent a communiqu� to SEBI outlining the norms for granting RTGS access to the clearing corporations of stock exchanges so as to facilitate DVP-I based trade for trade settlement for the funds leg of corporate bond trades. The clearing corporations of NSE and BSE submitted their applications for the same through SEBI. In May 2009, SEBI put in place the simplified listing agreement for debt securities. As was proposed in the draft for public comments, issuers with listed equity who are already subject to detailed disclosure requirements, now have to make minimal disclosures while issuers of listed debt alone make reasonably elaborate disclosures but less than those required under the equity listing agreement. The simplified listing agreement has two parts A & B. Issuers with equity listed need to comply with the brief disclosures as per part A while those with unlisted equity or non compliance otherwise with the Equity Listing Agreement would require compliance with Part B of the simplified listing Agreement. In May 2009, the fourth meeting of CoBoSAC was
convened. The committee, inter alia, discussed the analysis on reporting of
Corporate Bonds prepared by NSDL and learnings from the recent issue by Tata
Capital Limited. CoBoSAC also reviewed the preparedness of the clearing houses
at NSE and BSE for the RTGS based clearing and settlement. In June 2009, the applications made through SEBI by the clearing corporations of NSE and BSE for access to the RBI RTGS system were forwarded to RBI for its consideration. In June 2009, SEBI issued a circular
clarifying the applicability of regulations/ guidelines of SEBI on privately
placed convertible debt securities. The issue of debt securities that are
convertible, either partially or fully or optionally into listed or unlisted
equity shall be guided by the disclosure norms in terms of SEBI (Disclosure and
Investor Protection) Guidelines, 2000.� The
issue and listing of non-convertible debt securities, whether issued to the
public or privately placed shall be done in accordance with the provisions of
the SEBI (Issue and Listing of Debt Securities) Regulations, 2008. � In July 2009, SEBI issued a circular to all
Mutual Funds, In August 2009, the reporting of inter-scheme transfers of Corporate Bonds by Mutual Funds was started. The data is also updated on the SEBI Website at link. During the last fiscal
year from April 2008 to March 2009, secondary
market trades (both OTC and exchanges) stood at Rs.148,752crore (Rs.96,119crore
in 2007-08) whereas primary
issuances by corporates in the form of private placement during the current
fiscal stood at Rs.207,164crore (Rs.128,602crore in 2007-08) as per information
collected from BSE and NSE. Private placement also includes issuances pursuant
to offers made to 50 persons or more under exemption provided under S.67(3) of
the Companies Act. During the same period, transfers in Corporate Bonds
executed at NSDL and CDSL stood at Rs.436,357crore (Rs.2,87,587crore in
2007-08). During the Current
fiscal year from April to August 2009, secondary
market trades (both OTC & exchanges) stood at Rs.123,753 crore. During
the same period, transfers
in Corporate Bonds executed at NSDL and CDSL stood at Rs.206,330crore. _______ |
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