S.No.
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Recommendations of the Committee on which SEBI needs to take action
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Action Point
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Expected time for implementation
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1
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Enhancing issuer base
The time and cost for public issuance and the disclosure and listing requirements for private placements should be reduced and made simpler.
Banks should be allowed to issue bonds of maturities of over 5 years for ALM purpose and not only for the infrastructure sector as at present.
Given the growing requirement of capital at banks, appropriate regulatory limits may be set for the banks when they subscribe to bonds issued by other banks, thereby also encouraging other entities to subscribe to bonds issued by banks.
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There are two parts to this recommendation. The first part relates to the reduction of time and cost of public issuance (in comparison with that of private placement) by making disclosures and listing requirement simpler. The subject could be studied in depth by SEBI and then the disclosure and listing requirement could be worked out. These could also be discussed at the PMAC
The second part of the recommendation is to be implemented by RBI.
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Legal Department has already taken up first part of the issue. Regarding second part of the issue, RBI is to be approached.
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2
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Listing of Issues
For already listed entities, disclosures should be substantially abridged. They may be required to make only some incremental disclosures every time they approach the market with a fresh issue either through public issue or a private placement. But they would need to include rating rationale in their disclosure document. For unlisted companies issuing bonds to institutional investors/QIBs, rating rationale should form the basis of listing;
Companies, which have no securities listed at the exchanges or have listed only privately placed bonds but wish to make a public issue, should be subjected to stringent disclosure requirements, as the securities are being offered to the retail investors and there is no information on the issuing entity available in the public domain. Accordingly, the present requirements of Chapter VI of SEBI DIP Guidelines should as such be made applicable with necessary adaptations as relevant to a debt instrument. The rating rationale should additionally be made a part of the disclosure document.
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The abridged offer documents for follow-on issuances/rights issues in the case of public issues have already been approved by SEBI.
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Action has already been initiated.
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3
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Non-compliance with the listing agreement should not result in suspension or delisting of securities, as it would harm the small investors. Penal action against the promoters/directors of the defaulting company is, however warranted.
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The SCRA has been suitably amended authorizing SEBI to take action against the issuer companies for non-compliance with the Listing Agreement.
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No further action is called for.
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4
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SEBI should encourage the growth and development of professional trustee companies. Debenture trustees should ensure that information on rating downgrades is made available to all investors. Moreover, a press release should be issued by the concerned debenture trustee whenever there is a default by a corporate. All information/ reports, including compliance reports filed by the companies and by the debenture trustees should be made public and be put up on the websites of the companies, debenture trustees and stock exchanges. Investors, by and large, are not aware of the role and responsibilities of a debenture trustee. Suitable education programs, including advertisements, should be launched about the role and responsibilities of debenture trustees. SEBI should issue suitable guidelines for providing wide dissemination of information/reports including compliance reports filed by companies and debenture trustees, defaults if any and all other relevant information that are required to be brought to the knowledge of the investors;
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SEBI is already examining the amendment of rules and regulations pertaining to Debenture Trustees
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While amending the regulations will take time, the latter part of the recommendation will be implemented immediately.
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5
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Companies should pay interest and redemption amounts, in respect of corporate bonds issued by them, to the concerned depositories who would then pass them on to the investors through ECS/warrants. This would generate accurate public announcements about defaults and improve transparency about soft defaults;
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SEBI has already issued a circular for adopting ECS for IPOs in equities. Another circular may be issued to cover the corporate debt issuances also.
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This can be implemented soon after the report is accepted.
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6
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It may be made mandatory for the issuers to get the privately placed bonds listed within 7 days from the date of allotment, similar to the norms applicable to public issues. SEBI should issue suitable guidelines in this regard; The credits to the demat account within 2 days from the date of allotment should be made mandatory. SEBI should issue suitable guidelines in this regard.
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The condition to list privately placed bonds within 7 days of allotment has already been prescribed as per Chapter VIII of SEBI (DIP) Guidelines, 2000. The same has to be mandated for private placements also vide an amendment to our corporate debt circular dated 22.12.03.
The practice of credit to the demat account within 2 days from the date of allotment has already been specified vide Clause 3.2 of the Listing Agreement for debt securities specified vide circular No. 39/2004.
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The first part of this recommendation would have been addressed once the recommendation at 1 above is implemented.
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7
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Enhancing Investor Base
Retail investors should be encouraged to participate in the market through stock exchanges. Such investors should also be encouraged to participate in the corporate bond market through mutual funds;
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This will happen only when the facilities are put in place and there is investor awareness built about trading in bonds.
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Initiation on investor education is already an integral part of SEBI’s functioning.
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8
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A separate higher limit should be allowed for investments by FIIs on a yearly basis in corporate bonds. However, it is recognized that this has implications for managing the capital account and RBI, as such, may review this matter at an appropriate stage;
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The Union Budget for 2006-07 has announced an increase in the limit on FII investment in Government securities from $ 1.75 billion to $ 2 billion and the limit on FII investment in corporate debt from $ 0.5 billion to $ 1.5 billion.
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A circular to the custodians has already been issued.
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9
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Consolidation of Privately Placed Bonds
Consolidation of the issuance process to create large floating stocks is required to enhance market liquidity. There should be a guideline limiting the number of fresh issuances that would include re-issuance of the existing bonds by a corporate in a given time period (say over a quarter). Any new issue should preferably be a reissue so that there are large stocks in any given issue, thereby helping to create secondary market liquidity; Issuers should be encouraged to consolidate their various existing issues into a few large issues which can then serve as benchmarks;
Legal impediments to consolidation, if any, should be examined and removed; Re-issuance of the same security should be included for the purpose of the cap suggested for stamp duty, in order to encourage re-issuance.
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This is extremely important for consolidation of bond issuances. It will help increase the floating stock of an instrument and enhance the liquidity in the corporate bond market.
Legal issues involved for such consolidation and the extent to which they come under SEBI’s purview should be examined and suitably addressed.
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Approvals will take about 3-6 months as legal changes are involved.
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10
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Bonds Primary Issuance Database
The immediate creation of a centralized database of all bonds issued by corporates is an absolute necessity. This database should also track rating migrations. The stock exchanges would be best suited for maintaining this database as most of the information is already available with them at the time of listing and only a suitable interface would need to be put in place between the stock exchanges and the rating agencies for any subsequent rating migrations This database should be made available free of cost to all the investors;
SEBI may prescribe appropriate enabling regulations for the setting up and licensing of platforms for non-competitive bidding and order collection for say upto 10 percent of an issue as also for the facilitation of an electronic bidding process for the primary issuance of bonds and securitized assets on the lines of what is already available on the exchanges.
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The data base should be central and hence located at only one place. It will save time, cost and hassles for the users. Through the listing agreement it could be made mandatory for issuer companies to provide this information to this data base for all issuances and updates thereafter. The credit rating agencies could be mandated under the regulations or by way of a circular to inform the centralized data base. Using technology and security systems, it should be possible for the issuers and the credit rating agencies to post the information on the data base.
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Implementation of the proposals in the text of the report will take care of this requirement.
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11
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Development of Secondary Market Trade Reporting System
Steps should be taken to immediately establish a system to capture all information related to trading in corporate bonds as accurately and as close to execution as possible, and disseminate it to the entire market in real time;
It would be cost effective to use the existing infrastructure available with the national exchanges for dissemination of information related to trading in corporate bonds. SEBI should frame detailed guidelines for setting up of such reporting platforms and should ensure coordination among them;
The concerned regulators of the various entities, who are party to transactions in corporate bonds, should mandate them to report specified details of each transaction within a specified time to the trade reporting system. The details to be reported and the time of reporting and the regulations governing usage of this platform should be specified by SEBI;
In order to provide direct access to regulated institutions such as banks, insurance companies, mutual funds, etc to the trade reporting system, suitable changes in the existing regulations should be made by SEBI.
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Resources would be frittered away if there are multiple platforms dissemination bits and pieces of information and also if information is available exchange-wise. It will be then left to the market and the participants to navigate from one data base to another and then consolidate the information at their end. Hence, ideally the same platform which hosts the centralized data base should also capture the trading data so that all the information will be at one place. Once this is agreed upon, the participants would have to be mandated to provide near real time trading information.
Wherever brokers are involved, they should be made responsible for providing this information to the data base. In case of bilateral trades, the parties on both sides of the transactions would have to be made responsible.
Several of the key participants in such bilateral trades are not however, regulated by SEBI. Hence SEBI will have to write to RBI/IRDA/Govt (for PFs etc) to mandate the respective agencies under their purview to report trading information to this data base.
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This recommendation could be implemented immediately once the report is accepted and the details of information to be disseminated are finalised.
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12
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Clearing and Settlement System
The clearing and settlement of trades in this market must follow the IOSCO standards and the global best practices by way of well established clearing and settlement procedures through recognized clearing and settlement agencies;
The clearing and settlement agencies may provide the clearing and settlement services in phases by initially offering DVP I (gross trade by trade settlements) and use the experience to migrate within a reasonable time frame into DVP III (netted settlements) systems. In the first instance, in order to ensure DVP settlements of corporate bonds in accordance with international best practices, RBI may consider issue of grant of suitable access to the concerned clearing and settlement entities to the RTGS system ;
In order to improve secondary market trading, repos in corporate bonds may be permitted by RBI to be operated by the proposed clearing entities for corporate bonds;
As corporate bonds are governed by the SCRA and SEBI regulations, the entities handling the clearing and settlement of these securities will have to be recognized entities under the SEBI framework and SEBI will frame suitable regulations for the clearing and settlement of corporate bonds. However, in the case of trading, clearing and settlement of repos in corporate bonds, appropriate regulations will be framed by RBI in consultation with SEBI.
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In the case of equities, settlement takes place on a net basis for funds and securities i.e. using DVP III. But there is strictly no finality of settlement in the central bank money and hence there remains a day light risk. This will be eliminated only when clearing agencies other than CCIL are granted access to the RTGS whether for the debt market or for the equity market. In order to achieve global standards in clearing & settlement functions, it has been a longstanding demand of clearing corporations of stock exchanges to be given direct access to the RTGS system of RBI. This should be facilitated by RBI.
A separate clearing and settlement arrangements need to be put in place.
What is important to note is that in equity the global standards have already been reached as there is novation (albeit without a legal basis) and settlement under DVP III. In the case of corporate bond trading when an exchange based order matching system is set up (as discussed in the next item 12), the same mechanics will have to be used for settlement.
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SEBI would write to RBI to permit the clearing corporation/clearing agency to be a member of RTGS both for equity, bonds and derivatives.
In the case of trading in repos in corporate bonds, SEBI will need to write to RBI for framing the guidelines .
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13
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Order Matching Trading System
As market participants gain experience with trade reporting and the first phase of clearing and settlement systems, efforts should be made to develop online order matching platforms for corporate bonds. Such trading platforms can be set up by the stock exchanges or jointly by regulated institutions like banks, financial institutions, mutual funds, insurance companies, etc. SEBI would frame specific guidelines for setting up such trading platforms. Any platform, other than the one offered by a stock exchange would effectively be performing the functions of an exchange to a limited extent and as such would need the specific approval of SEBI;
The Committee recognizes the need for more than one category of member viz., some who will trade on their own account and/or some who will do agency business. The membership criteria and responsibilities would be significantly different between the various types of members. The provisions of the relevant legislations/regulations may be reviewed and appropriate amendments made thereto, if necessary, for the purpose. As it is necessary to avoid multiplicity of regulators for entities taking limited purpose membership for trading on their own behalf in the proposed trading and clearing platforms, the responsibility of regulating their activity in corporate bonds through trading platforms will vest with SEBI while the primary regulation of these institutions will continue to vest with their respective primary regulators.
Appropriate approvals may be considered by concerned regulators to enable free participation on the trading platform through limited membership by the concerned entities for the purpose of their proprietary trading.
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The major holders of corporate bonds like banks, FIs, PDs, PFs, Insurance companies are not regulated by SEBI. Hence, SEBI will have to write to all concerned regulators who will advise their regulated agencies to trade on the designated order matching system.
SEBI can in the interest of market will mandate a particular exchange to begin with to set up an order matching system. The same exchange which provides the centralized data base should ideally have order matching system. This system or platform should be separate from that of equity and derivative platforms already existing. The trades should be settled through novation and settlement guarantee fund, and as in the case of equities, the clearing agency of the exchange should be connected to the depositories for electronic transfer of bonds.
At a later date when trading picks up and the market deepens, SEBI can examine whether there is a scope for other trading platforms to be set up.
Also the chosen exchange should examine the scope of introducing T+1 settlement only for corporate debt, if it has to compete effectively with the OTC/telephone market. In the case of NDS also settlement is mostly on T+1 basis, if not on T+0 (i.e same day).
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SEBI can announce the plan through a comprehensive press release first, to put the market on notice.
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14
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Phased Implementation of Recommendations relating to Trade Reporting, Clearing & Settlement and Order Matching System
The above recommendations would be best implemented in a phased manner. In Phase I, the trade reporting and dissemination system would be implemented and trades reported through the reporting systems will be accepted for clearing and settlement by the approved clearing entities. DVP I clearing could be offered for all corporate bonds and DVP III offered for those instruments that have sufficient liquidity;
In Phase II, measures for improving liquidity and reducing costs will be introduced. This will include the introduction of tripartite repo contracts in corporate bonds, securities lending and borrowing and other mechanisms for reducing settlement risk. This will allow DVP III settlement to be offered for a larger universe of corporate debt securities;
In Phase III, the above trade reporting could migrate to STP enabled order matching systems as well as DVP III settlements.
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Since the setting up of the order matching system in meaningful manner will take time ( at least a couple of months, considering the need for setting up infrastructure, examination of legal issues within SEBI, registration of members by the stock exchange etc), it would be most desirable to begin straight away with the centralized data base.
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As in the case of recommendation 13, SEBI can announce the plan through a comprehensive press release first, to put the market on notice.
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15
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Reduction of Shut Period
The current shut period in corporate bonds is very high and needs to be reduced and aligned to that for Government Securities. While trading in corporate bonds just before the coupon date, buyers and sellers have to transfer a part of the money through cash and trading during shut period.
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Legal aspects need to be examined
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16
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Unified Market Convention
FIMMDA, being the representative of the banks and institutions, should take a lead role to put in place unified market conventions to be followed for corporate bonds. The standardized practice of 30/360 day count convention, followed for dated Government Securities, may be made mandatory for all new issues of corporate bonds. For existing bonds, the existing terms may have to be observed unless agreed to by issuers and holders. A suitable road map may be finalised to migrate interest payment conventions across all fixed income instruments, including government securities, to an actual/actual basis.
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This could be done relatively easily and the unified market convention of 30/360 may be adopted by an amendment to SEBI’s corporate debt circular dated 22.12.03.
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This circular can be issued as soon as the report is accepted.
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17
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Repos in Corporate Bonds
RBI may allow Repos in corporate bonds as already announced in the earlier monetary policy. It will give an opportunity to investors who have illiquid corporate bonds to recycle the same and borrow money against these securities.
The entities that will provide the trade matching system could also provide a repo facility on lines of CBLO for Government Securities.
The activity relating to trading in repo on corporate bonds in lines of CBLO and / or its settlement will be regulated by RBI.
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Implementation of this proposal will need some deliberation and consultation with RBI.
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There is need to discuss the matter with the stock exchanges and the RBI.
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18
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Introduction of Interest Rate Derivatives
Currently, the interest rate derivatives market is confined to the OTC market with only a handful of participants. Large corporates are active participants in this market. There is no mechanism for dissemination of trades and prices. Steps may be taken to introduce reporting system in the market and ensure real time dissemination of information. Simultaneously steps may be taken to immediately introduce the revised and approved exchange traded derivative products which have been pending for a long time.
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SEBI has already taken the necessary steps. The exchanges are also ready to take up the task. It is equally clear that an interest rate derivative market is an essential complement of a corporate bond market as well as Govt securities market.
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The matter could be taken up with RBI.
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19
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Reduction in Market Lot
The minimum market lot criteria of Rs.10lakhs for trading in corporate bonds at the stock exchanges should be reduced to Rs.1lakh to enable better access to smaller investors.
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This can be easily introduced by amending the corporate debt circular dated 22.12.03.
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The circular may be issued as soon as the report is accepted for implementation.
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