Mumbai: The Securities and Exchange Board of India (Sebi) has set the ball rolling for the full-fledged development of the country’s nascent corporate bond market. The capital markets regulator wants companies’ bonds to be traded on exchange platforms the same way stocks and government securities are traded as it aims to create demand for a wider set of such securities.
NSE and BSE operate corporate bond platforms but those are merely systems for reporting corporate bond deals. Sebi is looking to create a platform that automatically does order matching similar to stocks and government securities, said three people familiar with the development. Most of the trades in the corporate bond market are decided over the phone.
The regulator also wants to ensure guaranteed settlement of trades and streamline the process of trade execution and settlement, known as ‘straight-through processing’, said one of the people in the know.
“An automatic order-driven system and seamless settlement will bring in transparency and liquidity to the corporate bond market,” the person said.
The matter was discussed in the Sebi-appointed Mutual Fund Advisory Committee (MFAC) meeting last week. The regulator has formed expert working groups led by Ananth Narayan, finance professor at SP Jain Institute of Management and A Balasubramanian, CEO, Aditya Birla Sun Life AMC to collect suggestions and thrash out the details. The regulator intends to wrap up the process of creating a blueprint in three months, one of the three people quoted above said. An email query to Sebi seeking comments on the subject went unanswered.
In an interview with ET on July 13, Sebi chairman Ajay Tyagi said the need for having a deeper and liquid bond market has never been felt more than now in these difficult times. Mutual fund industry officials said the fiasco at Franklin Templeton could have triggered the urgency to come up with a more lasting solution for easing the crisis in corporate bonds. Franklin announced shutting down six debt schemes and withheld withdrawals indefinitely on April 23 as the fund house struggled to sell its illiquid lowly-rated papers to meet the redemptions.
Activity on the proposed trading platform will be initially driven by mutual funds. While the presence of banks and insurance companies will be critical for the proposed system’s success, Sebi is hoping that the presence of mutual funds and better trading and settlement systems would attract banks and insurers, too. The capital market regulator is in charge of mutual funds and listed corporate bonds, while money market and banks come under the Reserve Bank of India.
“Mutual funds are part of 40-50% of the transactions in corporate bonds. So, the participant base for a trading platform is set,” said a senior mutual fund industry official who did not want to be identified. “But we will need banks and insurance companies to bring in liquidity.”
Sebi wants to model the corporate bond platform on the lines of the Negotiated Dealing System – Order Matching (NDS-OM), an electronic trading platform for issue and trading of government securities and State Development Loans. Clearing Corporation of India on behalf of the RBI operates the NDS-OM.