SEBI

SEBI Introduce a ‘Liquidity Window Facility’ for Investors

An implementation of a “Liquidity Window Facility” for debt securities investors via a stock exchange mechanism has been suggested by the Securities and Exchange Board of India (SEBI). Concerning ordinary investors, who find it difficult to sell their positions because of less trading activity and little market depth, this effort intends to solve the liquidity issues that frequently beset the Indian debt market.

SEBI hopes to improve trading efficiency and investor trust by making it simpler for investors to buy and sell debt securities by establishing an exclusive liquidity window for stock exchanges. This plan is a component of SEBI’s larger initiative to open up the bond market to a wider spectrum of investors and enhance its depth. Implementing the liquidity window has the potential to mitigate significant liquidity issues, increasing the attractiveness of debt securities as an investment choice and bolstering the overall growth of India’s financial markets.

Understanding Debt Securities

A debt security is a financial instrument with established fundamental characteristics, which include the nominal amount (the sum of money borrowed), interest rate, maturity and renewal date, that may be purchased or traded between two parties.

Debt securities encompass a variety of financial instruments, such as corporate bonds, municipal bonds, certificates of deposit (CD), government bonds, and preferred stocks. Collateralised securities, like zero-coupon investments, Government National Mortgage Association (GNMA) issued mortgage-backed securities (MBSs), collateralised debt obligations (CDOs), and collateralised mortgage obligations (CMOs), are another type of debt instrument.

It is a kind of asset produced when someone loans money to someone else. Corporate bonds, for instance, are debt instruments that companies sell to investors. In exchange for a particular amount of interest payments and the repayment of their principal on the bond’s maturity date, individuals lend funds to firms.

On the other hand, investors purchase government bonds, debt instruments released by governments and supported by their confidence. Investors lend funds to the government in exchange for interest payments also known as coupon payments and the repayment of their principal at the bond’s maturity.

Because their interest payments provide a fixed income stream, debt securities are sometimes referred to as fixed-income securities. Debt instruments guarantee repayment of their original principal plus a preset interest payment stream, unlike equity investments, where the investor’s profit is contingent on the stock issuer’s success in the market.

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What is the Stock Market Mechanism?

The stock market is an online marketplace where investors may increase their wealth by buying shares of companies sold by businesses looking to raise money. All stock market operations are governed by SEBI, guaranteeing ethical and secure trading methods. Under SEBI regulations, the two depositories oversee all investors, brokers, and stock exchanges to ensure the unhindered flow of capital and trade.

The stock market has two segments: primary and secondary markets. An initial public offering (IPO) is when a firm introduces its shares to the main market for the first time. Businesses sell shares to the general public to raise money for expansion or other business goals. In the main market, primary investors purchase shares in lots and bid for IPO subscriptions.

These investors invest to make money through secondary market stock resale. Following the launch of an initial public offering (IPO), the security will be traded on a secondary market, where shares bought by primary traders are offered for sale to other investors. The ownership interests are then exchanged amongst investors according to supply and demand, which is impacted by market capitalisation and corporate performance.

To trade on the stock market, each investor must have a DEMAT account. The depository digitally stores an investor’s cash and assets through these DEMAT accounts, enabling the investor to sell their assets when needed.

Stock exchanges allow investors to access various shares and other assets like bonds, mutual funds, and so on. They also conduct market research and assist businesses and investors in comprehending the market’s everyday state.

Different indexes indicate the performance of the market as a whole and of each sector. The two broad market indexes of the NSE and BSE are Nifty and Sensex. These indexes indicate the market’s overall performance by calculating the financial performance of the leading companies across all sectors.

Regulatory Compliance by SEBI in LWF

To improve liquidity within the corporate bond market, especially for retail investors, Sebi has suggested establishing a different liquidity window tool for holders of debt instruments via the stock exchange structure. According to Sebi’s proposal, the liquidity window facility would address the problem by giving issuers a controlled way to offer options on debt instruments at predetermined intervals or dates.

Through the agreement, lenders can offer investors options, allowing them to sell their debt securities back to the issuer before the assets’ maturity. It is only available for potential debt securities issuances via the public issue procedure or private placement (planned listing). The Securities and Exchange Board of India (Sebi) accepts public feedback on the draft circular until September 6.

According to the circular, the organisation releasing proposed to be listed debt securities might, at its own choice or freedom of action, offer the debt securities’ liquidity window facility, based on an International Securities Identification Number (ISIN), at the moment during the debt securities’ issuance, while making the opportunity accessible to investors who are qualified in the debt securities.

The issuers’ board of directors must first give their permission before they may decide to offer this facility. The stakeholder connection committee in firms with listed shares will oversee the facility.

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Features of the Liquidity Window Facility

Here are some features and conditions of the Liquidity Window facility:

Authorizations and Governance

The issuer must get its Board of Directors’ approval before introducing this facility. The Stakeholders Relationship Committee (SRC) of listed equity corporations will oversee the execution and results of the liquidity window. For pure debt-listed businesses where SRCs are not required, the issuer’s board or an authorised board-level panel will oversee this role. The facility must be impartial, open, non-discriminatory, and non-discretionary for the qualified investor class.

Duration of Operation

The liquidity Window can only be opened a year after issuing the debt instruments. This buffer time assists in managing early fluctuations by ensuring that the investments have reached a specific maturity level before using the liquidity window.

Investor Qualifications and Restraints

The issuers might identify the investors qualifying for the Liquidity Window program. The qualifying requirements must be clear upfront, regardless of whether the investment opportunity is available to all traders or retail investors. Qualified investors must also own the debt instruments in demat form to participate.

Additionally, during the term of the debt instrument, issuers will set an overall cap on put option exercises, usually between 10% and 15% of the total issue amount. It is also possible to establish sub-limits per window, in which surplus offers will be approved proportionally.

Planned Stock Exchange and Liquidity Window Designation

For liquidity reasons, issuers may select any publicly traded exchange as the “designated stock exchange.” Depending on the issuer, the liquidity window must be available for business as usual for at least 3 working days per month or quarterly. Each fiscal year must begin with providing the schedule and any required notifications.

Mechanisms of Payment and Appraisal

On the last day of the liquidity window, the value of the debt securities offered under the call option will be determined. The valuation process would comply with SEBI’s requirements for mutual funds. Investor payments are due one working day after the window closes.

Management of Received Securities

Issuers can cancel the debt instruments or trade them using online bond platforms, stock exchanges, RFQ platforms, or elsewhere within forty-five days following the liquidity window closing (or sooner). It is feasible to replenish the liquidity limit using the money received from these sales.

Compliance and Reporting

Within three business days of the liquidity window’s closing, issuers must submit reports to the securities exchange and furnish details to depositories, including debenture fiduciaries. These disclosures are necessary to keep the market honest and transparent.

Impact on Investors and Debt Market

Implementing SEBI’s Liquidity Window Facility for investors in debt securities through a stock exchange mechanism offers significant advantages to investors and the wider Indian debt market. This initiative by SEBI resolves one of the main challenges within the Indian debt market, i.e., the deficiency of liquidity within the marketplace, particularly for retail investors who frequently tackle challenges in buying and selling debt securities because of the limited volumes and market depth.

Expected Modifications Within Liquidity and Trading Volumes

Expected modification in liquidity and trading volumes may result from changes in market conditions, regulation or investors’ behaviour. This fluctuation can impact the ease of buying or selling assets and affect the overall market and affect overall market activity.

Rise in Trading Volumes

The liquidity window is predicted to improve the trading volumes within the debt securities significantly. This will encourage more investors to participate, knowing they can easily enter and exit the marketplace. This increased flow will, in return, improve the liquidity, which will also create a positive feedback loop.

Market Depth and Efficiency

Market depth will improve as trade volumes rise, facilitating large transactions without significantly affecting pricing. Large institutional investors can engage in this more efficient market without worrying about disruption.

Possible Narrowing of Spreads

The spreads between bids and asks within the debt marketplace are anticipated to shrink due to increased liquidity and more effective price discovery. Investor transaction costs will be reduced, increasing the debt market’s allure compared to alternative investment possibilities.

Strengthened Market Confidence

The liquidity window might increase market confidence, particularly for small and individual investors. Suppose investors are certain that a dependable system is in place to guarantee liquidity. In that case, they might be more inclined to participate in various debt instruments with longer maturity periods or larger credit risks.

Conclusion

With SEBI’s proposed Liquidity Window Facility, a significant step has been made towards increasing the availability and efficacy of the Indian debt market. The program provides a specialist liquidity platform to address key investor issues, particularly those about price discovery and selling holdings. The expected increase in trading volume and the deeper market would benefit institutional and individual investors, boosting confidence in debt securities as a wise investment option. This move will likely contribute to the growth and resilience of India’s financial markets, making them more dynamic and investor-friendly.

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