Sebi's cap on fresh issuance of corporate bonds to deepen market

According to the new directive, a maximum of 12 fresh debt securities would be issued in a year

The recent announcement by the Securities Exchange Board of India (Sebi) to restrict the number of different bond issuances by a company to 12 could become a catalyst for deepening the corporate bond market, as well as help improve the repo in corporate bonds, even as issuers would have to maintain considerable discipline in their financial planning. 

The regulator last week capped the maximum number of International Securities Identification Numbers (ISINs) that can be issued in a year to 17; of this, 12 ISINs are allowed for plain-vanilla securities and five more for structured products. 

This essentially means that in any year, a maximum of 12 fresh debt securities can be issued. The same ISIN can be used for reissuance of papers with the same terms, but not fresh issuance above the stipulated numbers with different terms. Typically, non-banking finance companies (NBFCs) issue bonds practically every alternate day to capture any rate change, and also based on weekly requirements. Now, they will have to chuck that practice. For example, if in the course of a month, fund demand totalling Rs 1,000 crore comes up, a company will have to go for an issuance of Rs 1,000 crore at one go. Earlier, the fund would have been raised over the course of the month in multiple batches. 

For every batch of issuance, the terms of the bond issuance, like coupon, would change. And this made the market fragmented as, for taking a large exposure to a company, multiple securities had to be sourced.

According to Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership Ltd, consolidating the securities may give a major boost to trading in the secondary market as well as help kick-start repos in the corporate bond segment. He expected frequent issuers to rework their borrowing strategies to manage higher refinancing risk and possible negative carry with fewer ISINs and bunched-up redemptions. But, over the medium-term, the increase in floating stock was expected to increase secondary liquidity and the consequent increased investor interest may reduce funding costs for issuers.

The consolidation of ISINs will increase the floating stock of securities under a given ISIN, which can aid liquidity in the secondary market, rating agency ICRA said.

“An improvement in liquidity will aid in better price discovery of securities and hence pricing for the risk. Better price discovery can also lead to strengthening the foundation for new products like credit default swaps for the companies and will make the Indian debt market more vibrant.”

According to ICRA, some issuers have more than 500 privately placed live ISINs and some issuers having over 150 ISINs maturing in any particular year, with most of the issuers from the financial sector. Limiting the ISINs’ maturities to 17 per year from a single issuer will hence impact the financial sector entities the most, especially the housing finance companies-NBFCs, and they will need to better plan their asset-liabilities to align the operating cash flows with debt maturity schedules.

But there will be some short-term problems. 

Alpana Dave, head of institutional sales, Crest Debt Capital Market said NBFCs and mutual funds (MF) would face some problem due to this rule. “Many a time, NBFCs issue papers directly to MFs based on the fixed maturity plan profile. Now MFs have to pick up whatever is available in the market that best suits their maturity plan,” she said.