CPs, CDs may get to trade on bourses

Sebi move seen as precursor to MTM requirement from Day 1

The Securities and Exchange Board of India (Sebi) is planning to allow certificates of deposit (CDs) and commercial paper (CP) with residual maturities of 60 days or less on the exchange platform.

This step is seen as a precursor to the mark to market (MTM, revaluing assets at current worth) requirements for mutual funds (MFs), to be implemented from Day 1. Last week, Sebi brought down the threshold for MTM of debt securities by MFs to 60 days from 91 days.

“Sebi wants to take it to Day 1. At present, it is difficult to draw yield curve maturities below 60 days. In the normal course, the short-term yield curve has to be upward sloping. But, since prices are not transparent, we have a flat yield curve,” said a person familiar with the development.

A CD is a time deposit with a bank. CDs are generally issued by commercial banks and can be bought through brokerages. They bear a specific maturity date, a specified interest rate and can be issued in any denomination, much like bonds.

CP is a short-term debt instrument issued by companies. These, typically, bear coupons marginally higher than that of CDs. At present, in the absence of transparent pricing in the over-the-counter (OTC) market, it is difficult to decipher a fool proof valuation mechanism for these instruments. “If it’s on an exchange platform, prices can be seen by everyone and it will be easier to draw a curve,” the person added.

At present, these instruments are traded privately but the trades are reported on the exchanges. Devendra Nevgi, founder, Delta Global Partner, said the move would be good in the long term. “Post-trading reporting is of no great use. If the instruments are actually traded and reported on a real-time basis, it will be of great value. This mechanism will make the Net Asset Values(NAV) more realisable. Investors can be sure the NAV they see is what they get, both while purchasing and redeeming.”

Nevgi says it is important to build the peripheral infrastructure to make the exchange mechanism successful.

“Otherwise, what happened in the case of fixed maturity plans (FMPs) will be repeated here. The exit will only be on paper ,” he adds.

Sebi had made listing of FMPs compulsory to allow exits to small investors. However, due to lack of liquidity, meaningful exits are not possible in most cases. Comprehensive changes need to be made in the Companies Act, RBI rules and other relevant provisions to make this effective, said a fund manager. “Once listed, issuers should also be allowed to buy back, if necessary,” he added.

Also, typically when debt instruments are traded, the volume is concentrated in better rated instruments; lower rated ones don’t get traded. On the flip side, listing may increase the cost for issuers, experts said.