Funds welcome Sebi move on corporate bond settlement

The domestic mutual fund industry has appreciated the Security and Exchange Board of India’s (Sebi’s) move on clearing and settlement of trades in corporate bonds through clearing corporations. Fund houses believe the step will bring transparency in the bond market and enhance liquidity.

Sundeep Sikka, chief executive officer of Reliance Capital Asset Management, said: “It is a welcome move which will help in right price discovery. So far, we had the counter-party risk involved in corporate bond trading, which will no more be an issue once a clearing corporation comes into place. This will, therefore, help improve volumes.”

The market regulator, in a recent notification, had announced that all trades in corporate bonds between mutual funds, foreign institutional investors, venture capital funds and RBI-regulated entities would necessarily be cleared and settled through the National Securities Clearing Corporation or the Indian Clearing Corporation effective from December 1.

At present, mutual fund houses are either dealing in corporate bonds directly or through a broker. It involves settlement risks that makes the bond market a bit illiquid and not as attractive as the equity market. N K Garg, CEO of Sahara Mutual Fund, said the move would be healthy for the overall debt market. “It will ensure transparency, leading to liquidity in the market, and will improve efficiency. One would know who is the buyer or seller, as in the case of equity space,” said Garg.

However, fund managers also maintained that only one such move may not be enough. Killol Pandya, head (fixed income) at Shinsei Investments, said: “Though such a measure will make the bond market vibrant, as well as broaden and deepen its reach, more is needed.”

In agreement with this, Rajiv Anand, CEO of the new Axis Mutual Fund, said: “Counter-party risk is not the key issue. I think, though positive, the measure will have limited benefits.”