Sebi bids for enhanced NCDs disclosure; Risk-o-Meter

To help retail investors take an informed decision, markets regulator Sebi today proposed enhanced disclosure for public issuance of non-convertible bonds, including by way of a 'Risk-o-Meter' to better explain low to high-risk credit ratings given to such bonds.
The watchdog also proposed restrictions on investment amount in case of retail investor and allocation to such investors in base issue size.
Sebi feels that there is need for an additional layer of protection for retail investors, who get attracted towards such debt securities which though on one side pay higher coupon rate but on the other side have a below investment grade credit rating.

Issuing the draft papers, Sebi has proposed to enhance disclosure requirements with respect to such issuances and simultaneously also introduce Risk-o-Meter.
The regulator has sought comments from public till January 29 on the proposals and final regulation would be put in place after taking into consideration suggestions of all the stakeholders.
Since rating is an important factor to make an investment decision, Sebi said that an easier and better alternative should be introduced the rating in a pictograph. The pictorial representation may be similar to a 'Risk-o-meter' which was introduced in the offer documents schemes of mutual funds or like a speedometer in a car.

It has been proposed that rating to be displayed on the 'Risk-o-meter' should be the latest rating provided by the credit rating agency. Modifiers such as '+' (plus) or '-' (minus) may be included, if applicable, in the meter. It should be exhibited prominently on the front page of the offer document.

Besides, an asterisk mark should be put on the 'Risk-o-meter' and an explanation of all the credit ratings provided by the credit rating agency should be printed on the back side of the front page in tabular format so that the investors can understand the relevance of the credit rating of that issue vis-a-vis other ratings provided by the credit rating agency.

Also, Sebi has proposed for a ceiling in the investment by a retail investor. In case of secured non-convertible debentures (NCDs), the regulator has suggested that allocation in the issue to retail investors should not be more than a certain maximum amount, like 10 per cent of the base issue size.
As unsecured NCDs contain higher risk than secured ones, for unsecured NCDs, the allocation to retail investor should not be more than a certain maximum amount. For example 5 per cent of the base issue size.
The corporate bond market has evolved gradually over time due to the various measures taken by Sebi. The total primary issuance has increased from Rs 1.18 lakh crore in 2007-08 to Rs 4.92 lakh crore in 2015-16, while for the current fiscal (till November, 2016) it is Rs 4.43 lakh crore.

Further, funds raised through public issuance has grown from nil in 2007-08 to Rs 33,811 crore in 2015-16 and for 2016-17 (till November, 2016) the amount stands at Rs 23,893 crore.