Sebi proposes risk-o-meter for retail junk bond issuances

The Securities Exchange Board of India (Sebi) on Wednesday proposed that there should be a ‘risk-o-meter’ in junk bond issuances to warn retail investors about the risks involved, so that they are not misled by the high coupon these papers offer. 

The proposal is part of a consultation paper and not a rule yet, but riskometer is a standard practice in the mutual fund sector. 

Noting that in public issuances, advertisements focus mainly on coupon “which lures the retail investors to invest”, the capital markets regulator said investors also get confused as below-investment-grade companies club different instruments, secured and unsecured, in the same offer document. 

“Thus, for a retail investor to differentiate between secured and unsecured tranches within the same offer document and with different credit ratings may be a complex task and may affect their investment decision,” the consultation paper noted. 

Increased disclosure norms have become crucial considering the ever expanding size of the primary market in corporate bonds. 

The total primary issuance has increased from Rs 1,18,485 crore in 2007- 08 to Rs 4,91,884 in 2015-16 while for FY17 (till November 2016) it is Rs 4,43,281 crore, Sebi data showed. 

Further, the amount raised through public issuance has grown from nil in 2007-08 to Rs 33,811 crore in FY16 and for FY17 (till November 2016) the amount stands at Rs 23,893 crore. 
 

Even as credit-rating agencies assign ratings and there is always a standard disclosure in the offer document, often in fine print, a retail investor may easily miss that. Sebi said there was a need for an additional layer of protection for the retail investors “who get attracted towards such debt securities which though on one side pay higher coupon, on the other side have a below-investment-grade credit rating”.  

“Since rating is an important factor to make an investment decision, it is felt that an easier and better alternative would be to introduce the rating in a pictograph or picto-meter format,” Sebi said. 

The pictoral warning will be easy to grasp for an investor, the paper said, adding: “The idea is not only to caution the investors but to enlighten them about the risk factor involved with the debt issue.”