FPI dealings in corporate debt: Sebi mulls 10% of trades via RFQ route

Move could boost liquidity, transparency

The Securities and Exchange Board of India (Sebi) has proposed that at least 10 per cent of corporate bond market trades by foreign portfolio investors (FPIs) should be done on the request for quote (RFQ) platform.

At present, most trades in the corporate bond market are over-the-counter (OTC), creating a lot of opacity. The markets regulator has been nudging debt market participants such as mutual funds (MFs), alternative investment funds (AIFs) and brokers to use the RFQ platform to boost secondary market liquidity and transparency.

RFQ is a dedicated platform for debt securities launched in 2020 by stock exchanges. It works as a single interface for buyers and sellers and enables multilateral negotiations on a centralised online trading platform. It also offers a straight through process of clearing and settlement for the completion of the trade.

“In the corporate bonds segment, secondary market trades are predominantly an OTC market phenomenon, driven by institutional investors. Prices are negotiated offline bilaterally, and cleared on a delivery versus payment (DVP-1) basis. Hence, enhancing and coalescing the fragmented liquidity of corporate bonds and improving transparency has been a need felt by market participants over a period of time,” Sebi has said in a discussion paper.

In the last financial year(FY23), foreign portfolio investors (FPIs) only carried out 4.5 per cent of their total trades in corporate bonds through RFQ while it accounted for only 0.78 per cent of the total trades in the segment on the platform.

“While RBI (Reserve Bank of India) has been increasing the investment limits in corporate bonds for FPIs over the years, investments by FPIs in corporate debt have been declining during the same period.  As a result, the corporate bond limit for FPIs is grossly underutilised at the moment,” noted Sebi.

While the limit utilisation stood at 75.9 per cent at the end of March 2019, it had fallen to 15.52 per cent by March 2023. This decline comes even when the investment limits have more than doubled in the same period.

Sebi is of the opinion that a mandatory threshold for the usage of RFQ platform may help deepen the Indian corporate bond market with higher adoption and liquidity. Further, it will also provide disclosures such as term sheets, price information, market quotes etc. 

Earlier in 2021, the market watchdog had mandated MFs to route at least 25 per cent of the total secondary market trades by value through the RFQ platform.

After the implementation, nearly 61 per cent of all such trades by MFs were carried out on the RFQ platform in FY23. For portfolio management services (PMS), this number stood at 24.5 per cent. PMS are also mandated to carry out 10 per cent of the trades through RFQ.

Similar thresholds have been put in place for stock brokers and alternative investment funds too since the onset FY24.