Dealers against Sebi's latest curb proposals on corp bonds' e-mechanism

Sebi wants the e-platform to be mandatory for issuance over Rs 50 cr, against Rs 500 cr earlier

Bond arrangers and merchant bankers are largely against the sweeping changes proposed by the capital market regulator, Securities and Exchange Board of India (Sebi), in electronic book-building mechanism for corporate bonds.
 
The regulator on May 22 came up with a consultation paper that proposes, among other things, making it mandatory for using the electronic platform for bond issuance of over Rs 50 crore, from Rs 500 crore earlier, making it mandatory for qualified institutional buyers to bid directly on the platform for anything above Rs 10 crore, directing merchant bankers to disclose the names of their investors taking the bonds and mandatory lock-in of 60 days in some specified cases, such as if a merchant bank is buying the bonds on a proprietary basis or if a bond is sold to a single investor outside the electronic mechanism.
 
The merchant bankers are also demanding greater play in the book-building process. Currently, they are not allowed to directly bid on the platform other than for their investors.
 
Past data suggests that issuance in the corporate debt market is almost entirely on a private placement basis. For example, of the Rs 7.25 lakh crore of total issuance in 2016-17, Rs 6.95 lakh crore was via the private placement route. The regulator and the government have been trying to attract retail investors in the segment, but not much success has been made.
 

Merchant bankers now argue that since the market has not attracted retail investors as such, placing restrictive clauses in the market-making process itself will stifle further development of the market.
 
To start with, bond dealers are arguing that reducing the mandatory limit to Rs 50 crore would mean small and medium enterprises (SMEs), and lower rated firms, who find it difficult to access the bond market anyway, will have avoid the route altogether as one-on-one arrangement is convenient for them but hitting the online marketplace could be uncertain territory for these small borrowers due to fear of lack of demand.
 
In the case of bond issuance above Rs 500 crore, which are mandatory through the electronic mechanism, usually the issuers are highly rated and heavily in demand among investors. Price discovery is easy there, but not in the case of small bond issuance by SMEs.
 
Sebi’s call in having the investors names disclosed, say merchant bankers, is another hindrance in developing the market. Sebi has proposed the concept of ‘closed’ bidding should be abolished in favour of ‘open’ bidding.
 
“Although the bids and bidding trends would be visible to all market participants on a real-time basis, the electronic bidding platform may disclose the said bids on an anonymous basis without disclosing the names of investors, arrangers and sub-arrangers,” Sebi’s consultation paper said.
 
While this seemingly improves transparency, bond arrangers say this will deter some regular investors to enter the market.
 
“Not all investors want to disclose their names. For example, high net worth individuals are generally averse to disclosing their names,” said a corporate bond arranger.
 
The Reserve Bank of India (RBI) allows anonymity on its government bond trading platform. However, the participation on the RBI’s platform is restrictive, but there is no need to disclose the name of the end-user and there is no lock-in period either.
 
“When merchant bankers take part in the auction, they don’t always do that because they have been appointed by the investors. Rather, after getting the bonds, the merchant bankers look for investors,” said a banker.
 
Therefore, a mandatory lock-in period of 60 days doesn’t work in favour of anybody, they aver.