Concept of Consolidation and re-issuance in the Corporate Bond Mark

1. Con­sol­i­da­tion in Cor­po­rate Bond Market

The report of High Lev­el Expert Com­mit­tee on Cor­po­rate Bonds and Secu­ri­ti­za­tion (Dr.

R.H. Patil Com­mit­tee) had rec­om­mend­ed for con­sol­i­da­tion of pri­vate­ly placed bonds so

as to avoid frag­men­ta­tion of debt mar­ket with mul­ti­ple issues and for re-issuances which

help in cre­ation of large float­ing stocks which is need­ed to enhance mar­ket liquidity.

SEBI is propos­ing to put in place, an enabling frame­work for the same.

2. Con­sol­i­da­tion in G‑Sec Market

In the G‑Sec (Gov­ern­ment Secu­ri­ties) mar­ket, the grad­ual extin­guish­ing of illiquid,

infre­quent­ly trad­ed and reis­sue of liq­uid bonds has helped in improv­ing liquidity.

Gand­hi Com­mit­tee Report (“Report of the Work­ing Group on Enhanc­ing Liq­uid­i­ty in the

Gov­ern­ment Secu­ri­ties and Inter­est Rate Deriv­a­tives Mar­kets”) has recommended

active and pas­sive con­sol­i­da­tion modes for con­sol­i­dat­ing the G‑sec mar­ket and bringing

liq­uid­i­ty in the mar­ket. In the G‑Sec mar­ket, a pol­i­cy of pas­sive con­sol­i­da­tion through

reis­suance was start­ed in 1999 in order to improve fun­gi­bil­i­ty among the secu­ri­ties and

to facil­i­tate con­sol­i­da­tion of debt. The larg­er stock size of secu­ri­ties has greatly

improved mar­ket liq­uid­i­ty and helped the emer­gence of bench­mark secu­ri­ties in the

mar­ket.

Giv­en the encour­ag­ing results in liq­uid­i­ty in the G‑Sec mar­ket, this exper­i­ment is now

rec­om­mend­ed to be attempt­ed in the cor­po­rate debt mar­ket. It is pro­posed that there

should be enabling pro­vi­sions re-issuance of the exist­ing bonds by an issuer in a given

time peri­od (say over a quar­ter) and any new issue should prefer­ably be a reis­sue so

that there are large stocks in any giv­en issue, there­by help­ing to cre­ate secondary

mar­ket liquidity.

 

3. Proposal

Sec­tion 24 of the Com­pa­nies Act, 2013 empow­ers SEBI to admin­is­ter cer­tain provisions

of Com­pa­nies Act includ­ing issue and trans­fer of secu­ri­ties by mak­ing regulations.

The pub­lic issue of debt secu­ri­ties is cov­ered under SEBI (Issue and List­ing of Debt

Secu­ri­ties) Reg­u­la­tions, 2008 [SEBI (ILDS) Regulations].

There­fore, amend­ments are pro­posed in SEBI (ILDS) Reg­u­la­tions, 2008, to include a

spe­cif­ic enabling pro­vi­sion to this effect.

In view of the same, it is pro­posed to amend the Chap­ter II of the (SEBI (ILDS)

Reg­u­la­tions) to incor­po­rate a sub-reg­u­la­tion (A) to Reg­u­la­tion 18 as under:

“Con­sol­i­da­tion and Re-issuance”

18 (A): An issuer may car­ry out con­sol­i­da­tion and re-issuance of its debt securities,

sub­ject to the ful­fill­ment of the fol­low­ing conditions:

1. a) there is such an enabling pro­vi­sion in its arti­cles under which it has been incorporated;
2. b) the issue is through pri­vate placement;
3. c) the Issuer has obtained cred­it rat­ing from at least one cred­it rat­ing agency

reg­is­tered with the Board and is disclosed;

1. d) such rat­ings should be reval­i­dat­ed on a peri­od­ic basis and the change if any,

shall be disclosed;

1. a) appro­pri­ate dis­clo­sures are made with regards to con­sol­i­da­tion and re-issuance,

in the Term Sheet.