Will SEBI succeed in trying to create a much needed vibrant Bond Market?

By Rajeev Jhawar (rajeev@vinodkothari.com) [Updated as on November 27, 2018]

In a vibrant market, resides a healthy economy. On the Budget day, India sought to expand its bond market beyond the traditional ambit of sovereign debt. In pursuant to this, Securities and Exchange Board of India(SEBI) has initiated to diversify borrowings of Indian corporates by mandating to raise at least a quarter of their incremental funds from the bond market.

The regulator came out with a circular dated 26 November 2018, based on the concept paper released on 20 July,2018; targeting all listed entities (whose specified securities, or debt securities or non-convertible redeemable preference share are listed on SEBI’s recognized stock exchange) thereby addressing the liquidity problem persisting in the bond market, with an intention to create a robust secondary market for the debt securities in India.

For the entities following April-March as their financial year, the framework shall come into effect from April 01, 2019 and for the entities which follow calendar year as their financial year, the framework shall become applicable from January 01, 2020.

The requirements brought by SEBI and corresponding inferences

The regulator proposes that the Large Corporates (LC) that are listed companies (whose specified securities or debt securities or non- convertible redeemable preference shares are listed) (excluding Scheduled Commercial Banks) will have to compulsorily raise 25% of their incremental borrowings (being fresh long term borrowings during the FY) from the bond market in the financial year for which they are being identified as LC, as a part of corroborating the same. The term financial year here would imply April-March or January-December as may be followed by the entity.

As per the circular,large corporates would refer to entities

  • having outstanding long-term borrowings of Rs. 100 crores or above.Further, long term borrowings would mean any outstanding borrowing with original maturity of more than 1 year excluding external commercial borrowings(ECBs) and inter corporate borrowings between a parent and subsidiary and,
  • a credit rating of “AA and above”, where credit rating shall be of the unsupported(unsecured) bank borrowing or plain vanilla bonds of an entity, which have no structuring/ support built in; and in case, where an issuer has multiple ratings from multiple rating agencies, highest of such rating shall be considered for the purpose of applicability of this framework.

Lower rated corporates have been exempted from the framework for the time being due to the limited demand for such securities. It is believed that if the 25% norm is followed religiously, it would tantamount to increase bond flotation as more companies would be able to access the debt market. Besides, the government might limit corporates’ dependence on banks and the risk associated with it. However, there is a need for an expansion in the investor base for implementation of these rules.


There is no secondary market for corporate bonds in India to speak of. The sorry state of affair could be because of illiquid debt market, bad press in case of default, risk averse attitude as well as dearth of investor’s awareness. On the bright aspect, bonds are ideal way to raise financing for a certain kind of long-gestation infrastructure project. Typically, infrastructure projects are capital-intensive and long-gestation. It takes years to roll out toll-roads, build flyovers and set up massive power generating plants. The project developer has no cash flow to service debt until the project is running and banks may not be considered a viable source as bank funding is short tenure, which would result in asset-liability mismatch.

It is also believed that a sound corporate bond market, would take a lot of pressure off banks, which are reeling under bad debts. Retail investors will also get a chance to invest in such projects via debt funds. In short, large exposure to risk would be substantiated with huge rewards.

Further, in order to ensure investors faith in the company, the rating of ‘AA and above’ has been given preference as corporates with such high rating would have less chance to default on its obligations towards the investors which was demonstrated in the consultation paper also.

Impact on Financier’s Interest

The entry barrier for lower rated corporate bonds would be demolished because the proposal might escalate the pool of investment grade issuers. So far, the small borrowers resorted mostly to institutional finance and inter-corporate deposits. The bond avenue would serve as an alternative for them to raise finance at a reasonable price keeping in mind investor’s perpetual keenness to diversify their investments. It may be useful to classify BBB-rated corporate bonds as investment grade and thus allow pension funds and insurance companies to enter that space.

Disclosure requirements for large entities [1]

A listed entity, identified as a Large Corporate(LC) under the instant framework, shall make the following disclosures to the stock exchanges, where its security(ies) are listed:

  • Within 30 days from the beginning of the FY, disclose the fact that they are identified as a LC, in the format as provided in the circular;
  • Within 45 days of the end of the FY, the details of the incremental borrowings done during the FY, in the formats as provided in the circular;
  • The disclosures made shall be certified both by the Company Secretary and the Chief Financial Officer, of the LC;
  • Further, the disclosures made shall form part of audited annual financial results of the entity.


The LCs would need to disclose non-compliance as part of “continuous disclosure requirements”.For FY 19-20 & 20-21, the aforesaid requirement has to be met on an annual basis as on the last day of the FY.In case of failure, explanation as regards to the shortfall has to be made to the stock exchange (SE).

For FY 19-20 & 20- 21, no penalty but explanation will be required.From FY 21-22 onward, the minimum funding requirement has to be met over a block of 2 years. In case of any shortfall of the first year of the block is not met as on the last day of the next FY of the block, a monetary penalty of 0.2% of the shortfall amount shall be levied and paid to SE.The manner of payment of the penalty has not been provided in the Circular but SEs are expected to bring the same.The entity identified as a  large corporate  shall choose any one of the Stock Exchanges (where the securities are listed) for payment of the penalty.

The Stock Exchange(s) shall collate the information about the Large Corporates, disclosed on their platform, and shall submit the same to the Board within 14 days of the last date of submission of annual financial results.

Whether SEBI’s attempt would prove to be a boon or a bane, is likely to be seen as days unfold.

[1] https://www.sebi.gov.in/legal/circulars/nov-2018/fund-raising-by-issuance-of-debt-securities-by-large-entities_41071.html

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