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Bond issuers set to become Market Maker to enhance liquidity

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Issuer to provide Liquidity Window facility to eligible investors effective from Nov 1, 2024

Vinita Nair & Palak Jaiswani | corplaw@vinodkothari.com

August 18, 2024 (Updated October 22, 2024)

While SEBI took numerous measures to deepen the bond market and increase transparency and participation viz., Electronic Book Building Platform (‘EBP) for issue above Rs. 50 cr., Request for Quote (‘RFQ’) platform, reduction in face value of privately placed bonds, online bond platform (‘OBP’), corporate bond repo system etc, illiquidity in bond market continued to remain one of the major concerns for SEBI. To address the issue of liquidity mainly for retail investors, SEBI vide its consultation paper dated August 16, 2024, had proposed the introduction of Liquidity Window facility, a unique concept in bond market. SEBI notified this facility vide circular dated October 16, 2024 effective from November 01, 2024.

What is the proposed Liquidity Window Facility (‘LWF’):

LWF, at the issuer’s discretion, allows eligible investors to exercise a put option on NCDs on predetermined dates. This enables investors to sell their securities back to the issuer, removing the need to find prospective buyers in the market. In this setup, the issuer assumes the role of market maker, a concept that has not yet been fully implemented in the bond market.

Key Features of LWF:

  • Issuer’s discretion: It is optional for the issuer to provide LWF.
  • Nature of issuance: Issuers can provide this facility for prospective bond issuances through public issues as well as on a private placement (proposed to be listed) at the ISIN level.
  • Quantum of LWF: Minimum 10%[1] of final issue size. Aggregate limits and sub-limits (in no. of securities) for put option that can be exercised in each window to be disclosed in the offer document.
  • Timing: LWF to commence after the expiry of 1 year from date of issuance. Facility may be operated on a monthly or quarterly basis at issuer’s discretion, as indicated in the offer document upfront.
  • Eligible Investors: The issuer will determine which investors are eligible, with a particular focus on retail investors. Investors need to hold securities in demat form to avail this benefit. If put options exercised during the period exceed sub-limits, acceptance will be on a proportionate basis.
  • Pricing of bonds under LWF:
    • Date of valuation: ‘T-1’day where T is the first day of the LWF[2].
    • Issuers can provide a maximum discount of 1% on the valuation arrived. Price plus accrued interest payable.
    • Display valuation on the website of the issuer and SE during the liquidity window period.
  • Option with the issuer for bonds purchased under LWF: Within 45 days of closure of LWF or before the end of quarter, whichever is earlier:
    • sell on debt segment of SE; or
    • sell on RFQ platform, if eligible to access; or
    • sell through an online bond platform provider; or
    • extinguish the NCDs. 
    • In case of sale, amount realized will be added back to the aggregate limit and will replenish any past usage of the limit.
  • Restriction on re-issuance[3]: Re-issuance is not allowed under ISINs in which LWF is offered
  • Exemption in ISIN capping[4]: ISI.Ns in which LWF is offered are exempted from computation of ISIN limits as per Chapter VIII of NCS Master Circular.
  • Operational Guidelines: Stock exchange, in consultation with clearing corporations and depositories, will issue detailed guidelines on how to use the LWF, including the process for exercising the put option.

Other Conditions:

  1. Authorisation and Implementation
    1. Prior approval of BOD.
    2. Monitoring of implementation & outcome SRC or BOD (in case there is no SRC).
    3. Transparent, non-discretionary and non-discriminatory within the class of investors.
    4. Does not compromise market integrity or risk management.
  2. Liquidity Window Period:
    1. Duration: Open for 3 working days.
    2. Intimation of proposed schedule: To be provided 5 working days before the start of the financial year in which facility it is to be given via SMS/WhatsApp.
  3. Mode and manner of availing:
    1. Put options can be exercised by blocking the securities in demat a/c during trading hours and using the specified mechanism to intimate issuer w.r.t. the exercise of put option.
    2. Investors may modify or withdraw bids during the window period[5].
    3. Submissions received during window period (during trading hours) will only be considered valid
    4. Further guidelines to be provided by SE
  4. Settlement[6]: T+4 days
  5. Reporting and disclosure requirements:
    1. Submit report to SE – within 3 WD from closure of window; and
    2. Inform the depositories and DT regarding NCDs to be extinguished – within 3 WD from end of 45 days from the closure of window (timeline to sell/ extinguish purchased securities)[7]
  6. Website disclosure:
    1. By: SE, depositories, DT, and Issuers
    2. When: Disclose on website upon issuance of each ISIN in which facility is provided. Details to be maintained and updated at all times.
    3. Details: List of ISINs for option is available, o/s amount, credit rating, coupon rate, maturity date, valuation details and other relevant information (as per para 6.11 of circular)
    4. Issuer to submit above details to SE, depositories and DT to disclose on their website
    5. In case of change: Issuer to intimate SE, depositories and DT within 24 hrs of change. SE, DT and depositories to update their website within 1WD of such intimation.

[1] Minimum 15% was proposed in the CP.

[2] CP proposed the date of valuation as the day of closure of liquidity window.

[3] Not proposed in the CP earlier.

[4] Not proposed in the CP earlier.

[5] Not proposed in the CP earlier.

[6] Not proposed in the CP earlier.

[7] CP proposed the timeline  of 3 working days from the date of window closure

Other resources related to the topic:

  1. SEBI rationalises offer document contents and certain timelines for NCD public issuance
  2. LODR norms of equity extended to debt listed entities
  3. SEBI further caps limit for ISINs to reduce fragmentation and boost liquidity

LODR norms of equity extended to debt listed entities; Disclosure of DT Agreement

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– Palak Jaiswani, Manager | Corplaw@vinodkothari.com

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Other Related Resources:

  1. SEBI further caps limit for ISINs to reduce fragmentation and boost liquidity
  2. Mandatory listing for further bond issues

Resource Centre on Buyback

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Date of PublicationTitleAuthor/ SpeakerLink
August 09th, 2024FAQs on Share BuybacksTeam Corplawhttps://vinodkothari.com/2024/08/faqs-on-share-buybacks/
July 29th,2024Discussion on Proposed tax regime on buybackVinod Kothari and Payal Agarwalhttps://www.youtube.com/watch?v=RLC34F_qZkw
July 23rd,2024Bye bye to Share BuybacksTeam Corplawhttps://vinodkothari.com/2024/07/bye-bye-to-share-buybacks/
February 10th, 2023SEBI notifies amendments to all modes of Buy-backSanya Agrawalhttps://vinodkothari.com/2023/02/sebi-notifies-amendments-to-all-modes-of-buy-back/
November 19th 2022(updated February 8th, 2023)SEBI’s revised framework brings relaxation under buy-back normsPayal Agarwalhttps://vinodkothari.com/2022/11/ease-of-corporate-slimming-sebi-proposes-substantial-relaxation-of-buy-back-norms/
September 2022Insight on the concept of Buyback of Securities (podcast)Team Corplawhttps://open.spotify.com/episode/1Zs92WR7GNGWsIR89bTTBK
September 08th , 2021Presentation on Buyback of securitiesHarsh Junejahttps://vinodkothari.com/2021/09/buy-back-of-securities/
March 28th, 2020Buy-back of shares during Covid-19 PandemicVinita Nair
		https://www.moneylife.in/article/share-buyback-during-covid19-pandemic/59865.html
September 22th, 2019SEBI’s Buyback Rules For Leverage LimitsTeam Corplawhttps://vinodkothari.com/2019/09/sebis-buyback-rules-for-leverage-limits/
September 11th, 2018SEBI amends Buyback Regulations:-Aligning and re-framing the requirements with other lawsNikita Snehilhttps://vinodkothari.com/2018/09/sebi-amends-buyback-regulations-aligning-and-re-framing-the-requirements-with-other-laws/
April 02nd,2018Proposed changes under SEBI(Buy-Back Of Securities) Regulations, 2018Nikita Snehilhttps://vinodkothari.com/2018/04/proposed-changes-under-sebi-buy-back-of-securities-regulations-2018/
March 27th, 2012Guide to buy-back shares of unlisted companiesTeam Corplawhttps://vinodkothari.com/2012/03/guide-to-buy-back-shares-of-unlisted-companies/

FAQs on Share Buybacks

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-Team Corplaw | corplaw@vinodkothari.com

Uploaded version_FAQs on BuybackDownload

Our other resources on the topic :

  1. Bye bye to Share Buybacks
  2. SEBI’s revised framework brings relaxation under buy-back norms

Research Analysts v/s Investment Advisors – Is the Line Blurring ?

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Last updated on 1st October, 2024

– Payal Agarwal, Associate and Dayita Kanodia, Executive | finserv@vinodkothari.com 

An investment in knowledge pays the best interest

– Benjamin Franklin

Investment advisors and research analysts, including the unregistered ones have been on SEBI’s radar for quite some time. As per latest data available on SEBI’s website (30th September, 2024), there are 953 Investment Advisors1 and 1358 Research Analysts2 registered with SEBI. Following the consultation paper on review of regulatory framework for investment advisors and research analysts SEBI, in its Board meeting on 30th September, 2024, has approved many of these proposals. While some proposals are aimed at an ease of registration for an entity/ person as an RA/ IA, the CP also contained substantial proposals w.r.t. the activities and functioning of IAs and RAs. 

In this article, we discuss the broad concept of IAs and RAs and a few major proposals under the CP, with our analysis on the potential implications. The fine text of the Amendment Regulations is awaited, for getting the necessary clarity on the position of IAs and RAs, pursuant to the revised regulatory framework.

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Variable Capital Companies 

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Payal Agarwal l payal@vinodkothari.com

The Union Budget 2024 refers to permitting a flexible mode for financing leasing of aircrafts and ships, and pooled funds of private equity through a variable capital company (VCC) structure. Variable Capital Companies (VCCs), as the name suggests, are companies in which the capital is not static, that is to say, the investor has the option to withdraw capital based on the satisfaction of certain conditions. In a traditional company form of entity, the capital is static, and any reduction in capital (except buyback upto a specified extent), attracts specific procedure, including most importantly, approval from NCLT and other regulatory/ statutory authorities. 

Read more: Variable Capital Companies 

Globally, similar structures exist in various countries, known by different names, such as – Variable Capital Companies in Singapore and Mauritius, Open Ended Investment Companies (OEIC) in the UK, and a specific form of collective asset management companies in Ireland and Luxembourg. 

In the context of India, the discussions around VCC are not new, the IFSCA has been exploring opportunities to bring a legislative framework for incorporation of the VCC form of entity. In fact, an Expert Committee, under the Chairmanship of Mr M S Sahoo, had released a report providing recommendations for bringing a legal framework for VCCs in IFSC in October, 2022. 

What are VCCs?

VCCs are a relatively new form of corporate structure, an investment vehicle housing multiple funds under one entity, while ringfencing the asset pools of each sub-fund distinctly – like a Protected Cell Company (PCC).

In jurisdictions such as Mauritius, the VCC has an option to elect to have a separate legal identity for each of its sub-fund, however, the same would require each sub-fund to be incorporated as a separate company. Even if the sub-funds are not incorporated as separate legal entities, their properties remain distinct from the umbrella fund (VCC) and any liability attributable to a specific fund is discharged solely from the assets of such a sub-fund. 

Most importantly, as the name suggests, these structures have a flexibility on pay-outs to the investors. Such flexibility is provided in the form of permitting redemption of the shares of the fund at any time at a price related to the net present value of the scheme property, subject to the shares being fully paid-up. 

Introduction of VCCs in IFSC 

The Report recommended VCC structure to be first introduced in IFSCs owing to the preparedness of international players in dealing with such structures since VCC structures are already existent in various other jurisdictions. Based on the functioning of the VCC-structure in IFSCs, the same may be subsequently introduced in the domestic Indian financial system too. 

Regulatory framework for VCCs in IFSC

Under the IFSC regulatory ecosystem, VCCs are proposed to be recognised under the IFSCA Act, 2019. Additionally, the activities of the VCC should be governed by the IFSCA (Fund Management) Regulations, 2022. 

The Report suggests a VCC to be incorporated as a company, and the sub-funds thereof to derive their character from the VCC instead of being recognised as separate legal persons. There is a segregation of assets and liabilities at each sub-fund level, and as such, each sub-fund is bankruptcy remote from the insolvency proceedings initiated against another sub-fund. 

Conditions w.r.t. “variability” of capital in VCC 

Unlike a company which has a fixed paid-up capital, in case of a VCC, the paid-up capital, at all times, reflects the value of the net assets of the VCC. 

The Report suggests VCCs may raise funds in both equity and debt form, issuing different classes of equity and debt securities to represent the interest of the holder in the specific sub-fund to which the securities relate to. The Report also proposes the introduction  of “management shares” and “participating shares”, similar to the concept already prevalent in Singapore.

The recommendations suggest redemption of participating shares, carrying economic rights, at the net asset value of the scheme, subject to the shares being fully paid-up. On the other hand, for management shares, containing voting rights, the same is proposed to be irredeemable, however, the VCCs should have an option to buyback such shares with requisite approvals and following due procedure. 

In view of the flexibility that VCC provides, the structure is getting increasingly popular. In Singapore, since the launch of provisions around VCCs in 2020 vide the Variable Capital Companies Act, 2018 in January, 2020, a total of 969 VCCs have been incorporated till 2022, representing around 2000 sub-funds. 

Read our other articles on Union Budget 2024

  1. Union Budget 2024: Did it hit the mark?
  2. Bye bye to Share Buybacks
  3. Scaling up skilling by using CSR funds: Any takers?

SEBI eases investing norms for NRIs, OCIs, and RIs through FPI route in IFSC

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-Surabhi Chura | corplaw@vinodkothari.com

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A policy on policies: Guide to writing corporate policies

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finserv@vinodkothari.com | corplaw@vinodkothari.com

Why Policies:

  • Policies have become a regulatory necessity in many cases. The Companies Act and Listing regulations require several policies: for example, nomination and remuneration policy, CSR policy, whistle blower policy, policy for determination of material subsidiary etc.
  • The RBI’s regulations require policies every now and then – an indicative list of policies needed by NBFCs (for base layer and middle layer) is here
  • RBI regulations for banks require an even larger list of policies. An indicative list of policies for banks can be accessed here.
  • To conclude: policies are needed for companies in many respects/fields.

What’s the policy behind policies:

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Online workshop on Verification of Market Rumour by listed entities and other related amendments

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Register here
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Other resources on the amendment:

  1. YouTube video on aforesaid amendment: https://www.youtube.com/watch?v=-BvHsUtR4TI&feature=youtu.be
  2. Article on Top companies forced to respond to rumours on big price spikes: Changes in Listing Regulations relate rumour responses to “material price movement”
  3. Snippet summarizing the amendment: https://lnkd.in/gSJM-YUj