Sebi announces new feature of voluntary put option in corporate bonds to address the perception of illiquidity in the corporate bond market
The Securities and Exchange Board of India (Sebi) has announced a new liquidity window facility aimed at enhancing the liquidity of corporate bonds, set to be operational from November 1, 2024. This facility includes a voluntary "put option" for investors, enabling them to sell bonds back to issuers at a maximum of 100 basis point discount from its valuation.
In a circular issued on October 16, 2024, Sebi said this initiative aims to address liquidity concerns, particularly for retail investors, by allowing put options exercisable on pre-specified dates or intervals.
Vishal Goenka, Co-Founder of IndiaBonds.com, welcomed the initiative, calling it another "innovative and progressive move" by Sebi for the development of the corporate bond market in India. "The true effects of this policy can only be seen in a year's time but it provides more confidence to retail investors which in turn will create more confidence in new/growth stage issuers," he said.
Put Option In Corporate Bonds
A "put option" refers to a voluntary facility that allows bondholders to return the bonds to the bond issuer if they choose. Entities issuing debt securities which are proposed to be listed may at their discretion provide the liquidity window facility at the time of issuance of such instruments.
Sebi felt that a perception of illiquidity in the corporate bond market has set in as institutional investors typically hold bonds until maturity.
Rules Governing Put Option
The liquidity window will only apply to prospective debt sales—whether through public offerings or private placements for listed securities. "The issuer shall provide liquidity window facility only after the expiry of one year from the date of the issuance of the debt securities. Re-issuances shall not be permitted under the ISINs in which liquidity window facility is offered," the regulator said. The facility will remain open for three working days and requires approval from the issuer's board of directors.
Investors wishing to exercise the put option will need to block their securities in their demat accounts during trading hours, with the settlement of transactions expected within four working days. Payments will be made the next day after the window closes. Further, issuer shall ensure the amounts payable to investor shall not be at a discount of more than 100 basis points on the valuation of securities displayed on their websites plus the accrued interest.