On October 16, 2024, the Securities and Exchange Board of India (SEBI) introduced a significant new initiative aimed at enhancing liquidity for investors in debt securities and this is effective from November 1, 2024. SEBI implemented a facility known as the “Liquidity Window.” This new framework will enable investors to sell their listed bonds or debt securities back to the issuers before the securities maturity date.

The introduction of this facility is expected to provide investors, particularly retail investors, with greater flexibility and ease of access to their investments when required. By addressing the liquidity challenges in the corporate bond market, the Liquidity Window aims to make corporate bonds a more attractive investment option, offering investors a clear exit route and helping to boost overall participation in the market.

Meaning of Liquidity Window Facility

The Liquidity Window Facility is a mechanism introduced by SEBI that allows investors to sell their debt securities (such as bonds) back to the issuer before the securities’ maturity date. This is facilitated through a put option, which gives investors the right, but not the obligation, to sell their securities to the issuer at a pre-determined price. This facility is designed to offer greater flexibility to investors, especially retail investors, by providing them with a structured exit option. By enhancing liquidity in the corporate bond market, the Liquidity Window aims to address the challenge of illiquidity, making it easier for investors to manage their portfolios and exit investments when necessary.

Key features of the Liquidity Window

1. Eligibility Criteria:
   • The Liquidity Window will only apply to new issuances of debt securities, whether they are issued through a public offering or a private placement, as long as they are intended to be listed on the stock exchange. This means that only new debt securities will be eligible for the facility.
   • The issuer will have the discretion to specify which investors can avail themselves of the facility—whether it will be available to all investors or just retail investors. In either case, the securities must be held in dematerialized (demat) form.
   • Issuer must obtain approval from its Board of Directors before providing the liquidity window facility.
2. Put Option Details:
   • The issuer will reserve a certain percentage of the total issued bonds for investors to exercise their put options. This percentage will be at least 10% of the total issue size.
   • The issuer will also set limits on how many bonds can be sold during each liquidity window, which could be monthly or quarterly. If more investors want to sell than the available limit, the issuer will accept the put options proportionally.
3. Duration and Frequency:
   • The liquidity window will remain open for three working days. Issuers can choose to operate this facility on a monthly or quarterly basis, and they will be required to disclose the schedule in the offer document upfront.
   • Investors will be notified of the opening of the liquidity window through SMS or WhatsApp messages, ensuring that they have adequate time to participate.
   • Liquidity window facility can only be provided after one year from the issuance of debt securities and Re-issuances under the same ISIN are not allowed.
4. Settlement Process:
   • Once an investor exercises the put option, the value of the bonds will be determined on the first day of the liquidity window (referred to as “T-1” day). This valuation will be made available on both the issuer’s and stock exchange’s websites.
   • The payment to the investor will not be more than 1% below the calculated valuation, along with any accrued interest.
   • Payments will be made within one working day from the closure of the liquidity window, directly to the investor’s bank account linked with their demat account.
5. Role of Stock Exchanges:
   • The liquidity window will be facilitated through stock exchanges, which will serve as the designated platforms for investors to tender their debt securities.
   • The stock exchanges, in collaboration with clearing corporations and depositories, will publish detailed guidelines on how to exercise the put option, block securities in demat accounts, and settle the transactions.
6. Reporting and Transparency:
   • Issuers will be required to submit regular reports to the stock exchanges, disclosing the details of debt securities that have been tendered, exercised, and settled during the liquidity window. These reports will be made public and will be available for viewing on the websites of the issuer, stock exchanges, depositories, and debenture trustees.
   • Issuer must disclose details of ISINs for which the liquidity window is available on their website, including information such as outstanding amount, credit rating, and maturity date.
   • Issuer must update changes in information (e.g., credit rating, outstanding amount) to stock exchanges, depositories, and debenture trustees

Benefits of the Liquidity Window

1. Enhancing Liquidity: The introduction of the liquidity window facility directly addresses the issue of illiquidity in the corporate bond market. It gives investors the ability to sell their debt securities back to the issuer at specified intervals, which is crucial for enhancing the attractiveness of corporate bonds as an investment. This feature significantly improves the liquidity of these investments, providing investors with an opportunity to exit their positions when needed. By making it easier for investors to sell their bonds, the liquidity window enhances the overall attractiveness of corporate bonds as an investment option, particularly for those who may require more flexibility in managing their portfolios.
2. Fostering Investor Confidence: This move is expected to boost investor confidence, especially among retail investors who often find it challenging to exit their bond investments due to a lack of liquidity. The liquidity window ensures that they have an option to exit their investments on pre-determined dates, thereby reducing uncertainty and making bond investments more accessible and less risky.
3. Transparency and Fairness: SEBI’s framework for the liquidity window ensures that the facility is implemented in a transparent and fair manner. The rules clearly outline the criteria for eligibility, the terms of the put option, and the process for exercising it, ensuring that all investors have equal access to the facility. By mandating disclosure requirements and transparency in the process, SEBI aims to minimize any potential for manipulation or preferential treatment.
4. Boosting Corporate Bond Market: With the implementation of this framework, SEBI aims to attract more retail and institutional investors to the corporate bond market. This will enhance the depth and liquidity of the market, which in turn will help issuers access capital more efficiently.

Conclusion:

The introduction of the Liquidity Window facility is a game-changer for the Indian corporate bond market. It not only provides a way for investors to exit their investments more flexibly but also improves the overall liquidity and transparency of the market. As this new regulation comes into effect from November 1, 2024, it is expected to open up more opportunities for both issuers and investors in the bond market.

Investors, particularly retail investors, can look forward to better flexibility and control over their investments, while issuers can enjoy better access to capital with a more robust investor base. By addressing liquidity concerns, SEBI has taken a significant step towards making India’s corporate bond market more inclusive and investor-friendly.

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CS Isha Deshwal