SEBI Circular: Introduction of Liquidity Window Facility

Date: October 16, 2024

Issued by: SEBI (Securities and Exchange Board of India)

Circular No: SEBI/HO/DDHS/DDHS-PoD-1/P/CIR/2024/141

Recipients

This circular is addressed to:

- Issuers who have listed and/or propose to list Non-convertible Securities - Recognised Stock Exchanges

- Registered Depositories

- Recognised Clearing Corporations

- Registered Credit Rating Agencies

- Debenture Trustees

- Merchant Bankers, Registrars to an Issue, Share Transfer Agents, and Bankers to an Issue

Subject

Introduction of Liquidity Window Facility for investors in debt securities through Stock Exchange Mechanism

1. Purpose

The Corporate Bond market plays a crucial role in providing a source of funds to issuers while offering a lucrative investment avenue for investors. In recent years, SEBI has undertaken multiple measures to broaden the investor base, promote participation, and enhance transparency in the corporate bond market. These measures include the introduction of platforms such as:

- Electronic Book Provider platform for debt securities for debt securities issued on private placement basis, exceeding issue size Rs 50 crores.

- 'Request for Quote' platform for secondary market transactions

- Framework for Online Bond Platforms

- Corporate bonds repo platform operated by AMC Repo Clearing Limited Despite these advancements, the corporate bond market still suffers from low levels of secondary transactions, contributing to a perception of illiquidity, particularly among retail investors.

To address the issue of liquidity and attract retail investors, SEBI is introducing the Liquidity Window facility, which allows issuers to offer put options for investors on pre-determined dates. This will create uniform norms for issuers to adopt the Liquidity Window mechanism.

2. Applicability

The Liquidity Window facility is optional and applies to issuers of debt securities that are to be listed either through a public issue process or via private placement. The facility can only be offered for prospective issuances of such debt securities, starting from November 1, 2024.

3. Key Features

3.1. Authorizations and Monitoring:

- The issuer must obtain prior approval from its Board of Directors to offer the Liquidity Window.

- The Stakeholders Relationship Committee (SRC) will monitor its implementation for entities with listed securities. For entities listing only debt, a board-level committee will take charge.

- The implementation must be objective, transparent, and non-discriminatory among eligible investors.

- The liquidity window should not compromise asset liability management or risk management as determined by the issuer’s board.

3.2. Eligibility and Exclusions:

- The issuer can choose to offer the Liquidity Window to all investors or restrict it to retail investors. Retail investors are defined as those holding debt securities with an aggregate face value not exceeding ?2,00,000.

- The issuer will provide the liquidity window one year after the debt securities issuance. Re-issuance is not allowed under ISINs offering this facility.

- These ISINs will be exempt from the ISIN limit count for debt securities.

3.3. Aggregate Limits:

- Issuers must specify a minimum 10% of the total issue size for which the put option will be exercisable.

- The issuer may also set sub-limits per liquidity window, and if exceeded, the allocation will be on a proportionate basis.

3.4. Designated Stock Exchange and Period of Operation:

- The issuer will designate a Stock Exchange for operating the Liquidity Window.

- The liquidity window will be open for three working days and can be scheduled monthly or quarterly.

- Issuers must announce the schedule of the liquidity window in the offer document and notify investors of its availability each financial year.

4. Valuation and Payments

4.1. Debt securities will be valued on the day before the liquidity window opens (T-1). This valuation will be published on both the issuer’s and the stock exchange's websites throughout the window period.

4.2. Payments to investors will not be at a discount exceeding 100 basis points from the valuation plus accrued interest.

4.3. Payments will be made within one working day from the closure of the liquidity window to the bank account linked to the demat account of the investor.

5. Reporting and Disclosure

5.1. Issuers must report the utilization of the Liquidity Window to stock exchanges within three working days after closure.

5.2. Issuers must update their website with details of the ISINs for which the liquidity option is available, including the issue size, credit rating, coupon rate, and the percentage of debt securities exercised under the put option.

5.3. Issuers must also provide details of any extinguished or sold debt securities.

6. Effective Date

The provisions of this circular will be effective from November 1, 2024.