The Securities and Exchange Board of India (Sebi) has put in place a framework for a new hybrid product, whereby companies can raise low-cost debt and at the same time, allow investors to detach the equity component from the instrument and trade in it.
Sebi has amended its DIP (Disclosure and Investor protection (DIP) guidelines to provide for a combined offering of Non-Convertible Debentures (NCDs) with warrants, through the Qualified Institutional Placement (QIP) mechanism. While NCDs and warrants would be offered together, they can be listed and traded separately.
As per Sebi, Qualified Institutional Buyers (QIBs) can now subscribe to the combined offering of NCDs with warrants, or to the individual instruments, i.e., either NCDs or warrants, where separate books are run for NCDs/ warrants.
The minimum contract value for trading of NCDs/warrants has been set at Rs 1 lakh. Earlier, warrants used to be listed one year after the issuance.
This product is an alternative to domestic convertible bonds, which former Finance Minister P Chidambaram had proposed in Budget 2008.
“I propose to enhance the tradability of domestic convertible bonds by putting in place a mechanism that will enable investors to separate the embedded equity option from the convertible bond and trade it separately," Chidambaram had said.
Domestic convertible bonds are local equivalent of foreign currency convertible bonds (FCCB).
With this product having an option to convert debt into equity, issuers can raise debt at a lower interest rate. The idea was to deepen corporate bonds market by providing it greater liquidity, said a banker.
However, Sebi in consultation with market participants, explored alternate structures which would yield the same benefits as that of DCBs to the issuer and enhance the suite of products from the investors’ point of view.
Meanwhile, Sebi wholetime member TC Nair said On Monday in Delhi that the regulator is likely to finalise the blueprint for an exchange traded corporate bonds market in India in a couple of months.
| DEBT AT A LOWER RATE |
| * Regulator provides for combined offering of Non-Convertible Debentures (NCDs) with warrants, through the Qualified Institutional Placement (QIP) mechanism |
| *While NCDs and warrants would be offered together, they can be listed and traded separately |
| *The minimum contract value for trading of NCDs/warrants has been set at Rs 1 lakh |
| * With this product having an option to convert debt into equity, issuers can raise debt at a lower interest rate |
“With interest rates coming down, this is a conducive climate for corporate bonds market,” Nair told reporters at a function organised by The Associated Chambers of Commerce and Industry of India. He said the government securities market in India is fast expanding, thanks to the comfort people draw from a sovereign guarantee.
“That kind of confidence is missing in corporate bonds. We will have to consider all these factors, because it may not be useful to have a market, if there are no volumes," Nair said. He said currently corporate bonds have a daily trade volume of Rs 300-400 crore in India.
Nair said in India there is a preference for exchange-traded derivatives and the regulator is working at creating such markets.
“But we are going slow on it to ensure these instruments do not become weapons of mass destruction in India,” he said, alluding to the American coinage for derivatives in the wake of the financial crisis.
