The Securities and Exchange Board of India (Sebi) has given a three-month window to unlisted bond issuers to get their securities listed, which would help debt mutual funds (MFs) bring down their overall exposure to such securities.
According to industry participants, the regulator has asked MFs to inform the unlisted debt issuers about this window and consider this route.
The window will open from June 15 and would be extended to unlisted non-convertible debentures (NCDs) held in portfolios of various debt scheme as of March 31, 2020. The issuers using this window would not be required to comply with electronic bidding platform guidelines.
According to estimates, the industry has over Rs 40,000 crore of exposure to unlisted debt papers.
Lack of liquidity in the debt markets has made it challenging for debt MF schemes to bring down their exposure levels. The industry is required to bring down scheme-level exposures to unlisted debt to ten per cent by December 31, 2020. By September 30, the exposures are needed to brought down to 15 per cent.
Sources suggest the grandfathering may still be allowed. On October 1, the regulator issued the directions on unlisted debt securities, but allowed grandfathering of those securities held as of the circular date. This meant that such papers will be exempted from the limits till their maturities.
The one-time window offered by Sebi comes at a time when debt schemes have undergone heavy redemption pressure, which has indirectly increased their exposures to unlisted papers and other relatively less liquid portfolio holdings.
“Due to higher redemptions following Covid-19 pandemic and lockdown, the asset size of several debt schemes has shrunk. To meet redemptions, fund managers have had to rely on selling more liquid investments in their portfolios. In few cases, the concentration to unlisted papers has gone to up to 50-70 per cent and in some it is between 11-22 per cent,” said a debt fund manager.
“The window will help such schemes to bring down their exposure as close as possible to Sebi-stipulated limits over the coming months,” he added.
However, experts say it remains to be seen how many issuers are open to getting debt papers listed.
“While a fund house can request the company to get its papers listed, if the company does not want to get it listed, the fund house doesn’t have a legal authority like Sebi. However, listing will be good for the overall system and if some issuer is unwilling to list, it would also show its intent,” said Joydeep Sen, consultant at Phillip Capital.
In its October circular, Sebi directed fund houses to make sure that unlisted exposures are of simple structures. This would put out instruments such as zero-coupon bonds, securities with credit-enhancement or structured obligations off-limits in the unlisted space.
Recently, Sebi also pointed out unlisted debt securities, particularly those where a single investor invested, suffered on two fronts. “Opaqueness of structure and the true nature of risk on one hand, and lack of ongoing disclosure in respect of financials of the issuer…”