SEBI looking at standardisation in the corporate bond market

August 4, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

SEBI looking at standardisation in the corporate bond market

Subject :Economy

Section: Capital Market

In News: SEBI is looking at standardisation in the corporate bond market in a big way on the lines of the G-Secs market.

Key Points:

G-Sec market is very liquid because the coupon payments, the day count, among others, are standardised. In the case of G-Sec, the coupon payment dates are half yearly (July 8 and January 8).
A standardised corporate bond issue would have a minimum notional size, pay interest semi-annually and mature on one of four fixed quarterly redemption dates
Beyond AAA rated bonds:
- SEBI is set to emphasise on the need to go down the rating scale as about 97 per cent of the bond issuances are from the top three rating categories — AAA, AA+ and AA.
- Compared to this the US only has 5 per cent of corporates are in the AAA and AA bucket, and about 75 per cent of the trading happens in the A, BBB, BB rating categories
Bank dependence for credit:
- Although banks are in good state it actually doesn’t help the bond markets because the banking system’s credit keeps on growing.
- At present most of the bond issuances are in the NBFC segment. So, we hardly get any issuances from manufacturing and other segments.
Importance of standardisation:
- Standardisation increases the number of identical or similar bonds available for trading, which enhances market liquidity.
- Broadens the pool of investors to the bond market, including international investors, due to the ease of understanding and trading similar instruments.
- It makes the process of issuing, trading and settlement of bonds more streamlined and efficient. At present almost 95 per cent of the bond issuances happening via private placements.
- Standardization can simplify regulatory compliance as regulators can create uniform rules and guidelines applicable to a broader range of bonds.

Example of standardisation:

Day count convention is the method used to calculate the interest accrued on fixed-income security, such as bonds or loans, based on the number of days in a specific period.
30/360 convention: This convention deems all months to be 30 days in length and each year to be 360 days. Interest accrues at a daily interest rate equal to 1/360th of the interest rate, but for each full month is deemed to accrue for 30 days, regardless whether the month has 28, 29, 30, or 31 days.

What Is the Bond Market?

The bond market or debt market, fixed-income market refers to trades and issues of debt securities. Governments typically issue bonds in order to raise capital to pay down debts or fund infrastructural improvements.
Publicly traded companies issue bonds when they need to finance business expansion projects or maintain ongoing operations.
Bonds tend to be less volatile and more conservative than stock investments, but they also have lower expected returns.

Bonds are of the following types:

Fixed-interest bonds carry a fixed interest rate.
Floating interest bonds carry a fixed “spread” and a fluctuating interest rate component that is subject to changes in benchmark rate. So this floating component is reset at regular intervals.
Zero coupon bonds are issued at a discounted rate and redeemed at their par value. They don’t offer interest payments at regular intervals.
Government bonds are nearly risk-free investment avenues issued by government bodies.
Corporate bonds are issued by public and private companies for financing an array of business purposes.
Tax-free bonds are generally issued by a government enterprise and offer a tax advantage to investors.