Market participants including bankers, arrangers, public sector units and investors met the Securities and Exchange Board of India (Sebi) on Friday to discuss the electronic book mechanism for issuance of debt securities on private placement basis, or the EBP mechanism, on which the regulator had earlier issued a consultation paper. According to sources, a major point of contention was the proposed reduction in the mandatory limit for EBP mechanism to Rs 50 crore from Rs 500 crore. Sebi had proposed in the consultation paper that EBP mechanism may be mandated for all private placements of debt securities with an issue size of Rs 50 crore and above. “There were various suggestions regarding this. Some said the limits should be rating linked while some indicated the limit should be raised to a higher level,” said a source.
The regulator had also proposed that securities allotted against the proprietary bid of an arranger would be subject to a lock-in of 60 days period from the date of allotment. Bond arrangers have argued that such a step would kill the liquidity in a particular issue and will limit the participant’s ability to manage risk parameters. “If somebody has certain risk parameters in place like stop-losses then they might not be able to follow that. This will reduce the liquidity. Why will an arranger think of putting money if there is such a lock-in mechanism?” the source observed.
The regulator had also proposed that for a qualified institutional buyer (QIB) whose bid amount is Rs 10 crore and above might have to participate directly on the bidding platform rather than go through arrangers. Market participants have recommended that QIBs putting in bids above Rs 10 crore should not be forced to participate through EBP and should be given a choice if they wish to do the bidding via an arranger. “There should not be a compulsion to do the bidding via EBP,” said a bond arranger.
One of the points proposed by the regulator was that an issuer will also have to mention the green shoe option upfront. Usually bond issuers mention only the base size and refrain from disclosing the actual quantum they intend to raise. As a result, certain investors, who are not clear about the actual issue size, invest their funds in the bond issue even if they preferred to wait. This point if made mandatory will be a big positive for an investor considering they will have a prior information of the total size of the issue. “There are some investors who wish to invest only if the issue size, for example, is less than Rs 1,000 crore. If this is clarified upfront, investors are going to have an upper hand,” said a bond market expert.