Sebi's Corporate Bond Liquidity Window Fails to Gain Traction in India
A unique facility designed to allow investors to exit corporate bonds has failed to catch on more than a year after the Securities and Exchange Board of India (Sebi) introduced it. Issuers have largely refrained from offering this mechanism due to a combination of low incentives, excessive guardrails, and potential balance sheet uncertainties.
A senior official from the regulator confirmed that the use of the liquidity window has been negligible so far, with public data on its utilization remaining unavailable. The framework, which came into effect on 1 November 2024, was aimed at addressing low market liquidity—a longstanding concern in India's corporate bond market.
Addressing Market Illiquidity
In October 2024, Sebi highlighted that limited trading, partly driven by institutional investors holding bonds to maturity, had resulted in the market being perceived as illiquid. This perception discouraged wider participation, particularly from retail investors. To tackle this issue, the regulator proposed a mechanism under which issuers could offer a liquidity window through put options, allowing investors to sell bonds back to them on pre-specified dates or intervals.
Under this framework, issuers of listed non-convertible securities could, at their discretion, offer the facility either to all investors or only to retail investors one year from the date of issuance. Issuers were required to set aside at least 10% of the final issue size for such buybacks over the tenor of the bond and could specify sub-limits for each liquidity window. If investor demand exceeded these limits, acceptances were to be done on a proportionate basis.
Lack of Issuer Interest
Despite the elaborate structure and Sebi's objective of boosting investor participation, issuers have not opted to offer the facility. Suresh Darak, founder and CEO of Bond Bazaar, an online bond platform, noted, "There should be some vested interest for the issuers." He emphasized that the numerous guardrails in the liquidity framework have dampened enthusiasm, suggesting that for participation to increase, the industry needs more flexibility to figure things out.
Detailed Regulatory Conditions
The rules were accompanied by a range of stipulations that added to the complexity. Issuers had to secure board approval, ensure oversight by a stakeholder relationship committee or the board, and maintain objectivity and non-discrimination among eligible investors. The liquidity window could be opened monthly or quarterly for three working days at a time, with schedules disclosed upfront in the offer document and reminders sent to investors through SMS or WhatsApp.
Within 45 days of the liquidity window's closure or before the end of the relevant quarter, whichever is earlier, the issuer should either sell the tendered debt securities through the exchange, request-for-quote (RFQ) platform, or an online bond platform, or extinguish them. This detailed list of requirements contributed to the loss of interest among issuers.
A Uniquely Indian Construct
The liquidity window is a uniquely Indian regulatory construct. While other markets use puttable bonds, rely on strong market-making structures, or see central banks step in with liquidity support during crises, no major jurisdiction has introduced a regulated, periodic liquidity window that allows investors to routinely sell bonds back to issuers.
Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap, a debt syndication firm, explained, "The uncertainty around the timing and quantum of buybacks creates balance sheet and treasury planning challenges, while investors may find the valuation-driven exit unattractive, especially in a hardening yield environment."
Valuation and Settlement Challenges
According to Sebi, debt securities will be valued on a T-1 basis, where T refers to the first day of the liquidity window. The issuer must ensure that the amount payable to investors is not at a discount of more than 100 basis points to this valuation, in addition to accrued interest. Manisha Shroff, a partner at Khaitan & Co., pointed out that while this stipulation aims to protect investor interests, a discount of 100 basis points represents a high rate, especially for securities with longer maturity periods.
Payments to eligible investors are required to be credited within one working day of the closure of the liquidity window to the bank account linked to the demat account from which the securities were tendered and transferred. Settlement is to be completed on a T+4 basis, with T representing the first day of the liquidity window.
Broader Market Context
The timing of the framework coincides with a slowdown in corporate bond issuance. Funds raised through corporate bonds declined 6% year-on-year to ₹6.76 trillion in the first nine months of FY26, according to Sebi data, even after a 125-basis-point cut in policy rates and sustained liquidity support from the Reserve Bank of India. While 1,458 issuers accessed the bond market during this period, a year earlier 1,219 borrowers had raised ₹7.18 trillion through corporate bonds, highlighting softer borrowing appetite.
Sebi has been pursuing multiple initiatives to deepen the corporate bond market and widen participation. These include:
- Introduction of an electronic book provider platform for large private placements
- RFQ platform for secondary market transactions
- Reduction in the face value of privately placed bonds proposed to be listed
- Framework for online bond platforms
In December, Sebi's board approved a move to allow issuers to offer incentives such as additional interest or discounts on issue prices to specific investor categories, including senior citizens and women, to encourage participation. However, structural frictions in bond trading persist.
Compliance and Tax Hurdles
Manisha Shroff further noted that entities intending to list their debt securities on the stock exchange must make numerous disclosures and ensure compliance with comprehensive pre-issue and post-issue requirements. She urged Sebi to simplify these listing requirements to ensure ease of access to the debt capital market for both issuers and investors.
Tax policy has also weighed on investor sentiment in the debt markets. The removal of indexation benefits for long-term debt mutual funds since April 2023 has hurt returns. The mutual funds association has urged the government to restore long-term capital gains treatment with indexation for debt mutual funds held for more than 36 months.
In summary, Sebi's corporate bond liquidity window, despite its innovative design, faces significant challenges in adoption due to regulatory complexities, issuer disincentives, and broader market conditions. As India strives to deepen its bond market, addressing these barriers will be crucial for enhancing liquidity and investor participation.
