Khan Committee Report on Corporate Bond


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.



 It has been well recognized that a well-developed corporate bond market complements a sound banking system in providing an alternative source of finance to the real sector for its long-term investment needs. An active corporate bond market also helps in the diversification of risks in the financial system. In order to enable public and private sector firms to borrow for longer maturity periods in local currency to meet their investment needs and avoid balance sheet mismatches and foreign currency exposures, there is a need to accelerate the development of local currency bond market. An active corporate bond market could also provide institutional investors such as insurance companies and provident and pension funds with quality long term financial assets, helping them in matching their assets and liabilities.
2. There has been a number of reports by expert Committees on development of corporate bond markets in India viz. Report of High Level Expert Committee on Corporate Bonds and Securitisation in 2005 (R. H. Patil Committee), Report of the High Powered Expert Committee on Making Mumbai an International Financial Centre in 2007 (Percy Mistry Committee), A Hundred Small Steps [Report of the Committee on Financial Sector Reforms (CFSR)] in 2009 (Dr. Raghuram Rajan Committee), Reports of the City of London, etc. These Committees have examined in detail various aspects related to the development of corporate bond market and have made useful recommendations. Many of these recommendations have been implemented.
The Financial Stability and Development Council Sub-committee (FSDC-SC) in its meeting held on September 10, 2015 decided to constitute a Working Group on Corporate Bonds with representation from the Ministry of Finance, Government of India and all the regulators with the remit to guide the implementation of the recommendations made by all the earlier committees and suggest further measures that may be taken to develop the corporate debt market in the light of evolving macroeconomic and financial market conditions within a specific time span. Accordingly, a Working Group was constituted as under Harun Rashid Khan, Deputy Governor, Reserve Bank of India.
                                             
                                                  Summary of Recommendations


Reissuance
1. i. The issuers coming out with frequent debt issues with the same tenor during a quarter may club them under the same umbrella ISIN which in turn would increase the float in the market, thus enhancing its liquidity. These issuers may come out with a feasible maturity structure wherein they can stagger the redemption amount across the year by amortizing the repayments. Necessary changes may be made in the issuance process of ISINs by depositories, viz., NSDL and CDSL to facilitate the same.
ii. Re-issuances may not be treated as fresh issuances for the purpose of Stamp duty.
iii. The corporate governance norms applicable to companies which have listed only debt securities and not equity may be reviewed to make them less onerous.

Standardization of corporate bond issuance
2. As suggested by market participants, SEBI may have a re-look at the guidelines issued in October 2013 so as to clarify on day count convention, shut period, basis for yield calculation, calculation of coupon interest and redemption with intervening holidays with illustrations. The date of payment may be specified as the date on a Mumbai business day, the day on which RBI and money markets function.
Investors
FPIs investment in corporate bonds
3. Necessary amendments may be made in FEMA regulations to allow investment by FPIs in unlisted debt securities and pass through securities issued by securitizations SPVs / Special Purpose Distinct Entity (SPDE) as announced in the Union Budget 2016-17. Necessary notification, in this regard, may be issued by RBI by end August 2016.
4. Amendments may also be carried out in both FEMA notification and SEBI guidelines to facilitate direct trading in corporate bonds by FPIs in the OTC segment and on an electronic platform of a recognized stock exchange, subject to certain safeguards, without involving brokers.
5. In terms of RBI guidelines on credit default swaps, the credit exposure of a protection buyer shall be on the protection seller. In case of need for further clarification of doubts, if any, market participants may seek the confirmation of the respective regulators.

Intermediaries
Market –Making Scheme
6. Stock exchanges may operationalize market making scheme in corporate bonds.
7. Regulated entities like banks, PDs, in addition to brokers, may be encouraged by the regulators to act as market makers in corporate bond market subject to appropriate risk management framework. RBI may examine allowing trading members of debt segment of exchanges to access the repo market in corporate bonds to enable them to undertake market making.

Infrastructure
Electronic book for private placement of bonds
8. The Electronic Book Mechanism for private placement of debt securities, currently mandatory for issuances over Rs.500 crore, may be extended to all primary market issuances.
Uniform valuation norms
9. A uniform valuation methodology available on a daily basis may be followed by all the regulated entities for valuation of their holdings of corporate bonds. All regulators may explore an acceptable mechanism for valuation including engaging the Financial Benchmarks India Pvt. Ltd. (FBIL) or credit rating agencies for the same with necessary safeguards and regulatory oversight.
Electronic Trading Platform
10. The penalty structure in place for default in delivery of debt securities/funds for trades subject to CCP clearing by the clearing houses of the stock exchanges may be reviewed in consultation with all the stakeholders with a view to prescribing a penalty which is prudent yet reasonable. It is suggested that alternative mechanisms, such as borrowing through repo in corporate bonds, may also be explored for ensuring settlement.
Credit Rating Agencies
11. CRAs may be mandated to strictly adhere to the regulatory norms with regard to timely disclosure of defaults on the stock exchanges and their own website. They may also publish the credit rating transition matrix more frequently. CRAs may take up membership of credit information companies to access relevant credit information.
12. Banks may be encouraged to submit loan overdue information to CICs on a weekly basis to start with. RBI may consider whether CRAs may be allowed access to Central Repository of Information on Large Credits (CRILC) database based on legal feasibility and other relevant factors.
Integrated Trade Repository
13. As announced in the Union Budget 2016-17, a centralized database for corporate bonds covering both primary and secondary market segments may be established expeditiously in two phases, for secondary market trades by end August 2016 and for both primary and secondary market by end October 2016.

Instruments
Credit Default Swaps (CDS)
14. Amendments may be carried out in the RBI Act, 1934 to provide complete clarity on the legal position relating to netting of OTC derivative contracts. Pending amendments to the RBI Act or other enabling legal framework, based on expert legal opinion, possibility of permitting netting keeping in view the existing legal provisions and banking practices may be explored expeditiously.
Repo in corporate bonds
15. An electronic dealing platform with CCP facility with appropriate risk management framework similar to the CROMS platform for G-sec may be introduced. Electronic dealing platform without CCP facility may also be introduced for bonds for which CCP facility may not be feasible. Necessary guidelines may be issued by end September 2016.
16. FIMMDA may consult market participants to develop a commonly acceptable market repo agreement for execution among the market participants by end September 2016.
17. Guidelines on Tripartite repo on corporate bonds may also be introduced by depositories/other entities in consultation with SEBI by end September 2016.
18. Entities authorized as market makers in corporate bond market, including the brokers, may be allowed to participate in the repo market executed on electronic platform linked to guaranteed settlement.
Basel III compliant Perpetual Bonds
19. Insurance companies and EPFO may be allowed to invest in AT-1 bonds of banks subject to prudential limits with credit rating upto investment grade.
20. The maximum investment ceiling of 2% of the total portfolio of the funds in AT-1 instruments stipulated for non-Government PFs may be reviewed for relaxation.
Bond Index
21. Corporate bond index may be introduced by the Stock Exchanges/other entities.

Incentives
Credit enhancements of bonds
22. During the initial phase the upper limit for PCE by the banking system as a whole may be enhanced to a higher limit with no single bank having exposure of more than 20 per cent of the bond issue size by end August 2016.
23. It may be clarified that the capital required to be maintained by banks on account of PCE would be reduced if the base rating of the project improves during the credit enhancement period. Guidelines in this regard may be issued by end August, 2016.
24. A separate regulatory framework may be formulated for providing credit enhancement of corporate bonds by NBFCs engaged in such activities. Necessary guidelines, in this regard, may be issued by end August, 2016.
Encouraging corporates to tap capital market
25. Large corporates with borrowings from the banking system above a cut-off level may be required to tap the market for a portion of their working capital and term loan needs. Necessary guidelines may be issued by RBI taking into account market conditions by September 2016.

Innovations
Acceptance of corporate bonds under LAF repo of RBI
26. After the measures like introduction of tripartite repo and repo on electronic dealing platform with CCP facility gain some traction, RBI may explore the possibility for accepting corporate bonds for LAF operations with suitable risk management framework including rating requirements and appropriate haircuts.
27. Legal basis may be examined expeditiously to remove the technical obstacles for RBI to accept corporate bonds as collateral under LAF repo as and when the Scheme is introduced.

Rationalisation of Stamp Duty
28. The stamp duty on debentures should be made uniform across states and be linked to the tenor of securities within an overall cap. Re-issuance of the same security should be included for the purpose of the cap, in order to encourage re-issuance. As this issue has been pending for quite some time, this may be resolved expeditiously.

Investor Protection: Revamp Bankruptcy Act and SARFAESI Act
29. In order to achieve the objective behind the Bankruptcy Code, issues such as early notification of the rules, development of insolvency professionals, tribunal/court infrastructure and information utilities and quick redressal of the transitional problems may be addressed with priority.
 



Tuesday, 27th Jun 2017, 11:37:17 AM

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