The Securities Exchange Board of India (“SEBI”) vide circular dated October 16, 2024 (“Circular”), has introduced a uniform framework for a Liquidity Window facility (“LW Facility”) for investors in debt securities.

In the Circular, SEBI has noted that the secondary corporate bond market has been perceived to have limited liquidity due to a large number of institutional investors holding corporate bonds till their maturity. Issue of liquidity for investors, especially retail investors, is one of the issues that the LW Facility aims to address. As per Regulation 15 of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“ILNCS Regulations”), an issuer of debt securities which are proposed to be listed (“Issuer”) can provide the right to redeem such securities by way of a put option, to all investors or only to retail investors, prior to the maturity date of such securities.

Accordingly, SEBI has introduced the LW Facility by use of put options as provided under Regulation 15 of the ILNCS Regulations, exercisable on pre-specified dates or intervals. Certain salient features of the LW Facility are as follows:

Issuer Discretion

The Issuers may, at their discretion, provide the LW Facility as provided in the Circular on an ISIN basis at the time of issuance of such securities. The LW Facility shall be available to eligible investors as specified in paragraph 5 below.

Prospective Applicability

The LW Facility can be provided only for prospective issuances of debt securities i.e., from the date of applicability of the Circular, issued either through public issue process or on a private placement basis (proposed to be listed).

Issuer Authorizations and Compliances

The Issuer must ensure that the LW Facility meets the following conditions:

1. is authorized by a prior approval of its board of directors (“Board”);
2. its implementation and outcome is monitored by (i) Stakeholders Relationship Committee (“SRC”), in case of issuers of listed specified securities; and (ii) the Board or such board level committee that the Board may determine, in case of issuers who have listed only their debt securities and are not mandated to constitute a SRC;
3. is objective, transparent, non-discretionary and non-discriminatory within the class of investors specified as eligible investors; and
4. its implementation or operation does not compromise market integrity or risk management, asset liability management or liquidity management norms as approved by its Board (in the absence of any such regulatory requirements).

Exclusion of eligible debt securities from ISIN count

LW Facility may only be provided after the expiry of 1 (one) year from the date of issuance of such securities. Re-issuances are not allowed under the ISINs where LW Facility has been offered. Such ISINs shall be exempted from the consideration for maximum ISINs under Part I of Chapter VII of the Master Circular for issue and listing of Non-Convertible Securities, Securitized Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper dated May 22, 2024.

Eligible Investors for LW Facility

The Issuers shall specify the eligibility of investors for the LW Facility i.e., whether it is available to all investors in the debt securities or only to retail investors. Such eligible investors desirous of availing the LW Facility shall hold the debt securities in demat form.

Aggregate limit and sub limit of LW Facility

The Issuer shall determine and specify the issue size of the eligible securities constituting the aggregate limit in respect of the LW Facility over the tenor of the debt securities, which shall not be less than 10% (ten percent) of the final issue size. The Issuer can also determine the sub limit of put options that can be exercised in each liquidity window over the tenor of LW Facility. The abovementioned limits must be disclosed in the offer document at the time of issuance.

Designated Stock Exchange

Issuer may designate any one of the stock exchanges as the ‘Designated Stock Exchange’ for the LW Facility.

Period of LW Facility

The liquidity window shall be open for 3 (three) working days and, at the discretion of the Issuer, may be operated on a monthly/ quarterly basis. The schedule of liquidity window(s) shall be disclosed upfront in the offer document. The notice regarding the liquidity window shall be made within 5 (five) working days via SMS/ WhatsApp messaging from the start of each financial year regarding the LW Facility being available on monthly/ quarterly basis in the respective financial year. Such notice/ intimation shall be treated as compliance with Regulation 15(6) of the ILNCS Regulations.

Mode and manner of LW Facility

The Circular briefly illustrates the mode and manner of availing the LW Facility. The Circular has specified that the stock exchanges in consultation with clearing corporations and depositories, shall publish detailed operational guidelines in this regard.

Valuation of the debt securities

Debt securities shall be valued on ‘T-1’ day where T is the first day of the liquidity window. Such valuation must be in accordance with the Chapter 9: ‘Valuation’ of Master circular for mutual funds dated June 27, 2024 (as amended from time to time) and shall be displayed on the website of the Issuer and stock exchange during the period of liquidity window. The Issuer must ensure that the amounts payable to the investor shall not be at a discount of more than 100 (one hundred) basis points on the valuation arrived plus the accrued interest. Such amount shall be payable to the eligible investor within 1 (one) working day from the closure of the liquidity window. Furthermore, settlement of debt securities will be on ‘T+4’ day where T is the first day of the liquidity window.

Debt Securities received by the Issuers

The Issuer may deal with the debt securities received pursuant to the LW Facility within 45 (forty-five) days of the closure of the liquidity window or before the end of the quarter (whichever is earlier) in the following manner:

1. sell such securities on the debt segment of stock exchange.
2. sell such securities on the RFQ platform provided that the Issuer is eligible to access it.
3. sell such securities through the Online Bond Platform; or
4. extinguishment of such debt securities.

Reporting and Disclosure Requirements

The Issuer is mandated to submit a report to the stock exchange where such securities are listed within 3 (three) working days of the closure of the LW Facility. Further, the Issuer must inform the depositories and the debenture trustee about the debt securities to be extinguished within 3 (three) working days from the end of the timeline as provided in paragraph 11 above. Additionally, the Issuer shall disclose on their website a list of ISINs for which LW Facility is available along with information as specified in the Circular. The aforementioned details are to be shared with the stock exchanges, depositories and debenture trustee as well, who shall host the same on their website/ corporate bond database.

The Circular shall be applicable from November 1, 2024.

Please find a copy of the Circular, here.

This update has been contributed by Aastha (Partner) and Nalin Malhotra (Associate).

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