Sebi proposes uniform pricing for debt securities
To deepen the bond markets, the regulator Securities and Exchange Board of India (Sebi) today proposed a uniform methodology to determine pricing of non-traded and thinly traded non-convertible debt securities.
The requirement of such a framework also assumes significance as large number of such investors belong to categories such as mutual funds, insurance companies and pension funds, which have a mandate of daily net asset value (NAV) with an exit facility at any point of time for their investors.
This requires a reliable and accurate price of the outstanding securities on a daily basis.
As per Sebi, the current practice of pricing of corporate bonds varies for different classes of regulated entities and this impacts trading in the secondary market.
Accordingly, it has been recommended that a uniform pricing methodology be evolved, which provides prices on a daily basis and may be followed by all the regulated entities for valuing their corporate bond portfolio.
"Availability of such a uniform pricing framework, will ultimately lead to improvement in liquidity in the secondary market and thus will help in deepening the bond markets," Sebi said in a 15-page consultation paper.
The proposal has been drafted after consulting with representatives of various market participants and industry bodies such as Association of Mutual Funds in India (Amfi) and Fixed Income Money Markets and Derivatives Association(FIMMDA).
Besides, a stock of the current set of pricing methodologies was taken and as identified in HR Khan committee report, there are primarily two different methodologies, one administered by FIMMDA and the other by credit rating agencies.
Monetary policy, Union budget, government borrowing or auctions days and material statements on sovereign rating has been suggested as exceptional events .
It suggested that pricing agency would be a corporate entity which undertakes the daily pricing activities and is regulated by either of Sebi or RBI and and have minimum net worth of Rs 10 crore; will not price a bond, which it has issued itself; has not less than two employees, each with at least five years of relevant working experience in areas related to bond trading or bond pricing.
The agency should also maintain complete records of its operations related to bond pricing including audit trail of the process and activity for at least seven years.
Trade should mean all trades in securities valuing at least Rs 5 crore and all primary issuances of securities worth Rs 25 crore or more.
According to Sebi, the pricing provided by the different pricing agencies should be made available by them, on a daily basis, on their website for public at large.
However, to ensure that the commercial interest of the pricing agencies is preserved, such pricing data should be made available to public at large after a delay of one day.