SEBI issues guidelines for creation of separate debt segment on bourses

The Securities and Exchange Board of India (SEBI) has issued guidelines for setting up a separate debt segment on the stock markets, thereby allowing financial sector intermediaries such as banks and pension funds to execute trades.

The debt segment on the stock exchanges would provide separate trading, reporting, membership, clearing and settlement rules to deal in "debt securities", helping to boost the country's corporate debt market, the market regulator said.

The SEBI board at its meeting last week decided to create a separate debt segment on the stock exchanges for trading in debt securities like debentures, bonds, deposits, notes and commercial paper.

''The debt segment shall offer separate trading, clearing, settlement, reporting facilities and membership to deal in "debt securities" as defined in Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008,'' SEBI said in a release.

The provisos include:

The debt segment should list all the securities and debt instruments and offer electronic, screen-based trading providing for order matching, request for quote, negotiated trades etc.

The trading facility may be provided using exchange network, including using access methods such as internet trading, mobile trading or any other methods specified by SEBI.

And, within the debt segment, there should be separate platforms for the retail and institutional investors, SEBI noted.

The retail market should offer facility for listing of and trading in publicly-issued debt instruments allowing participation by registered trading members on their own account or for execution of orders placed by their clients.

The institutional market segment should offer a market for non-publicly-issued debt instruments with a market lot size of minimum Rs10 million.

In addition to institutional investors, direct market access (DMA) facility should be extended to other investors to participate in institutional market of debt segment.

SEBI has prescribed a 9 to 3 trading session, in order to align trading in private debt with trading in government securities issued by the Reserve Bank of India (RBI).

"Institutions such as scheduled commercial banks, primary dealers, pension funds, provident funds, insurance companies, mutual funds... can trade on the debt segment either as clients of registered trading members or directly as trading member on proprietary basis only.

"Such institutions desirous of trading on own account only shall be given trading membership under SEBI (Stock Broker and Sub-Broker) Regulations, 1992 as proprietary trading member," SEBI said in a circular.

The market for debt securities differs from equity markets in several ways such as risk, returns, liquidity, type of participants and method of trading, SEBI noted.

 While "publicly issued debt securities are listed, traded and settled in a manner similar to equity, privately placed debt is usually traded between institutional investors on 'over the counter' (OTC) basis. Such OTC transactions are mandatorily reported on reporting platforms at FIMMDA, BSE and NSE," SEBI said.

SEBI has directed stock exchange, existing or new, willing to set up debt segment to make an application with the regulator providing operational, regulatory and any other necessary details.

SEBI has prescribed a minimum capital deposit of Rs50 lakh for a stockbroker to trade on the debt segment.

"With the view to infuse liquidity in the market, market makers shall be permitted in the debt segment. Market making may be provided by merchant bankers, issuers through brokers or any other entity as may be specified," it said.