To deepen the bond markets, regulator 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,” the Securities and Exchange Board of India (Sebi) said in a 15-page consultation paper. The regulator has sought public comments on the proposal till June 18 and final regulation will be put in place after taking into consideration views of all the stakeholders.
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.
Under the proposal, Sebi has focussed on issues like pricing agency, details of the methodology for undertaking pricing activity for bonds, approach of construction of spread matrix, governance framework and dissemination of the pricing related information. Sebi said that a single reference price would not be achieved by prescribing a principle or methodology, however it will generate daily closing prices which would be derived by following a consistent methodology for all the bonds in the market and would thus be more suitable and timely.
“The proposed methodology has been framed keeping in mind the fact that pricing illiquid debt securities is as much an art as science, hence making the process completely objective may neither be possible nor is desirable. Further, the idea is of providing uniformity to the process, while not taking away the judgement of a pricing agency,” Sebi noted.
The regulator has proposed to define exceptional events, that may lead to significant change in the yield of the debt securities. 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.