Uncertainties over cash flows and operational hurdles discourage issuers from using the liquidity window facility, launched over a year ago to boost the secondary market liquidity, said experts.
Securities and Exchange Board of India (Sebi) Chairman Tuhin Kanta Pandey at an event last week highlighted the need for more issuers to opt for this facility. “Liquidity window facility was introduced to allow investors to sell bonds back to issuers on maturity. We need more takers, more issuers to lean on this particular facility.”
Sebi put option offers early exit in bonds
Sebi introduced the facility in 2024, which allows investors to sell their bonds back to the issuer before maturity through a put option.
The move was aimed at addressing one of the most pressing issues of the corporate bond market – weak secondary market liquidity, especially for retail participants. The window remains open for three business days and can run on either a monthly or quarterly schedule.
“The liquidity window does not suit issuers because of two reasons. Firstly, issuers lack clarity on the amount of funds they would need to keep available for bond buybacks, creating an unpredictability in cash outflows. Secondly, issuers are unlikely to be always comfortable with prices at which bondholders may choose to sell,” said Mataprasad Pandey, vice president, Arete Capital Service.
Debt securities will be valued on a T-1 basis, where T refers to the first day of the liquidity window, as per Sebi guidelines. The issuer shall ensure that the amount payable to investor should not be at a discount of more than 100 basis points on the valuation arrived plus the accrued interest.
Liquidity window seen as operationally complex
Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincap LLP, highlighted the operational complexity of the liquidity window. “It demands intensive compliances, including oversight by board- or committee-level bodies, appointing valuation agencies, designating exchanges, and detailed reporting throughout the bond’s tenure — turning it into perpetual governance.”
He said it is further compounded by the treatment of bonds received pursuant to the put option. “Any bond resold by the issuer is added to the aggregate liquidity window limit, thereby replenishing past usage. This creates fluctuating exposure that demands tracking of utilisation and replenishment unless bonds are fully extinguished.”
Issuers have to allocate at least 10% of the final issue size for these buybacks. Issuers are permitted to sell such bonds tendered through the window on the exchanges, request for quote, online bond platforms or extinguish them within 45 days of the closure of the window or before the relevant quarter-end.
According to Paras K Parekh, partner at CMS INDUSLAW, the main issue is the nature of the market. “Institutional players drive it and hold long term. Therefore, retail participation is not an issuer’s priority. Requirements like buyback reservations, pricing restrictions, and extra compliances deter issuers from this facility.”