With an aim to develop and strengthen the corporate bond segment, regulator Securities and Exchange Board of India (Sebi) is contemplating the creation of a set of "market makers". These are entities that quote both a buy and a sell price of corporate bonds in order to create liquidity in the secondary market for such bonds.

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Also, the regulator is in the process of finalising the modalities for setting up a backstop facility for buying corporate bonds. In addition, Sebi is mulling to revamp the corporate bond database which is accessible to all investors, Sebi said in its annual report for 2020-21.

This database will make available more granular level information about debt covenants to investors in the debt market, it added. Being acutely conscious of the need for diversification of sources for financing the infrastructure needs of the country, Sebi has been focusing its attention on creating a vibrant secondary market for investment-grade corporate bonds.

The regulator has rolled out several measures in the recent past to facilitate liquidity in the secondary market. "One additional proposed step is aimed at creating a set of market makers who will be present in the market most of the time both on the buy-side as well as the sell-side of investment-grade corporate bonds," the regulator said.

Sebi said it is working out appropriate eligibility criteria for such market makers so as to ensure that financially sound entities with the requisite expertise are encouraged to participate. Simultaneously, the issues of funding the cost of inventory holding of these entities through various mechanisms -- by putting in place a back-to-back arrangement with the issuers, by creating a repo market for corporate bonds which can fund the inventory holding of the market makers, among others are also being examined.

With regard to the backstop facility, Sebi along with other stakeholders including the Ministry of Finance and the mutual fund industry is in the process of finalising the modalities to set up the facility. Based on a proposal from Sebi, an announcement in the Union Budget for 2021-22 was made with regard to the creation of a backstop facility that would purchase investment-grade debt securities both in stressed and normal times and help the development of the bond market.

The proposed backstop facility will function as an entity on standby and is envisaged to facilitate liquidity in the corporate bond market and to respond quickly to stress situations, similar to the mechanisms available in developed markets globally, Sebi noted. The facility will help in bringing liquidity and stability to the corporate debt market, address risk aversion during times of stress especially for securities rated below AAA, help in building the confidence of market participants in the secondary market and create liquidity options for investors at large.

Further, the regulator has mentioned about the pipeline of other proposals being worked on to increase confidence in the corporate bond market. In its report, Sebi said that asset management companies (AMCs) of mutual funds are in the process of setting up an entity for recognition as an LPCC (Limited Purpose Clearing Corporation) for clearing and settling repo transactions in corporate debt securities. The regulator has already issued the framework for LPCC that included the contribution of Rs 150 crore towards the share capital of the proposed LPCC by AMCs.

"It is expected that the entity formed by AMCs for repo clearing would be functional soon," Sebi said. With a view to further develop and deepen the corporate bond market, Sebi plans to revamp the existing rules relating to the issue and listing of debt securities by removing redundant provisions, easing the process of issue of debt securities and adding provisions on investor protection and transparency.

The regulator is also looking to enhance the continuous listing requirements for debt listed entities so as to improve the granularity of disclosures relating to financials, material events including credit events, corporate governance-related disclosures including related party transactions.