These latest guidelines provide an issuer with flexibility on the quantum of their buyback and what kind of investors they want to buy it back from. Sebi noted that issuers can give investors ‘put options’ that are exercisable on pre-specified dates or intervals.
A put option refers to a facility provided by bond issuers for holders of bonds to sell them back at a predetermined price before maturity. Entities issuing debt securities which are proposed to be listed may at their discretion provide the liquidity window facility at the time of issuance of such instruments.
However, the complicated process to issue a bond with such a liquidity window may not encourage bond sellers, especially the lower-rated issuers. “Many unlisted entities are generally concerned about the compliance and challenges associated with bond listings. The introduction of buybacks adds further complexity, with additional requirements such as tracking, reporting, and board-level monitoring committees,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.
“This mechanism is better-suited for lower-rated issuers seeking funds to meet credit demand, if they opt for a bond like this. These issuers typically offer higher coupon rates, which are more attractive to investors, especially in cases where the bonds may be illiquid, providing a valuable exit option. However, this mechanism may not be as effective for higher-rated AAA companies, as retail investors tend to be less inclined to invest in bonds with lower yields,” Srinivasan said.
Along with other challenges like planning your cash flow, and a mismatch that a buyback would bring, the tedious process also comes without motivators for issuers to opt for the ‘put option’.”If an issuer believes that the interest rate cycle is easing and he will get cheaper financing in the future he would opt to buy back his expensive bonds. Or if an issuer already has nine outstanding ISINs and needs more capital is another reason why one may opt for this,” said Nikhil Aggarwal, founder of Grip Invest, an alternate fixed income online investment platform.ISIN, or international securities identification number, is a 12-digit alphanumeric code that identifies a corporate bond or other security. An issuer can have nine active ISINs at a time. As an online bond platform provider (OBPP), Grip Invest will now focus on working with an issuer on introducing the ‘put option’, that the platform will buy back the bond and sell it ahead via their platform. “Within 45 days, the issuer can sell that excess paper, including in partnership with OBPPs, so we will act as a facilitator for this from the issuers perspective,” Aggarwal said.