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SEBI urges peers to rethink bond market curbs

Context:

SEBI has urged the RBI, IRDAI and PFRDA to relax investment restrictions.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy, Capital Market)

Dimensions of the Article:

  1. About SEBI’s recent requests to its peers
  2. The Need to boost Bond markets: inadequacy of current provisions
  3. About SEBI

About SEBI’s recent requests to its peers

  • With banks struggling to provide long-term capital, SEBI sought an urgent rethink on the investment norms specified by SEBI’s financial sector regulator peers (like RBI, IRDAI) for participation in the corporate bond market. This would facilitate a quicker economic recovery according to SEBI.
  • SEBI is calling for freer flow of funds from provident and pension funds, insurance firms and banks into corporate and infrastructure debt. SEBI wants to make the bond market a more functional source of finance for industry and infrastructure projects, and for this it has asked the RBI, IRDAI and PFRDA to relax investment restrictions.
  • Listing out instances of restrictions that limit insurers’ exposure to private debt and infrastructure financing, it has been indicated that the recent permission for pension funds to invest up to 5% of their corpus in Infrastructure investment trusts (INVITs) was unlikely to work.

The Need to boost Bond markets: inadequacy of current provisions

  • The RBI’s partial credit guarantee enhancement norms to help such projects (infrastructure projects which are rated lower) get a better rating faces practical challenges, while the Centre’s plan to set up a Credit Enhancement Guarantee Corporation, announced in the Union Budget 2019, is yet to take off.
  • RBI’s partial credit guarantee norms cap the extent to which a bank can provide credit enhancement to 20% of the issue size. This means it would need at least three banks to get 50% credit enhancement (needed to move from, say, a ‘BBB’ rating to ‘AA+’ needed by insurers and PFs) and it has been difficult to get three banks to provide this for a single project.
  • In the RBI’s Liquidity Adjustment Facility (LAF), corporate bonds are never accepted as collaterals and corporate bonds are not even enshrined in the statutory liquidity ratio (SLR). This needs to change as relying on banks as an exclusive funding source is not going to be a positive for the economy and more steps are needed for the bond market to develop.

About SEBI

  • The Securities and Exchange Board of India (SEBI) is the regulator of the securities and commodity market in India owned by the Government of India.
  • SEBI was established in 1988 and given Statutory Powers on 30 January 1992 through the SEBI Act, 1992.
  • SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-executive.
    1. It drafts regulations in its legislative capacity.
    2. It conducts investigation and enforcement action in its executive function.
    3. It passes rulings and orders in its judicial capacity.
  • Though this makes it very powerful, there is an appeal process to create accountability.
  • There is a Securities Appellate Tribunal which is a three-member tribunal.
  • A second appeal lies directly to the Supreme Court.
  • The SEBI is managed by its members, which consists of the following:
    1. The chairman is nominated by the Union Government of India.
    2. Two members, i.e., Officers from the Union Finance Ministry.
    3. One member from the Reserve Bank of India.
    4. The remaining five members are nominated by the Union Government of India, out of them at least three shall be whole-time members.
  • SEBI has to be responsive to the needs of three groups, which constitute the market:
    • issuers of securities
    • investors
    • market intermediaries
  • SEBI has been vested with the following powers:
    1. to approve by−laws of Securities exchanges.
    2. to require the Securities exchange to amend their by−laws.
    3. inspect the books of accounts and call for periodical returns from recognised Securities exchanges.
    4. inspect the books of accounts of financial intermediaries.
    5. compel certain companies to list their shares in one or more Securities exchanges.
    6. registration of Brokers and sub-brokers

-Source: The Hindu

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September 2022
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