Mint Explainer| How Sebi’s changes to bonds could help NBFCs
The Securities and Exchange Board of India (Sebi), in a circular issued on 7 October, has revised the framework governing the number of International Securities Identification Numbers (ISINs) that an issuer can have maturing in a financial year.
The move follows representations from market participants who said that existing restrictions were affecting funding flexibility and increasing refinancing risks, particularly for non-banking financial companies (NBFCs). Mint explains the changes and whether they would substantially help NBFCs.
What are the proposed changes?
Sebi has increased the maximum number of ISINs that may mature in a financial year for an issuer of debt securities from 14 to 17. An additional six ISINs will continue to be available for capital gains tax bonds issued on a private placement basis by authorized issuers under Section 54EC of the Income Tax Act, 1961.
An ISIN is a unique 12-character code assigned to a security, such as a bond or share, to identify it for trading, settlement and record-keeping.
Of the 17 ISINs, up to 12 can be used for plain-vanilla debt securities, including both secured and unsecured bonds. The earlier framework permitted nine such ISINs, with three additional ISINs allowed once the outstanding amount reached ₹15,000 crore. Under the revised framework, issuers can obtain one additional ISIN for every further ₹3,000 crore of outstanding debt beyond ₹15,000 crore.
A maximum of five ISINs are set aside for structured debt securities, market-linked debt securities, floating-rate bonds (FRBs), zero-coupon bonds (ZCBs) and Tier II bonds. If an issuer issues only instruments in these categories, the overall limit is 12 ISINs per financial year. Existing FRB, ZCB and Tier II bonds issued before the circular will be grandfathered and issuers cannot add fresh issuances in the category for a particular year if the existing count is five or more.
Why were the changes needed?
The earlier cap on ISINs could force issuers to concentrate repayments within a limited number of maturity windows, creating a bunching of liabilities. This is especially challenging for NBFCs, which need to match their borrowing schedules with the cash flows generated by their lending portfolios. When substantial repayments fall due around the same time, companies may face liquidity pressures and greater refinancing risk, creating difficulties in asset-liability management.
The issue also concerns investor preferences. Bond investors often have specific maturity requirements and may prefer fresh issuances over participating in the reissuance of an existing bond. Refinancing an instrument at its original coupon can become difficult when market rates have changed. For instance, a bond issued two years ago at a coupon of 6.5% may need to be refinanced when current rates are closer to 8%. Such differences can make refinancing difficult for both issuers and investors.
The circular, which was preceded by a consultation paper in August, said that large corporate issuers rated AA or higher, with outstanding long-term borrowings of at least ₹1,000 crore, must raise at least 25% of their qualified borrowings through debt securities. ISIN restrictions could hinder compliance with this requirement. The regulator's review followed representations from market participants, recommendations from a working group on online bond platforms and discussions in its Corporate Bonds and Securitization Advisory Committee (CBSAC).
Which kind of debt instruments are exempted, and why?
The revised framework excludes government-serviced and Extra Budgetary Resources bonds, as well as ESG debt securities, from the applicable ISIN limits. The exemptions take into consideration the different purposes served by these instruments rather than treating every bond issuance as part of the same pool.
Public sector undertakings frequently issue EBR bonds on behalf of the government. Counting these bonds towards the prescribed limits can reduce the number of ISINs available for their own financing requirements. Excluding them, therefore, gives such issuers greater flexibility to raise funds without their government-related issuances consuming the capacity needed for other borrowing.
The exemption for ESG debt securities is aimed at encouraging fundraising for environmental, social and sustainability-related objectives. By removing these instruments from the ISIN calculation, Sebi seeks to avoid making issuers choose between financing sustainability projects and staying within the limits applicable to other debt securities.
The framework also protects certain existing instruments from unintended violations. Outstanding FRBs, ZCBs and Tier II bonds issued before the circular are grandfathered. However, if these old instruments already account for five or more maturities in a financial year, the issuer cannot issue additional bonds under the relevant category for that year until the number falls below five.
How will the changes affect NBFCs?
The changes should give NBFCs greater flexibility to stagger repayments and align their borrowing schedules with the monthly cash flows from their loan portfolios. Increasing the allowance for plain-vanilla debt securities from 9 to 12 ISINs addresses the structural mismatch between a limited number of maturity slots and the need to distribute repayments across the financial calendar.
For lenders that depend heavily on market borrowings, this could reduce the risk of having to refinance large amounts of debt within a short period. More maturity options can also help companies tap investors whose investment preferences differ, instead of relying on a narrow set of instruments or repeatedly approaching the same pool of bondholders.
The revised framework may be particularly useful when market interest rates change between the original issuance and the refinancing date. Greater flexibility to issue fresh securities with different maturity dates can help NBFCs reach investors willing to subscribe at prevailing market rates. The benefits could extend to both large and smaller NBFCs, although the actual impact will depend on their funding mix, credit ratings, investor demand and borrowing costs.
NBFCs contributed 15.2% of the total outstanding corporate bonds at end-September of ₹61.52 trillion. Out of this, NBFCs raised ₹8.51 trillion in listed debt and ₹83,971.28 crore in unlisted debt.