May 22, 2021, 10:23 p.m.
That the country’s capital market lacks depth is an undisputed reality. Trading a significant number of bonds in the secondary market on a daily basis is seen as one way to add depth to an otherwise unpredictable market. The current senior executives of the Securities and Exchange Commission (BSEC) since its takeover are working to create a vibrant bond market that would provide companies with a viable source of long-term funds and investors with a rewarding investment opportunity.
The government has dominated a very small bond market for a long time. Its outstanding bonds are worth more than $ 17 billion, while two corporate bonds are valued at only $ 0.03 billion. Only private bonds are traded on the secondary market. Corporate bonds, mainly issued by banks, are traded between industry players. The securities regulator has now taken a look at these bonds to offer a bit of dynamism and diversified investment opportunities.
At its meeting last week, the Commission decided that the issuer of a perpetual bond, which is a fixed income security with no maturity date, will have to offload 10% of the instrument through a public offering. In addition to general investors, certain other market participants, including asset management companies and mutual funds, must invest up to 6% in each of the listed debt securities.
The intention of the securities regulator to help create a vibrant stock market is well appreciated, but a few relevant issues should not miss its attention. What remains important is the issuance of more corporate bonds and their secondary market trading to help provide businesses with an alternative source of funding to banks. The BSEC has so far authorized up to eleven banks to issue perpetual bonds valued at a substantial amount. These are additional level 1 bonds (AT1) issued to raise additional level 1 capital required under BASEL III.
It is however interesting to note here that perpetual bonds, although they offer attractive interest rates compared to term deposits, carry certain risks which include credit risk, interest rate risk and risk. liquidity. Usually, perpetual bonds are issued by high interest corporations when they are in financial difficulty.
The issuers of these bonds have the right to write off the principal in times of severe financial difficulty and pay lower than promised interest rates in the event of a financial downturn. Holders, on occasion, may have to liquidate their bonds at below par prices in the secondary market due to low demand for these bonds. There was a perpetual bond debacle in India last year. Investors, including institutions, lost funds worth around Rs. 85 billion in a perpetual bond issued by Yes Bank. Several cases are currently pending in Indian courts on this issue.
In these circumstances, the securities regulator, before authorizing the listing of perpetual corporate bonds, must make investors aware of all the risks involved. More importantly, as happens with initial public offerings (IPOs), issuers in their prospectuses must make all relevant financial information available for consideration by potential investors.