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Sebi is trying to create new avenues to deal with emerging issues in debt, say analysts.mint
Sebi is trying to create new avenues to deal with emerging issues in debt, say analysts.mint

Sebi move to allow defaulted debt trading a boost for MFs

  • This comes at a time when many issuers are struggling to honour their debt obligations in view of the covid-19 related financial hardships
  • At present, exchanges suspend trading/reporting of trades on debt securities before the redemption or maturity date

The market regulator’s new framework, which facilitates trading in defaulted debt, is likely to create a distressed bond market in India, industry experts said, potentially helping asset management companies, among others, to repay investors .

While there is a market for stressed bank loans in India, where several large global distressed asset funds and asset reconstruction companies (ARCs) are active, industry experts maintain that the move to allow trading of ‘D’ category debt papers and bonds will allow bond holders such as mutual funds to exit exposures faster.

“This is an attempt to create liquidity for securities that at present would be rendered illiquid in case of a default. All in all, it seems that this new framework will give rise to a distressed bond market, where more experienced hands could come and buy these bonds. Sebi is trying to create new avenues to deal with emerging issues in debt, distressed assets and ensure that they do not face legal impediments," said Ajay Shaw, partner, DSK Legal.

This comes at a time when many issuers are struggling to honour their debt obligations in view of the covid-19 related financial hardships.

At present, exchanges suspend trading/reporting of trades on debt securities before the redemption or maturity date. Depositories impose restriction on off-market transfers that restricts tradability on and after the redemption date. This leaves little room for bond holders such as MFs to sell these bonds.

A senior executive at a distressed asset fund confirmed that the move will be beneficial as it will lead to development of the stressed debt market in India.

“Since there is already a way of trading stressed loans, it is time we have something similar for stressed bonds as well. This facility is available in other countries at the moment and I see buyers like asset reconstruction companies (ARCs) and distressed asset funds showing interest in these bonds," the executive said on condition of anonymity.

According to Sudip Mahapatra, partner at law firm S&R Associates, distressed debt funds, hedge funds and asset reconstruction companies will be the primary buyers of these securities.

A debt fund manager at a mid-sized fund house said the framework lays the foundation of a new market, though it would take some time to develop. Debt funds, which have side-pocketed assets to the tune of 4,000 crore, can specially make use of this framework, he said. “Perhaps not all ARCs, or distressed funds, have an appetite for these bonds currently, but this lays the foundation for more experienced hands to get into the space of defaulting bond and ensure recoveries," he said on condition of anonymity.

According to the new norms effective 1 July, within two working days from the date of intimation of default, the depositories in coordination with stock exchanges shall update the ISIN (code for stocks and debt securities) master file and lift restrictions on transactions in such debt securities.

Nirmal Gangwal, founder and chairman of Brescon & Allied Partners LLP, a debt restructuring advisory firm, said certain things need to change before this can become effective.

“If a debenture goes for a default in India, there are no takers for it as our market is not mature and liquid enough. Secondly, the security structure and the enforcement of security is very convoluted in India. Whether it is the NCLT (national company law tribunal) or the DRT (debt recovery tribunal), the investor is at the mercy of the system. This will take some time and until the security enforcement is simplified, no investor would be willing to buy these bonds," he said.

jayshree.pyasi@livemint.com

Swaraj Singh Dhanjal contributed to this story.

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