New Framework Targets Liquidity in Lower-Rated Corporate Bonds

The tokenised corporate bond pilot launched on September 10 has raised approximately ₹1,025 crore across three issuances. This activity signals a shift from theoretical discussion to practical market implementation. The underlying technology relies on distributed ledgers and central bank digital currencies to streamline settlement.

However, the pilot does not solve the primary friction in the market: post-issuance liquidity. Investors in AA, A+, and A-rated bonds face uncertainty regarding who will buy their securities before maturity. This lack of a reliable exit route forces investors to demand higher premiums. Consequently, issuers face higher borrowing costs and a narrower investor base.

Mandatory Market Makers for New Issues

A proposed regulatory framework requires a professional market maker for every new corporate bond issue of ₹200 crore or more rated AA and below. A Sebi-registered merchant banker would be designated for this role. The appointment would last for three years or until the bond matures, whichever comes first.

The market maker must provide two-way quotes within specific spread limits. The maximum spread is capped at 75 basis points for AA-rated bonds. For lower-rated securities, the cap extends to 150 basis points. These limits reflect the higher risk and lower inherent liquidity of the instruments.

Compensation for this service is paid by the issuer through a transparent fee. This arrangement is not a guarantee of credit quality or protection against losses. It is a contractual commitment to maintain a functioning secondary trading venue.

Economic Benefits for Issuers and Investors

Integrating market-making costs into the issuance economics offers distinct advantages. Investors know at the point of subscription that a designated liquidity provider exists. Issuers gain a predictable cost structure for their capital raising. This transparency allows for more accurate pricing of risk.

A deeper secondary market can reduce the overall cost of capital for companies with strong credit profiles but lower ratings. Currently, these firms pay excessive premiums due to liquidity fears. Improving tradability narrows the yield spread between higher and lower-rated bonds.

Supporting Long-Term Economic Financing

India's infrastructure, manufacturing, and real estate sectors require substantial long-term capital. Banks cannot and should not finance all these projects alone. A diversified corporate bond market is essential to meet these financing needs.

The current market is heavily skewed toward AAA and quasi-sovereign issuers. This concentration limits access to funding for a broader range of creditworthy companies. Regulatory intervention aims to broaden the credit spectrum to include AA, A, and BBB rated entities.