Sebi looks to expand QIB definition; universities, urban local bodies may be able to invest in debt market

The consultation paper stated, expanding the definition of QIBs for investing into debt securities will serve to broaden the types, class and categories of investors

Higher educational institutions, urban local bodies and Micro Units Development & Refinance Agency (MUDRA) may be able to invest in debt securities as Qualified Institutional Buyer (QIB), if the consultation paper put out by the market regulator goes through.

These institutions may need to self-certify that they have the expertise to evaluate the investments and may need to hire outside experts to help with the evaluation, though the entity will be responsible for the investment.

The Securities and Exchange Board of India (SEBI) has invited suggestions for a consultation paper to expand the definition of qualified institutional buyer (QIB) in the debt market, to bring in more categories of investors and lower the cost of fund-raising.

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The paper stated, “QIBs are major participants in public issues of debt securities. While the Corporate Bond market has been dominated with the private placements (almost 98 percent of the total issuances), QIBs subscribed around 94 percent of the total funds raised through issuance of Corporate Bonds by the way of private placement on the Electronic Book Provider Platform (EBP) of the Stock Exchanges – a price discovery mechanism for debt private placements.”

It added, “Thus, QIBs have been serving as an important source of funding for issuers seeking to raise funds through private placement of listed debt securities.”

Besides universities and refinancing agencies such as MUDRA, entities such as include multistate cooperatives; non-banking financial companies, pension funds; refinancing agencies such as MUDRA; reinsurance companies; regulatory authorities under the control of the Central Government; and small finance banks regulated by the Reserve Bank of India could qualify as QIBs.

Currently QIBs are defined under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, include a mutual fund, venture capital fund, alternative investment fund, foreign portfolio investor with exceptions, a public finance institution, a scheduled commercial bank, a state industrial development corporation, an insurance company, a provident fund, a pension fund and insurance funds managed by army, navy or air force.

The consultation paper stated, expanding the definition of QIBs for investing into debt securities will serve to broaden the types, class and categories of investors, enhance access to investment opportunities within the primary issuance at EBP and help in leveling the playing field within the bond market.”

It added, ”Such a measure could also lead to a potential increase in the supply of funds to the issuers of debt securities (including for issuers of non-equity regulatory capital), aid better price discovery, which in turn could lower the cost of fundraising and promote capital formation.”