The Securities and Exchange Board of India (Sebi) on Wednesday said mutual funds will undertake at least 10% of their secondary markets trade in corporate bonds through the Request for Quote (RFQ) platform of stock exchanges from 1 October.
This is aimed at boosting the liquidity on the exchanges for secondary market bond transactions. The regulator also mandated mutual funds to disclose their portfolio every 15 days. As per current norms, funds disclose their month-end portfolios with only a few funds issuing half-monthly portfolios.
Additionally, the markets regulator also mandated disclosure of yields of the underlying instrument.
Currently, mutual fund schemes typically disclose the yield of the entire portfolio and not of individual securities.
The disclosure of yields of individual bonds will increase transparency for investors who are stuck in schemes that have taken riskier bets of investing in lower-rated papers.
The secondary trades to be done on the RFQ platform will not include inter-scheme transfers. These secondary transactions over RFQ platform would ensure negotiated deals across securities over an electronic platform.
Sebi said the move will enhance transparency and disclosure pertaining to debt schemes and investments by mutual funds in corporate bonds and commercial papers. This is based on recommendations of Mutual Fund Advisory Committee (MFAC).
At the capital markets summit organized by an industry body on Wednesday, Sebi chairman Ajay Tyagi said that this move will also improve price discovery in the bond market.
“Trading in corporate bonds is largely OTC (over the counter), which is then reported to the exchanges. To replicate this OTC nature but with better price discovery and transparency through electronic mode, Sebi has recently introduced RFQ platforms. We have decided to mandate mutual funds to use this platform in a phased manner. Use of this platform by other institutional investors as well will result in better transparency and price discovery in the bond market,” he said.
According to Tyagi, mutual funds were the worst hit by the liquidity issues brought about by covid-19.
Sebi, in its circular on Wednesday, also said that all transactions in corporate bonds and commercial papers wherein a mutual fund is on both sides of the trade will be executed through the RFQ platform of stock exchanges in one-to-one mode, and any transaction entered into by a mutual fund in corporate bonds in one-to-many mode and gets executed with another mutual fund shall also be counted for the 10% requirement.