SEBI plans to offer tax incentives

In a move to widen the corporate bond market, SEBI plans to attract
market makers by offering them tax incentives. Even the earlier provision
for filing shelf prospectus may be reintroduced to encourage more companies
to issue bonds, said a senior SEBI official involved with the process.

SEBI may reintroduce the system of shelf prospectus, which helps companies
to do away with a fresh filing for every issuance.

The RH Patil committee report on corporate bonds had suggested that bringing
in market makers, mainly banks and bond houses (or primary dealers), will
create a demand for bonds and deepen the market. The capital market regulator is keen to introduce a system where banks, bond houses, mutual
funds and insurance companies will buy and sell corporate bonds through a
faceless, order-matching electronic platform.

Several international players like ICAP, Reuters and Bloomberg have shown
interest in setting up platforms for screen-based trading. "The challenge
before us is to create regulations wherein these platforms are not perceived
as exchanges," said the SEBI official who added that platforms should be
identified as a system for bilateral settlement of trades.

SEBI is currently working on measures to draw companies to the corporate
bond market. The system of shelf prospectus will be an important step.
Introduced four years ago, it enabled companies to do away with a fresh
filing for every issuance.

SEBI had recently authorised the Fixed Income, Money Markets and Derivatives
Association (Fimmda) to set up a platform to report secondary transactions
in corporate bonds. It has also asked Fimmda to aggregate data placed on its
own platform, along with that reported on BSE and NSE, where corporate bonds
are currently traded.

Meanwhile, primary dealers (PDs), through Fimmda, have suggested that instead of fund raising through private placement of bonds, companies can
get a finer price if bond issuance happens through an auction-based mechanism. Just like gilt auctions, PDs would be allowed to bid in the
allotment.

Recently, the State Bank of Travancore and Vijaya Bank hit the bond market. "While the bonds issued by SBT had a rating only one level higher
than Vijaya Bank, there was a difference of 30 basis points in their coupons. Typically, the differential between such issues should be 5-10
basis points, but it rose to 30 bps in this case," said an official with a
PD.

In case of private placements, pricing is done by merchant bankers who
bargain with issuing banks for commissions. "As against this, an auction-
based procedure would give way for pricing determined by competitive forces," he said.