In what is expected to breathe life back into the currently illiquid Rs 160,000 crore (Rs 1,600 billion) unlisted corporate bond market, the Reserve Bank of India is likely to impose its guidelines on banks subscribing only to listed bonds, only on future issues.

The RBI is also likely to give banks a comfortable transition period to reduce their exposure to unlisted bonds to less than 20 per cent of their bond portfolio. As a result, banks could return to the debt market, merchant banking sources said.

The RBI and the Securities and Exchange Board of India have initiated consultations with market players to harmonise their respective guidelines.

Corporates, meanwhile, had sought more time to list their existing bonds on bourses, the sources said.

Sebi had issued a circular making it mandatory for issuers to list all their bonds and debentures.

Following this, the National Stock Exchange banned its broker-members from dealing in unlisted bonds.

The RBI, too, issued draft guidelines asking banks and financial institutions to pare their exposure to unlisted bonds to 20 per cent of their bond portfolio. These measures brought the unlisted bond market to a standstill.

Unlisted bonds account for about 60 per cent of banks' bond portfolio, and almost 80 per cent of the total bonds in the market. This lot was rendered illiquid because brokers were not able to issue contract notes on unlisted bond deals.

Sebi has not yet stated whether it will follow the central bank's lead and make its diktat on bonds prospective.

But NSE brokers, led by the Fixed Income Brokers' Association, had approached Sebi asking for clarifications on its circular.

According to sources, Sebi officials told them that the circular was for prospective issues and, therefore, there was no need for a clarification.

However, brokers are expecting Sebi to make its stand official, to avoid ambiguity later.

The total outstanding stock of bonds is estimated to be around Rs 200,000 crore (Rs 2,000 billion). Of this, Rs 50,000-60,000 crore (Rs 500-600 billion) worth of paper has been issued by companies.

The rest is a mixture of bonds issued by financial institutions, banks, state governments and central public sector undertakings.

Bond norms

• The RBI may give banks a comfortable transition period to reduce their exposure to unlisted bonds to less than 20% of their bond portfolio.
• The RBI and Sebi have initiated consultations with market players to harmonise their respective guidelines.
• Sebi had issued a circular making it mandatory for issuers to list all their bonds and debentures.
• Following this, the NSE banned its broker-members from dealing in unlisted bonds.
• These measures brought the unlisted bond market to a standstill.