December 7, 2020
Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.
In yet another welcome step to complete the set of instruments, mechanisms and regulations required for a corporate bond market to thrive, the Securities and Exchange Board of India (Sebi) is actively seeking to revise the rules to allow ‘naked warrants’ for institutional investors via the Qualified Institutional Placement (QIP) route, and has put out a discussion paper on the issue.
A warrant is an option issued by a company that gives an investor a right to subscribe to equity shares or debt securities at a predetermined price, and at a predetermined time. Warrants are issued along with a security such as a bond. Unlike a normal warrant, a naked warrant is not attached to a fresh issue of stocks or bonds. In the mature markets, such warrants are actively traded on the bourses. Warrants differ from call options essentially in the extended time available to exercise the option to buy the security in question. The new move makes ample sense as we seek to attract longterm funds for big-ticket infrastructure projects in the pipeline. It would make QIP an attractive route and enable larger participation by qualified institutional buyers (QIBs), especially foreign portfolio investors (PFIs).
In parallel, we need a favourable ecosystem to garner longterm term funds from pension funds and insurance companies, to coagulate infrastructural funding. Pension and insurance assets under management (AUM) in India now easily exceed `55 lakh crore, and the way forward is to boost long-term funds flow for long-gestation projects. Hence the pressing need to policy-induce an active debt market for corporate bonds, and also to step up provision for risk management instruments to duly hedge credit, interest-rate and currency risks. Sebi is doing its bit.