SEBI Seeks Views On Disclosure Framework For Municipal Bonds

Market regulator Securities and Exchange Board of India (SEBI) on Monday sought views from stakeholders on enhanced disclosure requirements for issuance of municipal bonds and non-convertible redeemable preference shares as the regulator looks to help retail investors take informed decisions. The proposed disclosure framework for these instruments include having a 'Risk-o-Meter' that would better explain the low to high-risk credit ratings given to them.

Earlier this month, SEBI floated a consultation paper on enhanced disclosure framework for public issuance of non-convertible bonds. Now, municipal bonds, also known as muni bonds, and non-convertible redeemable preference shares have been included.

Under the proposal, restrictions on investment amount has been suggested in case of retail investor and allocation of securities to such investors in base issue size. Besides, SEBI has suggested removing the minimum credit rating requirement. Issuing the draft papers, SEBI has proposed to enhance disclosure requirements for issuances of such securities and simultaneously introduce Risk-o-Meter.

SEBI has sought comments from public till January 29 on the proposals and final regulation would be put in place after taking into consideration views of all the stakeholders.

Since rating is an important factor to make an investment decision, SEBI said that an easier and better alternative should be introduced the rating in a pictograph. The pictorial representation may be similar to a 'Risk-o-meter', like a speedometer in a car, which was introduced in the offer documents of mutual funds. It has been proposed that rating to be displayed on the 'Risk-o-meter' should be the latest rating provided by rating agency. Modifiers such as '+' (plus) or '-' (minus) may be included, if applicable, in the meter. It should be exhibited prominently on the front page of the offer document.

Besides, an asterisk mark should be put on 'Risk-o-meter' and an explanation of all the credit ratings provided by the credit rating agency should be printed on the back side of the front page in tabular format so that the investors can understand the relevance of the credit rating of that issue vis-a-vis other ratings provided by the credit rating agency.

Also, SEBI has proposed a ceiling on the investment by a retail investor. In case of secured non-convertible debentures (NCDs), the regulator has suggested that allocation in the issue to retail investors should not be more than 10 percent of the base issue size. As unsecured NCDs contain higher risk than secured ones. For unsecured NCDs, the allocation to retail investor should not be more than 5 percent of the base issue size.

According to SEBI, both NCRPS (Non-Convertible Redeemable Preference Shares) Regulations and Municipal Regulations specify a minimum credit rating to be in place before public issuance of debt securities.

NCRPS Regulations specify that the minimum credit rating shall be 'AA-', while municipal norms say that only investment grade debt securities can be issued by municipalities.