Description

NSE issues operational guidelines for implementing the Liquidity Window Facility that allows investors to exercise put options on debt securities through stock exchange mechanism.

Summary

NSE has issued comprehensive operational guidelines for the Liquidity Window Facility (LWF) that enables investors to exercise put options on debt securities through the stock exchange mechanism. This facility is implemented in accordance with SEBI circular SEBI/HO/DDHS/DDHS-PoD-1/P/CIR/2024/141 dated October 16, 2024. The guidelines cover the entire process including bid placement, security blocking, allocation methodology, and settlement procedures for debt securities with liquidity window provisions.

Key Points

  • Liquidity Window available on stock exchanges with nationwide trading terminals as a separate facility
  • Issuers can choose one or more stock exchanges, with one designated as the Designated Stock Exchange (DSE)
  • Trading hours: 9:00 AM to 5:00 PM, with additional 30 minutes on last day for custodian confirmation
  • Mandatory early pay-in (EPI) through block mechanism required before placing bids
  • Securities must be blocked in depository system prior to bid placement
  • Investors exercise put option rights through stock brokers or OBPP during normal trading hours
  • Cumulative quantity of debt securities for which put option exercised is displayed online at specific intervals
  • SEBI-debarred investors are restricted from participating
  • Allocation done by RTA on T+2 working day (T = first day of liquidity window)
  • Allocation basis: full value or proportionate in case of oversubscription
  • All eligible investors treated at par for allocation regardless of category

Regulatory Changes

This circular implements the framework introduced by SEBI circular SEBI/HO/DDHS/DDHS-PoD-1/P/CIR/2024/141 dated October 16, 2024, which mandates that put option exercise facility for debt securities must be made available through stock exchange mechanism. The operational guidelines establish NSE’s specific procedures for implementing this regulatory requirement.

Compliance Requirements

For Issuers:

  • Select one or more stock exchanges providing liquidity window facility
  • Declare one exchange as Designated Stock Exchange (DSE)
  • Appoint Registrar and Transfer Agent (RTA) for allocation purposes
  • Appoint clearing member for settlement purposes

For Investors:

  • Exercise put option rights only through registered stock brokers or OBPP
  • Complete mandatory early pay-in (EPI) through block mechanism before placing bids
  • Ensure securities are available and not locked-in before tendering
  • Provide PAN, beneficiary account details and bank details including IFSC code

For Stock Brokers:

  • Facilitate investor bid placement during normal trading hours
  • Ensure early pay-in blocking is completed in depository system
  • Use settlement type and number specified by Clearing Corporations

For Depositories:

  • Mark early pay-in (EPI) through block mechanism in Beneficial Owner’s demat account
  • Provide blocked security details to Clearing Corporations
  • Keep securities blocked until settlement date unless bid is withdrawn/modified
  • Release securities only after confirmation of bid revision from CC
  • Provide facility to CC to cancel EPI
  • Support blocking for multiple ISINs simultaneously

For RTAs:

  • Receive bids from exchange upon closure of liquidity window (T+2)
  • Specify accepted quantity and draw up allocation
  • Apply allocation on full value or proportionate basis in case of oversubscription

For Clearing Corporations:

  • Specify settlement type and number for early pay-in
  • Receive early pay-in information and investor details from depositories
  • Coordinate with depositories for bid modification/withdrawal confirmations

Important Dates

  • Liquidity window operates from T (first day) to T+2 working days
  • Trading hours: 9:00 AM to 5:00 PM on all days
  • Last day of liquidity window: Additional 30 minutes provided for custodian confirmation
  • Allocation completion: T+2 working day (upon closure of liquidity window)
  • Settlement date: As per clearing corporation specifications (securities blocked until this date)

Impact Assessment

Market Impact: This facility significantly enhances liquidity options for debt securities investors by providing a structured, transparent exchange-based mechanism for exercising put options. The real-time display of cumulative quantities improves market transparency and price discovery.

Operational Impact: The implementation requires coordination across multiple market intermediaries including stock exchanges, depositories, clearing corporations, RTAs, brokers, and custodians. The mandatory early pay-in requirement ensures settlement certainty and reduces counterparty risk.

Investor Impact: Investors gain a standardized, regulated facility to exercise liquidity options on debt securities with clear allocation rules and settlement timelines. The proportionate allocation mechanism in case of oversubscription ensures fair treatment across all investor categories.

Infrastructure Impact: Depositories need to support multi-ISIN blocking facility, and clearing corporations must coordinate EPI cancellation mechanisms with depositories. The system requires real-time information sharing across multiple platforms for bid tracking and allocation.

Impact Justification

Introduces new operational framework for debt securities liquidity mechanism affecting all debt market participants including investors, issuers, brokers, RTAs and clearing members