Sebi's liquidity window for corporate bonds finds no takers as issuers balk at cumbersome norms
Jan 29, 2026
The newly introduced liquidity window for corporate bonds in India is facing an uphill battle. Despite the Securities and Exchange Board of India's intentions to boost market liquidity, many issuers are hesitant to adopt this facility due to stringent conditions and low incentives.
A unique facility that allows investors to exit corporate bonds has failed to catch on more than a year after the Indian market regulator introduced it, with issuers largely refraining from offering it thanks to a mix of low incentives, excessive guardrails and potential balance sheet uncertainties.
A senior official from the regulator said the use of the liquidity window has been negligible so far. Public data for the use of the mechanism is not available.
The framework, which came into effect on 1 November 2024, was aimed at addressing low market liquidity, a longstanding concern in India’s corporate bond market. In October 2024, the Securities and Exchange Board of India (Sebi) said that limited trading, driven in part by institutional investors holding bonds to maturity, had resulted in the market being perceived as illiquid, discouraging wider participation, particularly from retail investors.
To tackle this, the regulator proposed a mechanism under which issuers could offer a “liquidity window” through put options, allowing investors to sell bonds back to them on pre-specified dates or intervals.
Under the framework, issuers of listed non-convertible securities could, at their discretion, offer the facility either to all investors or only to retail investors one year from the date of issuance. Issuers were required to set aside at least 10% of the final issue size for such buybacks over the tenor of the bond and could specify sub-limits for each liquidity window. If investor demand exceeded these limits, acceptances were to be done on a proportionate basis.
Despite the elaborate structure and Sebi’s objective of boosting investor participation, issuers have not opted to offer the facility.
“There should be some vested interest for the issuers,” said Suresh Darak, founder and chief executive officer of Bond Bazaar, an online bond platform.
Range of stipulations
The rules were accompanied by detailed conditions. Issuers had to secure board approval, ensure oversight by a stakeholder relationship committee or the board, and maintain objectivity and non-discrimination among eligible investors.
The liquidity window could be opened monthly or quarterly for three working days at a time, with schedules disclosed upfront in the offer document and reminders sent to investors through SMS or WhatsApp.
Within 45 days of the liquidity window’s closure or before the end of the relevant quarter, whichever is earlier, the issuer should either sell the tendered debt securities through the exchange, request-for-quote (RFQ) platform or an online bond platform or extinguish them.
The detailed list of dos and don'ts added to the loss of interest among issuers.
“There are too many guardrails in the liquidity framework. If you want people to participate then you have to allow the industry to figure things out,” said Darak.
The liquidity window is a uniquely Indian regulatory construct. While other markets use puttable bonds, rely on strong market-making structures, or see central banks step in with liquidity support during crises, no major jurisdiction has introduced a regulated, periodic liquidity window that allows investors to routinely sell bonds back to issuers.
“The uncertainty around the timing and quantum of buybacks creates balance sheet and treasury planning challenges, while investors may find the valuation-driven exit unattractive, especially in a hardening yield environment,” said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap, a debt syndication firm.
According to Sebi, debt securities will be valued on a T-1 basis, where T refers to the first day of the liquidity window. The issuer must ensure that the amount payable to investors is not at a discount of more than 100 basis points to this valuation, in addition to accrued interest.
Settlement process
Payments to eligible investors are required to be credited within one working day of the closure of the liquidity window to the bank account linked to the demat account from which the securities were tendered and transferred. Settlement is to be completed on a T+4 basis, with T representing the first day of the liquidity window.
“While this (valuations) stipulation has been put in with a view to protect the interests of the investors, a discount of 100 basis points represents a high rate of discount, especially when it comes to securities with longer maturity periods,” said Manisha Shroff, a partner at Khaitan & Co.
The timing of the framework coincides with a slowdown in corporate bond issuance. Funds raised through corporate bonds declined 6% year-on-year to ₹6.76 trillion in the first nine months of FY26, according to data from Sebi, even after a 125-basis-point cut in policy rates and sustained liquidity support from the Reserve Bank of India.
While 1,458 issuers accessed the bond market during the period, a year earlier 1,219 borrowers had raised ₹7.18 trillion through corporate bonds, highlighting softer borrowing appetite. Public debt raised was up 6.9% to ₹7,084 crore in the first nine months of fiscal 2026 from ₹6,628 crore in the same period last year.
The regulator has been pursuing multiple initiatives to deepen the corporate bond market and widen participation. These include the introduction of an electronic book provider platform for large private placements, a RFQ platform for secondary market transactions, reduction in the face value of privately placed bonds proposed to be listed and a framework for online bond platforms.
In December, Sebi’s board approved a move to allow issuers to offer incentives such as additional interest or discounts on issue prices to specific investor categories, including senior citizens and women, to encourage participation. Even so, structural frictions in bond trading persist.
Indexation benefits
“An entity intending to list its debt securities on the stock exchange has to make a large number of disclosures and ensure compliance with a comprehensive list of requirements. This includes not only pre-issue, but also post-issue requirements,” said Shroff. “To ensure ease of access to the debt capital market for both the issuer as well as the investor, Sebi must simplify these comprehensive listing requirements."
Tax policy has further weighed on investor sentiment in the debt markets. The removal of indexation benefits for long-term debt mutual funds since April 2023 has hurt returns.
The mutual funds association has urged the government to restore long-term capital gains treatment with indexation for debt mutual funds held for more than 36 months.
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