Settlement Process of Corporate Bonds

Introduction

Corporate bonds play a vital role, offering investors a secure and stable way to earn returns. But, behind the scenes of every bond trade lies a critical process that ensures the smooth transfer of securities from one party to another—the settlement process. In India, this process has evolved over time, guided by regulations that promote transparency, efficiency, and reduced risk for all participants. If you’ve ever wondered how the settlement of corporate bonds works in India, you’re in the right place. In this blog, we’ll take you through the entire journey of a corporate bond, from the moment it’s traded to when it officially belongs to the buyer.

Where It All Begins

Picture this: An investor, eager to diversify their portfolio, decides to purchase corporate bonds issued by a large Indian corporation. They execute the trade through a financial institution, directly on stock exchanges, or via the Online Bond Platform Providers (OBPPs), the new kid on the block in bond investing. Once the buyer and seller agree on a price, the trade is executed. However, the journey of this bond isn’t over yet. What happens next is the settlement process, ensuring that the bond changes hands securely and the buyer receives their new asset while the seller gets paid.

Reporting the Trade – Transparency in Action

Every corporate bond trade in India, whether done over-the-counter (OTC) or through exchanges, must be reported within 15 minutes of execution. This is a rule set by the SEBI, aimed at promoting transparency and reducing systemic risks. These trades are reported on platforms like the Corporate Bond Reporting and Integrated Clearing System (CBRICS) or the Negotiated Dealing System-Order Matching (NDS-OM) platform. This step ensures that all market participants can see what’s happening in the bond market, fostering trust and integrity.

How Bonds and Payments Flow

Once the trade is reported, it enters the clearing and settlement phase. This stage is crucial as it facilitates, but does not guarantee, that both parties fulfill their end of the deal. Corporate bond transactions in India are typically settled on a T+1 basis—meaning the settlement is completed the next business day after the trade date. So, if you buy a corporate bond on Monday, by Tuesday evening, it will be in your possession, and the seller will receive the agreed payment. Here’s where the Clearing Corporation of India Ltd. (CCIL) or the clearinghouses of the exchanges step in. They act as intermediaries, ensuring a seamless transfer of securities. The Delivery versus Payment (DvP) system is used to eliminate counterparty risk, meaning the bond only transfers to the buyer if the payment has been made, and vice versa.

The Role of Depositories – Keeping Bonds Safe

India’s financial market is supported by two main depositories: National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). These depositories are responsible for holding bonds in electronic (demat) form. When the settlement takes place, the bond moves from the seller’s demat account to the buyer’s demat account through one of these depositories. This system brings both security and convenience. Instead of dealing with physical bond certificates that can get lost or damaged, everything happens digitally, ensuring smooth and traceable transfers.

Why It Matters for You

The settlement process might seem technical, but it has profound implications for individual investors. A well-regulated and efficient settlement process minimizes the risk of default, ensuring you receive the bonds you purchase without unnecessary delays. This confidence allows investors to actively participate in the corporate bond market, knowing that the infrastructure supporting these transactions is trustworthy and reliable. Moreover, the shift to a T+1 settlement cycle is a significant advantage. Globally, many markets still operate on a T+2 or even T+3 settlement cycle, making India’s bond market relatively faster and more responsive.

Settlement through OBPPs

With the rise of technology-driven platforms, Online Bond Platform Providers (OBPPs) have become a crucial component of the Indian debt market. OBPPs offer retail investors an easy way to access corporate bonds. However, the settlement process through these platforms is highly regulated to ensure security and transparency. As per the latest guidelines from SEBI, OBPPs are required to route all bond orders through the Request for Quote (RFQ) platform of recognized stock exchanges. This step is designed to ensure that all transactions are executed transparently, with real-time price discovery and seamless order execution.

One of the most significant features of the settlement process through OBPPs is that the money involved in these transactions does not touch the OBPP at any point. Instead, it is directly transferred to the recognized exchange for clearing and settlement. This structure adds an extra layer of security, ensuring that investors’ funds are handled by regulated entities rather than the platform itself.

Furthermore, SEBI mandates that all orders routed through OBPPs must be settled via the stock exchange mechanism, which is managed by clearinghouses such as the Indian Clearing Corporation Ltd. (ICCL) or National Securities Clearing Corporation Ltd. (NSCCL). This mechanism follows the Delivery versus Payment (DvP) system, ensuring that bonds are delivered only when the corresponding payment is made, mitigating counterparty risks. According to SEBI’s guidelines, the framework requires all OBPPs to register with SEBI and adhere to strict operational guidelines to ensure investor protection and market integrity. This framework aims to regulate the growing number of digital platforms offering bonds and prevent potential misuse.

By establishing these regulations, SEBI is creating a well-defined and safe pathway for retail investors to participate in the corporate bond market through digital platforms, ensuring transparency and accountability at every step of the transaction.

Advancements in Bond Settlements

As India continues its digital transformation, SEBI is working to make the settlement process for corporate bonds even more efficient and investor-friendly. A significant development in this direction is SEBI’s proposal to introduce a liquidity window facility for investors in debt securities, as outlined in its draft circular titled “Introduction of Liquidity Window Facility for Investors in Debt Securities through Stock Exchange Mechanism” (August 2024). This initiative aims to address one of the most pressing challenges for bond investors—liquidity, especially during periods of market volatility. According to the circular, SEBI is exploring the introduction of a liquidity window that will operate through stock exchange mechanisms, allowing bondholders to liquidate their positions more easily and securely. The goal is to reduce large price fluctuations that can occur when there is a lack of depth in the market, giving investors more confidence in being able to exit their positions, even during turbulent times. The circular also emphasizes that the liquidity window should operate transparently through the stock exchange mechanism to maintain trust and efficiency.

Moreover, as blockchain technology and smart contracts are explored by financial institutions worldwide, they could further revolutionize bond settlements in the future. While India isn’t fully there yet, the introduction of liquidity windows and continued digital advancements show the direction the country’s bond market is heading in—toward greater transparency, faster settlements, and improved liquidity for investors.

FAQs

Q. What is the settlement process of corporate bonds in India?

A. The settlement process of corporate bonds in India involves the transfer of securities from the seller to the buyer and the corresponding transfer of payment. It follows a T+1 cycle, meaning the settlement is completed the next business day after the trade is executed. The process is regulated by SEBI to ensure transparency, security, and efficiency.

Q. How does the T+1 settlement cycle work?

A. In the T+1 settlement cycle, if you buy a corporate bond on day one (T), the bond will be transferred to your account, and payment to the seller will be completed the next business day (T+1). This ensures quick settlement and reduces the risk of default.

Q. What platforms are used to report corporate bond trades in India?

A. Corporate bond trades in India are reported on platforms like the Corporate Bond Reporting and Integrated Clearing System (CBRICS) or the Negotiated Dealing System-Order Matching (NDS-OM) platform. These systems ensure that all trades are reported within 15 minutes of execution, fostering transparency and trust in the market.

Q. What role do depositories like NSDL and CDSL play in the settlement process?

A. Depositories like NSDL and CDSL hold corporate bonds in dematerialized form. They facilitate the transfer of bonds from the seller’s account to the buyer’s account during the settlement process, ensuring secure and traceable transactions.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.