Fast Track Public Issue of Debt Securities: Analysing SEBI’s Paper

Recently, the Securities and Exchange Board of India (“SEBI”) published a consultation paper[1] on the review of provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[2] (“LODR Regulations”) and the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021[3] (“NCS Regulations”). This consultation paper seeks to promote ease of doing business (“EODB”) and reduce compliance burdens on corporate entities by suggesting certain amendments to the LODR Regulations and NCS Regulations. In addition to the proposed amendments, the consultation paper also introduces the concept of ‘fast track’ public issuance and listing of debt securities.

In the Union Budget for Financial Year (“FY”) 2023-24, one of the announcements was regarding the need to carry out a comprehensive review of existing regulations to ease, simplify and reduce the cost of compliance. To implement the same, SEBI constituted a working group to suggest measures to promote EODB for listed debt issuers and review the LODR and NCS Regulations.

Proposed Relaxations to the LODR and NCS Regulations

Last year, a circular[4] issued by SEBI mandated the face value of each debt security[5] or non-convertible redeemable preference share (“NCRPS”) issued on a private placement basis to be Rs. 1 Lakh, which has now been proposed to be reduced to Rs. 10,000.00. The reasoning behind this proposal is to promote investments by non-institutional investors for whom such a high ticket size would act as an impediment to accessing the market for such securities. 

Clause 3.3.10 of Schedule I of the NCS Regulations mandates that the debt issuer company has to disclose its audited financial statements for the last three FYs in its offer document.[6] To reduce the file size of the offer document, the consultation paper provides that the statements should be accessible through a QR Code which opens the web link to the audited financial statements on the stock exchange’s website.  

Further, the said Schedule states that corporate entities should provide specified information for the preceding three financial years and the current financial year.[7] The consultation paper proposes that instead of providing the information for the current financial year (i.e. as on date) it shall be limited to the latest quarter of that financial year. This is to make it easier for debt issuers to close books of account to finalise certain information such as related party transactions and borrowings.

Schedule I of the NCS Regulations also specifies that the disclosures with respect to record date have to be made as part of the summary sheet in the offer document.[8] In market parlance, the shut period refers to the number of days between the record date and the interest payment or redemption date. The consultation paper proposes to standardise the record dates at 15 days before the due date of payment of interest or redemption.

According to Regulation 40 of NCS Regulations, the debt issuer is required to obtain a due diligence certificate from the debenture trustee at the time of filling of the draft offer document and at the time of listing.[9] The consultation paper provides a format for the due diligence certificate which appears to be aimed at harmonising the formats for the certificate under Chapter II of SEBI’s Master Circular for Debenture Trustees and the NCS Regulations.

Regulation 52(8) of LODR Regulations[10] requires a listed entity to publish financial results within two working days (on conclusion of the board of directors’ meeting) in newspapers. SEBI’s paper proposes to leave it to the discretion of the listed entity to decide whether or not to publish the results in newspapers. The reasoning seems to be that the financial results will already be sent to stock exchanges within 30 minutes of the closure of board meetings, and on board approval, the results get published on the websites of the entity and the stock exchange.

Fast Track Public Issuance and Listing of Debt Securities

The consultation paper notes that approximately 98% of the funds raised through the issuance of debt securities are on a private placement basis and nearly 95% of the issuers utilise the private placement route to meet their debt fund requirements. At present, Regulation 5 of the NCS Regulations provides that an issuer can raise funds through a public issuance of debt securities or by way of a private placement of non-convertible securities.[11] In India, the corporate bond market is largely a private placement market. Moreover, the non-institutional participation in the corporate debt market has been less than 2%. Thus, the present framework is introduced to promote public issuances in the corporate debt market and to boost the participation of non-institutional investors.

Eligibility Criteria for the Fast Track Issue Process

  • The issuer should be eligible as per Regulation 5 of the NCS Regulations.
  • The issuers NCSs or specified securities or units of REITs or InvITs should be listed on a stock exchange for a minimum period of three consecutive years.
  • The issuer should be in compliance with the LODR, REIT, and InvIT Regulations at the time of making the issue.
  • Debt securities being issued should have been assigned a rating of not less than “AA-” or equivalent.
  • There has been no downgrade in the rating of the issuer, by two notches or more in the last 2 financial years.
  • No regulatory action under such regulations, as specified from time to time, is pending against the issuer or its promoters or directors, sponsors, or investment managers, as applicable, before the Board. The issuer will be subject to such requirements as may be specified by its own principal or other financial regulator.
  • The issuer shall not be in default of:
    • Repayment of deposits or interest payable or any term loan or interest payable thereon.
    • Redemption of preference shares or debt securities and interest payable thereon.
    • Payment of dividend to any shareholder.

Proposed Fast Track Issue Process

Sr. No.

Key Steps

Recommendations regarding Fast Track Public Issue

1.       

Requirement of Prospectus

It is proposed to extend the applicability of the GID[12] and KID[13] concepts for the introduction of a common document for both fast track public issues and private placements.

2.       

Filing time for Draft GID

Comments need to be sought from the public on a draft offer document within 2 working days.

3.       

Disclosures in GID and KID

GID should consist of all the disclosures as mentioned under Schedule I of NCS Regulations.

KID should contain: Part A (all relevant disclosures not in GID) and Part B (details of the offer of debt securities)

4.       

Digital Statutory Advertisement

Newspaper advertisements could be done away with and issuers may be allowed to utilise electronic modes including advertisements on relevant websites.

5.       

Period of Subscription

Fast Track Public Issue shall be kept open for a minimum of 1 working day and a maximum of 10 working days, with an extension of 1 working day.

6.       

Minimum Subscription

The requirement of minimum subscription for banks and entities in the financial sector may be done away with.

7.       

Retention of Over Subscription

Retention limit is to be fixed at a maximum of 5 times of base issue size.

8.       

Timeline for Listing

3 days from the date of closure of the issue.

9.       

Preparation of Offer Document

Timeline brought down to 2 – 3 weeks.

Conclusion

The consultation paper demonstrates a strong commitment towards increasing the ease of doing business and improving disclosure requirements. Further, SEBI has addressed specific issues to enhance the participation of retail investors and facilitate public issuances in the debt market. While provisions pertaining to QR code for accessing audited financial statements and discretion to publish financial results in newspapers will be of immense help to stakeholders, the same are likely to have positive spillover effects of promoting digitisation as well.

References:

[1]Consultation paper on review of provisions of NCS Regulations and LODR Regulations for ease of doing business and introduction of fast-track public issuance of debt securities, available at https://www.sebi.gov.in/reports-and-statistics/reports/dec-2023/consultation-paper-on-review-of-provisions-of-ncs-regulations-and-lodr-regulations-for-ease-of-doing-business-and-introduction-of-fast-track-public-issuance-of-debt-securities_79762.html

[2]https://www.sebi.gov.in/legal/regulations/oct-2023/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-october-23-2023-_78921.html

[3]https://www.sebi.gov.in/legal/regulations/jul-2023/web-upload-of-the-securities-and-exchange-board-of-india-issue-and-listing-of-non-convertible-securities-regulations-2021-last-amended-on-july-6-2023-_73664.html

[4] SEBI vide circular dated October 28, 2022, specified provisions pertaining to denomination of issuance and trading of Non-convertible Securities (now incorporated in Chapter V of the Operational Circular no. SEBI/HO/DDHS/P/CIR/2021/613 dated August 10, 2021).

[5] ‘Debt Securities’ are defined under Section (2)(k) of the NCS Regulation as non-convertible debt securities with a fixed maturity period which create  or  acknowledge  indebtedness  and  includes debentures,  bonds  or  any  other security whether  constituting  a  charge  on  the  assets/properties  or  not, but  excludes security  receipts,  securitized  debt instruments, money  market  instruments  regulated  by the Reserve Bank of India, and bonds issued by the Government or such other bodies as may be specified by SEBI.

[6] 3.3.10 (a) The audited financial statements (i.e. profit and loss statement, balance sheet and cash flow statement) both on a standalone and consolidated basis for a period of three completed years, which shall not be more than six months old from the date of the issue document or issue opening date, as applicable. Such financial statements shall be audited and certified by the statutory auditor(s) who holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India (“ICAI”).

[7] Schedule – I of Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations 2021.

[8] Summary of terms – Terms to be included in the issue document.

[9] 40. The debenture trustee shall, at the time of filing the draft offer document with the stock exchange(s) and prior to opening of the public issue of debt securities, furnish to the Board and stock exchange(s), a due diligence certificate: (a) in case of secured debt securities, in the format as specified in Schedule IV of these regulations; and (b) in case of unsecured debt securities, in the format as specified in Schedule IVA of these regulations.

[10] 52 (8) The listed entity shall, within two working days of the conclusion of the meeting of the board  of  directors,  publish  the  financial  results  and the  line  items referred  to  in  sub-regulation (4), in at least one English national daily newspaper circulating in the whole or substantially the whole of India; Provided that if the listed entity has submitted both standalone and consolidated financial results, to the stock exchange(s), it shall publish consolidated financial results along with the line items referred to in sub-regulation (4), in the newspaper.

[11] Regulation 5 of Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations 2021.

[12] GID (General Information Document) will be common for all issues made by the issuer for the year (public or private).

[13] KID (Key Information Document) for the private placement will be sent only to a select group of persons for subscription, whereas the KID for a fast-track public issue will be made available to the public.

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The consultation paper demonstrates a strong commitment towards increasing the ease of doing business and improving disclosure requirements. Further, SEBI has addressed specific issues to enhance the participation of retail investors and facilitate public issuances in the debt market. While provisions pertaining to QR code for accessing audited financial statements and discretion to publish financial results in newspapers will be of immense help to stakeholders, the same are likely to have positive spillover effects of promoting digitisation as well.

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