In May 2021, the Securities and Exchange Board of India (SEBI) issued a discussion paper on the consolidation of the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008, and the Securities and Exchange Board of India (Issue and Listing of Non-convertible Redeemable Preference Shares) Regulations, 2013, with the intent to ease compliance obligations, and to harmonise and ensure consistency with other listing related regulations.
On 9 August, SEBI released the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS regulations), and on 10 August issued the Operational Circular for the issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper (operational circular), consolidating previous operational instructions on the listing of debt securities.
In principle approval of a stock exchange is now also required for privately placed debt securities, instead of only for public issues previously. All debt securities, privately placed or publicly offered, now need to be accompanied by a disclosure-heavy placement memorandum. The NCS regulations not only prescribe the disclosures required in the placement memorandum, but also minute aspects such as the format and content of the cover page and the use of simple English. A placement memorandum must contain the details of the issuer, its line of business, its business activities and those of its subsidiaries, and its branches or units. Prescribed details of the promoters must also be incorporated in the placement memorandum.
A placement memorandum must not contain unsubstantiated forward-looking statements. Where terms such as market leader and leading player are used in a placement memorandum, these must be independently corroborated. Specific risk factors have to be incorporated in a placement memorandum, ranked by materiality. Where an issuer is a financial services entity, additional disclosures are required, such as its lending policy, classification of loans, aggregate exposure to top 20 borrowers, details, gross and net exposure of non-performing assets for the past three financial years, portfolio summaries on industries and sectors to which loans have been provided, and the amounts and percentages of secured and unsecured borrowings.
Any call option, the right of an issuer to recall debt securities prior to maturity, and any put option, the right of investors to seek redemption of debt securities prior to maturity, must be disclosed in the placement memorandum, together with the date of the exercise,the exercise period and redemption amounts, including the premium or discount at which redemption shall take place. The period of exercise of any put option or call option must be at least three working days. An issuer must send a notice at least 21 days prior to the exercise of such option.
The operational circular requires the electronic book provider (EBP) platform to be used for all debt issues up to INR1 billion (USD13.7 million), or debt issues which aggregated with previous debt issues exceed INR1 billion. The previous threshold for the applicability of the EBP platform was INR2 billion. The EBP platform can be cumbersome, and in the garb of widening participation in the corporate bond market, can allow unconnected parties to intervene in a privately negotiated deal.
The consultation paper proposed a mix and match of existing regulations with modifications that made them more unwieldy. While the consultation paper was open for public comments, with reports of stakeholders being concerned, few suggestions appear to have been incorporated into the regulations. While consolidation and harmonisation of regulations is always welcome, the NCS regulations and the operational circular appear to have been saddled with the baggage of the previous regulations, while adding many burdensome disclosures of dubious utility. Mandating the use of the EBP platform promises to scare rather than attract institutional investors to primary debt issues. If there is a method in this exercise, one is hard pressed to find it.
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