Consolidating Debt Listing Regulations Is A Questionable Business
In May 2021, the Securities and Exchange Board of India (SEBI) released a discussion paper on the Consolidation of the Securities and Exchange Board of India (Debt Issuance and Listing) Regulations, 2008, and the Securities and Exchange Board of India (Regulations on the Issuance and Listing of Non-Convertible Redeemable Preference Shares 2013, with the aim of alleviating compliance obligations and harmonizing and ensuring consistency with other listing regulations.
On August 9, SEBI published the Securities and Exchange Board of India’s 2021 regulation (issuance and listing of non-convertible securities) (NCS regulation), and on August 10, issued the Operational Circular for the issuance and listing of securities non-convertible, securitized debt securities, collateral receipts, municipal debt securities and commercial paper (operational circular), consolidating previous operational instructions on the listing of debt securities.
In principle, stock exchange approval is now also required for private debt securities, instead of only for public issues previously. All debt securities, whether privately placed or offered to the public, must now be accompanied by a disclosure-heavy investment memorandum. NCS regulations prescribe not only 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 plain English. A placement note must contain the contact details of the issuer, its sector of activity, its activities and those of its subsidiaries, branches or units. The prescribed details of the promoters should also be incorporated into the placement memorandum.
An investment memorandum should not contain unfounded forward-looking statements. When terms such as market leader and major player are used in an investment memorandum, these should be independently corroborated. Specific risk factors should be incorporated into an investment memorandum, ranked by importance. When an issuer is a financial services entity, additional information is required, such as its lending policy, loan classification, overall exposure to top 20 borrowers, details, gross and net exposure of non-financial assets. for the past three fiscal years, the portfolio of summaries on industries and sectors to which loans have been made, and the amounts and percentages of secured and unsecured borrowing.
Any call option, the right of an issuer to call debt securities before maturity, and any put option, the right of investors to request redemption of debt securities before maturity, should be indicated in the investment memorandum, as well as the date of exercise, the period of exercise and the amounts of redemption, including the premium or discount at which the redemption will take place. The time limit for exercising any put or call option must be at least three working days. An issuer must send a notice at least 21 days before the exercise of such an option.
The Operational Circular requires that the e-book provider’s (EBP) platform be used for all debt issues up to INR 1 billion (USD 13.7 million), or debt issues that aggregated with debt issues. Previous debts exceed INR 1 billion. The previous threshold for the applicability of the EBP platform was INR 2 billion. The EBP platform can be cumbersome, and under the guise of growing participation in the corporate bond market, it can allow unrelated parties to step into a privately negotiated deal.
The consultation document proposed a combination of existing regulations with modifications that made them more cumbersome. While the consultation document was open for public comment, with stakeholder reports concerned, few suggestions appear to have been incorporated into the regulations. While regulatory consolidation and harmonization is always welcome, the NCS regulations and Operational Circular appear to have been loaded with the baggage of previous regulations, while adding many heavy disclosures of questionable utility. Forcing 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, it is difficult to find it.
Sawant singh and Aditya Bhargava are partners in Bombay office of Legal phoenix. Sristi Yadav, a senior partner, also assisted with the article
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