[By Shreya Saswati & Sruti Patra]
The authors are students of National Law University Odisha.
Introduction
The Securities and Exchange Board of India (SEBI) recently published a comprehensive consultation paper with a view of promoting ease of doing business by relaxing regulations followed in the securities market. The paper also introduces the concept of Fast Track public issuance and listing of debt securities while proposing norms for the same.
Proposed Relaxations to SEBI Regulations
SEBI’s regulations play a crucial role in regulating financial markets and listed entities, impacting the ease of doing business in India. They outline stringent compliance standards for listed entities, ensuring transparency, disclosure, and investor protection. However, excessive requirements pose challenges for businesses, especially smaller entities, impacting the ease of operations. Hence, striking a balance between robust regulations and reducing unnecessary administrative burdens is crucial to foster a conducive business environment in the country.
Reducing the face value of securities
SEBI had recently updated the minimum face value of debt securities such as Non-Convertible Securities (NCS) and Non-Convertible Redeemable Preference Shares (NCRPS) to Rs.1 Lakh as opposed to Rs.10 lakhs earlier. This reduction works as a means for greater involvement from non-institutional investors. In fact, SEBI observed an increase in their participation during July-September 2023 after this reduction. Even public feedback increasingly held high face value to be a barrier for such investors for market participation.
Hence, the consultation paper proposes two things. Firstly, issuance of NCDs or NCRPS with a reduced face value of Rs.10,000. Secondly, issuance of Securitized Debt Instruments (SDI) via private placement with face value of either Rs.1 lakh or Rs.10,000. The catch is, the issuer must appoint a merchant banker who shall conduct due diligence before issuing them. Furthermore, NCDs and NCRPS shall adhere to a straightforward structure without complex credit enhancement features or structured obligations.
Reshaping the NCS Regulations
The consultation paper also proposes changes to Schedule-I of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, which deals with disclosures for audited financials. The current inclusion of audited standalone and consolidated financial statements for the last three financial years, along with stub period financials, in the Offer Document has caused challenges due to technical complexities. To address these concerns, the paper suggests reducing file size by including links rather than inserting financial statements directly into the document. Additionally, leveraging QR codes has been proposed to redirect users to Stock Exchange’s website hosting relevant financial data and simplifying access to this information for potential investors.
When it comes to disclosures, firstly, the paper proposes issuers to provide certain relevant information required under the Schedule1 till the latest quarter of the current financial year instead of until date of issuance in order to ease this process. Secondly, to bring uniformity, the paper proposes standardizing the record dates, i.e., the date when an investor gains ownership of debt securities to 15 days before the interest payment or redemption due date.
Lastly, the consultation paper proposes the use of a standard format for due diligence certificate. The NCS Regulations require the issuer to obtain a due diligence certificate from the debenture trustee at the time of filing draft offer document or while listing securities. But SEBI’s Master Circular for Debenture Trustees consists of two different formats depending on their purpose. A standard format ensures clarity, consistency and easier evaluation.
Publication standards vis-a-vis LODR regulations
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) outlines that a listed entity is required to publish its financial results within two working days after the board of directors’ meeting. This publication needs to occur in at least one English national daily newspaper that circulates across the nation or a significant portion of India.2 But LODR Regulations already necessitate submission of financial results to stock exchanges within thirty minutes of the board meeting and immediate online publication which is accessible to debenture holders. Publishing results again in newspapers after two days is superfluous, hence, the paper proposes publication on newspaper to be optional within the designated time frame, which would help reduce unnecessary costs. Given the current digital age and the immediate accessibility of financial data online, this proposal seems pragmatic to reduce redundant costs. Balancing cost-efficiency with transparency and stakeholder communication remains pivotal in making informed decisions regarding this proposed amendment to the LODR.
Fast Track Public Issuance and Listing of Debt Securities
NCS are generally utilized by companies to secure long-term funds through public issuance of shares at a higher rate of return to the lender. The NCS Regulations govern the issuance and listing of debt securities through both public issuance of securities and private placement. Recently, Indian companies have mostly resorted to issuance and utilization of shares through private placement and that being the case, the corporate debt market raises these funds not through single placement rather multiple issuances all through the year. The decline in IPO filings can be attributed to many reasons like market volatility due to recession or hike in interest rates etc. Therefore, a need arises to increase the scope for the corporate debt market to revitalize public issue of debt securities and that too in the primary market so as to broaden the investor base and bond market in less time and cost. SEBI, through this consultation paper, tries to address the issue by suggesting a Fast Track Public Issue Process.
Technicalities & Modalities
This fast track public issue shall be kept open for a maximum of 10 working days, with a minimum one working day, with no minimum subscription for financing entities. With respect to the retention limit in case of over subscription, the same has been fixed at five times of base issue size, the same is the maximum limit.
On July 3, 2023, SEBI came up with the 2nd Amendment to the NCS Rules where it introduced the concepts of General Information Document (GID) and Key Information Document (KID) in order to serve the purpose of avoiding repetition in filings of documents by the issuers of debt securities. GID would be replacing shelf placement memorandum whenever there would be initial issuance of NCS whereas KID would be replacing placement memorandum on subsequent issuance of NCS.
Previously in February 2023, SEBI released a consultation paper on proposal for introduction of the concept of GID and KID, mandatory listing of debt securities of listed issuers and other reforms under NCS Regulations. These concepts were extended for issuance of NCS on private placement basis only and will be valid for 1 year and be listed on the stock exchange on first issuance. It was introduced so as to promote ease of doing business whereby upon filing of GID for issuance of NCS, on any further issuance within the validity period, only filing KID will be enough.
In the current consultation paper, GID and KID have been extended to public issuance of securities. KID will be provided to the public for fast-track issuance and the same is particularly important as it contains all important information as well as financial results. The result would be its usefulness to keep record of all the issuers of debt securities. These securities have to comply with LODR Regulations, SEBI (Infrastructure Investment Trusts) Regulations, 2014 and SEBI (Real Estate Investment Trusts) Regulations, 2014.
The fast-track issue will be facilitated by GID and KID, hence its disclosure is important, where GID would be consisting of disclosures contained in Schedule-I of the NCS Regulations and KID would be containing information in two parts, i.e., Part A, containing relevant material changes and developments, and Part B containing details of debt securities for which KID is being issued.
Analysis
Regulating the ease of doing business is necessary to foster a business-friendly environment. This consultation paper pertains to certain specific stakeholders as it highlights that almost 98% funds have been generated by issuing of debt securities through private placement basis. Also the corporate bond market significantly issue on private placement. Further due to less involvement of non-institutional investors, this paper encourages public issuance.
The expansion in the investor base and bond market and that too in an efficient way in a reduced time and cost can be fulfilled through public issuance of securities. The removal of minimum subscription is a step in the right direction as it will ensure an influx of funds for the financing entities and will help run their operations. This has to be complemented with the flexibility which is required for the issuers for raising funds and the same was fulfilled by the reduction in retention limit of over subscription as compared to the present public issuance of debt securities up to a maximum of 100% of base issue size.
In USA, the sale of debt securities has to abide by the federal and the state securities laws. According to federal law, before the issuance of debt securities, registration is done under the Securities Act, 1933. Certain securities have been categorized in a way that mandates the application of the Trust Indenture Act of 1939. However, this application does not extend to private placements; it solely applies to registered offerings or A/B exchange offers. On the other hand, in Canada, there is no restriction on issuance of debt securities. However the same can’t be publicly issued unless prospectus is filed with the securities commission.
Conclusion
SEBI’s consultation paper on expediting the debt issuance procedure has a potential to increase capital formation and make doing business easier. Fast-track issuance with a synchronized track record, will enable issuers to acquire financing with less cost and quicker timescales. Smart disclosure guidelines will encourage diversified businesses to participate in the debt securities market. Greater capital availability can stimulate growth and innovation, which in turn will support economic development.
SEBI’s proposed amendments aimed at expediting the debt issuance process hold promise for bolstering capital formation and facilitating business operations. However, these changes present inherent risks and shortcomings that necessitate careful consideration. The acceleration of issuance procedures might compromise investor protection and market integrity by potentially diminishing due diligence standards and increasing the likelihood of defaults or inadequate disclosures. Moreover, an influx of swiftly issued debt securities could impact market stability. To counter these potential pitfalls, SEBI must ensure a balanced approach by following stringent monitoring and continuous assessment to mitigate risks and maintain market resilience.