This article has been written by Hunar Kaur and Yuvraj Sharma, 4th year law students at Dr. Ram Manohar Lohiya National Law University, Lucknow and The School of Law, Narsee Monjee Institute of Management Studies, respectively.
Introduction
On December 9, 2023, the Security and Exchange Board of India (“SEBI”) has released a consultation paper (Consultation Paper) addressing a review of provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), and the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations). The primary goal of this initiative is to enhance the Ease of Doing Business (EODB) and alleviate compliance burden on corporate entities. Among the proposed reforms is the permission for companies to issue Non-Convertible Debentures (NCDs) and Non-Convertible Redeemable Preferences Shares (NCRPS) at a reduced face value of Rs. 10,000 as opposed to value of Rs. 1 lakh. This move by SEBI aims to encourage retail participation in the corporate bond market, presenting a positive development for both non-institutional investors and the overall bond market.
In this blog, the authors critically analyse the SEBI Consultation Paper, delving deeper into its implications. The blog extends to evaluate whether the proposed reforms fulfill the market requirements. The authors understand the potential benefits and challenges associated with these reforms. Furthermore, the analysis concludes with comments, providing a comprehensive overview of the proposed reforms and offering potential solutions to address the challenges.
SEBI’s Consultation Paper: The Highlights
SEBI Initiative: Reducing Bond Face Value for Increased Accessibility
SEBI in its meeting of September 30, 2023 approved a proposal to reduce the face value of bonds from 10 Lakh to 1 Lakh. The decision makes the bond market more accessible to non-institution investors. The reduction in face value from 10 Lakh to 1 Lakh in October 2022 and rise of Online Board Platforms (OBD) contributed to a notable increase in non-institutional investor participation from July to September 2023. During this period, non-institutional investors subscribed to 4% of the total amount raised (as mentioned in the Consultation Paper). To further enhance non-institutional investor participation and managing risk, it is proposed to allow the issuer to issue bonds with a face value of Rs. 10 thousand, subject to appointing a merchant banker for due diligence. Additionally, for scrutinized debt instruments (SDIs), issuers can offer SDIs at face value of Rs. 1 lakh or Rs. 10 thousand with the requirement of appointing a merchant banker for due diligence and disclosure in the private placement memorandum.
A feedback note is concerned with an increase in size of offer documents, attributed to the inclusion of audited financial statement for the last three years and stub period, which are already disclosed in annual reports. This has led to technical difficulties in filing documents with regulatory bodies and uploading them on websites. To address this, suggestions propose replacing direct inclusion with QR code, that when scanned, open a web link to the issuer’s website containing the financial information. This aims to streamline the filing process, enhance document legibility, and alleviate challenges associated with document size and approval process.
Streamlining Financial Disclosures: Proposal for Quarterly Reporting
The current regulatory provision requires the issuer to provide information for specific clauses, covering the preceding three financial years and the current financial year. The feedback suggests a need for change, proposing that details for these clauses be specified up to the latest quarter of the current financial year. This adjustment is recommended to facilitate the disclosure preparation process for issuers, as it allows them to finalize information such as Related Party Transactions and Borrowing after closing their books of accounts. The proposal aims to streamline and ease the disclosure procedure for issues.
Standardizing the Record Date
Currently, Schedule I of the NCS Regulations mandates disclosure of the record date in the offer document summary sheet. The record date signifies when investor must own debt securities for corporate actions and the “Shut Period” is the span between the record date and the interest payment or redemption date. Therefore, feedback highlights inconsistency in the shut period duration ranging from 1 to 45 days across issuers which averages around 15 days. To address this, a proposal suggests standardizing record dates at 15 days before the interest payments or redemption due date to establish uniformity in market place.
Harmonizing Due Diligence Certificate Formats
Regulation 40 of NCS Regulations, provides for the format of ‘due diligence’ certificate to be submitted by the debenture trustee. A format for the same is specified in ‘Master Circular for Debenture Trustee’ too. Feedback proposes aligning and hamonising the due diligence certificate formats under Regulations 40 and 44 of NCS Regulations with the format specified in the DT master circular. The proposal recommends modifying the format as outlined in Annex-I for uniformity.
Optional Newspaper Publication for Financial Result: Cost Reduction Proposal
As per the existing LODR Regulations, financial results must be sent to stock exchanges within 30 minutes of board meeting’s closure. The results are promptly published on the entity website and the stock exchange website providing immediate accessibility to debenture holders. Given this, the suggestion is to make the newspaper publication of the same within two working days. The proposal recommends modifying Regulations 52(8) to grant listed entities the ‘discretion’ to publish financial results in a newspaper within the specified timeframe, aiming to reduce costs, promote digital media usage, and consider environmental impact.
Boosting Non-Institutional Participation in Corporate Debt market
The Consultation Paper underscores that in the majority of funds raised through debt securities, about 90% occur through private placements with nearly 95% of issuers opting for this method. Currently Regulation 5 of the NCS Regulations allows issuer to raise funds public issuance or private placements of non-convertible securities. However, the corporate bond market in India is predominantly a private placement market and non-institutional participation in corporate debt is below 2%. To address this, the proposed framework aims to encourage public issuance of the corporate debt market and increase the involvement of non-institutional investors.
Enhancing Fast Track Public Issues: Eligibility and Recommendations
The eligibility criteria for fast-track issue process are outlined as (including compliance with NCS Regulations) – a minimum 3-year listing period for NCS or specified securities, compliance with LODR, REIT, and InvIT Regulations, a minimum credit rating of “AA-” for the debt securities, no downgrades in the issuer’s rating by two notches or more in the last two financial years and no pending regulatory actions against issuer or its related entities. The issuer should also not be in default of certain financial obligations.
The proposed fast track issue proposed suggests key steps, such a extending the applicability of General Information Document (GID) and (KID) concepts of a common document, seeking public comments on the draft offer documents within two working days including specified disclosure in GID and Key Information Document KID, allowing electronic modes for statutory advertisements, keeping the subscription open for 1 to 10 working days, removing the minimum subscription requirements for banks and financial entities, setting a retention limit at a maximum of 5 times the base issue size, listing within three days of issue closure, and reducing the timeline for offer document preparation to 2-3 weeks.
Conclusion
To ensure the Ease of Doing Business and simplifying the process of retail participation in the corporate bond market, SEBI came up with a consultation paper along some proposals for change which include the appointment of a merchant banker for SDIs, use of QR codes to access the documents, standardizing record dates at 15 days, a well aligned format for due diligence, among other things.
The appointment of a merchant banker, even for the SDIs, where the invest amount is Rs. 10,000 is a positive step. The rationale behind this lies in the belief that guidance from a merchant banker is beneficial for investor, helping them maximize returns on their investments. Hence, the recognition of merchant banker as a valuable guide, emphasizes the importance of financial expertise in optimizing investment outcomes, regardless the investment scale.
Another thing proposed in the Consultation paper is the use of QR Code to streamline regulatory filings. The QR code is intended to direct regulatory authorities to essential financial information making the final documents more concise and easily accessible. Basically, this innovation aims to enhance efficiency in regulatory processes by leveraging technology. The QR code simplifies the filing document and centralizes information potentially expediting the regulatory review process.
The paper suggests the adoption of uniform (standard) system by setting a standard duration for the “Shut Period”, which is the period between the record date and the interest payment, is set at 15 days before the interest payments or redemption due date (instead of it ranging from 1-45 days, as has always been). Standardization is highlighted as a key factor in improving the system. This proposal aims to bring consistency and clarity to the process, making it more predictable and understandable for all stakeholders involved.
And lastly, the paper underscores the importance of clarity in regulatory requirements. There can exist a confusion among the debenture trustee owing to two different specifications with regards to the format of ‘due diligence’ certificate (one in Regulation 40 and 44 of NCS Regulations and the other in ‘Master Circular for Debenture Trustee’) in harmony with both existing formats.
In summary, the proposed changes aim to enhance the process by easing it out for the non-institutional investors for whom the high ‘ticket price’ acted as a deterrent. They will now be now be able to access the market and enter the corporate bond scheme as the retail investor gets an alternative investment option owing to the significant reduction in the ticket size.