This article has been written by Snigdha Dash, 3rd year law student at National Law University, Odisha
Introduction
The Securities and Exchange Board of India (“SEBI”) in its recent consultation paper on the review of provisions of NCS Regulations and LODR Regulations for ease of doing business and introduction of fast track public issuance of debt securities (“Consultation Paper”) floated on December 9, 2023, explores the expedited public issuance of debt securities. The primary objective of the consultation paper is to streamline the process for issuers with a proven track record, facilitating quicker, cost-effective and less labour-intensive public offerings of debt securities. One of the key suggestions in the Consultation Paper is the reduction in the face value of privately placed debt securities to 10,000 rupees, a notable shift from the previous face value of Rs 10 lakhs per debt security before the October 2022 amendment (the regulator further reduced the face value from 10 lakhs to 1 lakh in this amendment). The overarching goal is to encourage greater involvement of non-institutional investors (“NIIs”) in the corporate bonds markets. This initiative signifies a strategic move towards enhancing efficiency and accessibility in the issuance of debt securities, particularly benefiting entities with established credibility.
The need to have the reform arose after the Budget announcement for Financial Year (“FY”) 2023-24, where the working group was formulated to give suggestions to promote the ease of doing business for listed debt issuers and review the applicability of provisions under SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (“LODR Regulations”) and SEBI (Issue and Listing of Non-Convertible Securities) Regulations 2021 (“NCS Regulations”).
The authors through this blog post would be analysing the proposed relaxations as emphasised in the consultation paper, highlighting the key changes and further concluding the article with potential implications.
The Proposed Relaxations and the Rationale behind it
- Reduction in denomination to face value of Rs 10,000/-
SEBI in its agenda ‘Introduction of Regulatory Framework for Online Bond Platforms’ for the board meeting held on 30 September 2023 approved the reduction of the face value of corporate bonds from 10 lakh to 1 lakh emphasising that the Non-Institutional Investors (“NII”) who cannot invest in huge bulk at once on single assets can participate by undertaking investments of smaller amounts. The numbers show that NII subscribed to 4% of the cumulative amount received as compared to the ordinary participation of less than 1%. This is attributed to the reduction of face value during October 2022 from 10 lakhs to 1 lakh and the mainstreaming of Online Bond Platforms (“OBP”).
This will ensure that the risks of investors are mitigated and due diligence is followed. In other cases, the appointment of a merchant banker is not mandatory for private placement mode through public issuance. This will show a positive shift towards ensuring risk mitigation and risk management measures and safeguarding the interest of NII.
- Amendment to Schedule I of the NCS Regulations- Rationalisation of disclosures for audited financials for the last 3 financial years by inserting a QR code or web link
Presently, the audited financial statements both on a standalone and consolidated basis shall not be more than 6 months old from the date of issue document or issue opening date, as applicable. This long period becomes heavier due to the inclusion of financial statements leading to technical difficulties at the time of filing the offer documents. Therefore, rather than availing the route of the offer document, the same financial documents can be provided as a QR code that opens to a web link. This makes access of essential financial access hassle-free while also supporting the idea of making informed investment decisions.
- Standardization of shut period
In general parlance, record date refers to the date on which an investor must be the owner of debt securities and shut period refers to the gap period between record date and interest redemption date. But as there is inconsistency in terms of the duration of the shut period which normally varies from 1-45 days, there should be uniformity and standardisation in terms of the treatment of record dates. To tackle this, the consultation paper proposes that record dates should be standardised as 15 days before the date of interest payment. This will ensure transparency, predictability and equal treatment to all the investors. The move is in line with SEBI’s goal to provide a friendly market ecosystem for investors.
- Publishing financial statements in newspapers as per LODR Regulations
Regulation 52 (8) of LODR Regulations mandates the listed entity to publish the financial results within two working days of the Board Meeting. Such a mandate should be made optional which facilitates cost reduction and preserves the environments facilitating the commitment to digital transformation.
Fast track public issue of NCDs
At present, there is no provision for expeditious issuance to simplify and streamline the regulatory framework and processes for issuance, making a proposal of this nature particularly relevant. SEBI has suggested the implementation of a rapid public issuance system aimed at assisting frequent issuers with a consistent track record in expediting the process of making public issues of debt securities, thereby reducing the associated time, cost, and effort.
SEBI has articulated that the fast-track public issuance of debt securities should have a duration ranging from a minimum of one working day to a maximum of 10 working days. It is suggested that the timeline for listing of the fast-track public issuance of debt securities be designated as ‘T+3,’ as opposed to ‘T+6’ for a regular public issuance.
Critical Analysis
In the Indian regulatory framework, there is a large quantum of participants who prefer private placements and the corporate bond market heavily relies on it. Approximately, 98% of the funds raised through the issuance of debt securities are on a private placement basis. Out of which 95% of the issuers use the private placement route to meet their debt fund requirements.
One of the biggest reasons why there is less to no participation of NIIs in the corporate debt market is because there is a consistent dominance of private placements and there are fewer public issues in the market. Once the public issuance route is made through a fast-track basis, it will encourage participation of the NIIs.
The proposed changes collectively focus on reducing the ticket size, this step has the potential to enhance retail involvement in the bond markets, rendering it more economical for individual investors. This is anticipated to create a mutually beneficial situation for both stakeholders, as it is poised to decrease the cost of capital for companies owing to increased demand.
However, caution is essential due to the associated risks. The identified risks encompass potential issues such as underselling or mis-selling of debt securities, emphasizing the need for careful consideration and transparency in the evolving landscape. In this regard, SEBI needs to take a proactive stance by requesting specific information details to align with risk mitigation efforts. It is crucial to highlight that issuers must disclose essential information directly to the sole market regulator, SEBI.
The proposals are primarily directed at streamlining and accelerating the issuance of debt securities, providing investors with faster access to information and opportunities. The ultimate benefits, however, rely on the effective implementation of these changes and their alignment with investor needs and market dynamics.
Conclusion
In conclusion, SEBI’s recent consultation paper and proposed relaxations signify a strategic move towards fostering a more inclusive and efficient corporate debt market. The intent to expedite the public issuance of debt securities, particularly for issuers with a proven track record, is a commendable step towards reducing time, cost, and effort. Over the past decade, the outstanding corporate bonds in the market have tripled to ₹40 lakh crores as of FY22, up from ₹12 lakh crores in FY12. However, in terms of GDP percentage, it constitutes only about 18%. By way of comparison, the corporate bond market to GDP ratio is significantly higher at 120% in the US, 80% in South Korea, and 36% in China. To foster further growth, the key lies in encouraging more individuals to invest. These regulatory initiatives hold the potential to reshape the corporate debt landscape, fostering increased participation, transparency, and efficiency in the financial markets.