1. Introduction
- The Securities and Exchange Board of India ("SEBI"), by way of the SEBI (Issue and Listing of Non-Convertible Securities) (Second Amendment) Regulations, 2023 ("NCS Amendment"), brought into effect certain changes to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2023 ("NCS Regulations") which set out the regime applicable to various securities, including non-convertible debentures ("NCDs") issued by way of private placement and listed on a stock exchange in India ("Listed NCDs") by a company ("Issuer"). We have set out in Part A (Changes to the NCS Regulations) below, the key changes brought about by the NCS Amendment.
- The amendments can be categorised, broadly, as follows:
- introduction of general information document and key information document (instead of a placement memorandum) for private placement of non-convertible securities, which we have further elaborated in paragraphs 1 and 2 of Part A (Changes to the NCS Regulations) below;
- introduction of a common schedule of disclosures for public as well as privately placed issue of securities, which we have further elaborated in paragraph 4 of Part A (Changes to the NCS Regulations) below. As a result, there are a number of additional disclosures required to be made by the Issuer in relation to a privately placed issuance as compared to the existing requirements; and
- disclosure of issue expenses, which we have further elaborated in paragraph 4 of Part A (Changes to the NCS Regulations) below. The amendments require greater detail to be included in relation to issue expenses, including all types of fees paid.
- Consequently, SEBI has also amended the 'Operational Circular for issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper' dated 10 August 2021 with the 'Master Circular for issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper' issued by SEBI on 7 July 2023 ("NCS Master Circular"). Additionally, SEBI has , under its circular dated 31 July 2023 (as amended on 4 August 2023) (the "ODR Circular"), included debenture trustees and Issuers as entities with whom investors can opt for online resolution of disputes in the Indian securities market. We have set out in Part B (Changes to the NCS Master Circular and the requirements under the ODR Circular) below the key changes made to the NCS Master Circular and the changes introduced by the ODR Circular.
- Finally, on 19 September 2023, SEBI amended the SEBI (Listing Obligations and Disclosure Requirement) Regulation, 2015 ("LODR Regulations") and introduced Regulation 62A to govern listing of issuance of non-convertible debt securities by a listed entity1. The key change introduced is that effectively, on and after 1 January 2024, if an entity has any Listed NCDs outstanding or issues any Listed NCDs, then all other issuances after 1 January 2024 also need to be listed. The entity will not have the option of issuing NCDs which are unlisted. We have set out in Part C (Changes to the NCD Regime under the LODR Regulations) below the key changes made to the NCD regime under the LODR Regulations.
Footnote
1. A listed entity is defined as an entity which has
issued shares or identified securities, including NCDs, listed on a
stock exchange.
PART A:
CHANGES TO THE NCS REGULATIONS
| Sr. No. | Provision under the NCS Regulations | Change pursuant to the NCS Amendment | Impact |
| 1. |
Regulation 47 – Shelf placement memorandum |
This provision has been deleted pursuant to the NCS Amendment. Prior to its deletion, the provision dealt with the filing of shelf placement memorandum and tranche placement memorandum in respect of issuance of debt securities on a private placement basis. | SEBI has decided to remove the concepts of shelf placement memorandum and tranche placement memorandum in respect of issuance of debt securities on a private placement basis, which will now be governed by the provisions relating to issuance of a general information document ("GID") and the key information document ("KID"). |
| 2. |
New Regulation 50A – GID and KID |
Regulation 50A has been introduced pursuant to the NCS Amendment, specifying that an Issuer proposing to make an issuance of Listed NCDs on a private placement basis is required to file a GID with the stock exchange(s) The GID includes the disclosures required under the NCS Regulations, and will be valid for a period of 1 year from the first issuance under such GID and will apply to all Listed NCDs issued during that period1. A separate KID then has to be filed for each issuance, specifying the details of the issuance, and material changes to the information set out in the KID2. This replaces the earlier requirement of each issuance being carried out under a separate placement memorandum. This requirement is applicable to Issuers on a 'comply or explain'3 basis until 31 March 2024 and on a mandatory basis thereafter. A GID is required to contain the following disclosures: (a) disclosure specified in schedule I of the NCS Regulations; (b) disclosures specified in the Companies Act, 2013 (as applicable); and (c) any other additional disclosure that SEBI may specify. The GID may indicate the amount of monies which the Issuer proposes to raise during the validity period of the GID, but this is not mandatory. The board and shareholders resolutions specifying the current borrowing limits of the Issuer are required to be attached to the GID. The details required to be included in the KID are: (a) details of the offer of non-convertible securities in respect of which the KID is being issued; (b) financial information, if such information provided in the GID is more than 6 months old; (c) material4 changes, if any, in the information provided in the GID; and (d) any material developments not disclosed in the GID, since the issue of the GID relevant to the offer of non-convertible securities in respect of which the KID is being issued. |
The previous regime provided for two types of placement memorandums. For frequent Issuers, there was the option of filing a shelf placement memorandum and for each issuance, a tranche placement memorandum. However, this was at the Issuer's option, and was not mandatory. Issuers who did not wish to file a shelf placement memorandum could carry out each issuance on a stand-alone basis by filing a placement memorandum for that issuance. Under the new regime, it is mandatory for all Issuers to file a GID and a KID, even if the Issuer does not intend to issue any further NCDs in the one year period. Based on our discussions with the stock exchanges, we understand that even for the first issuance, the Issuer is required to file a KID, along with the GID. They have also clarified that the GID is not required to contain any issuance specific information and such issuance specific information is required to be contained in the KID. If the Issuer is unable to comply with these requirements, it can explain the reasons for non-compliance to the stock exchanges(s) and continue with the existing practice of issuing NCDs pursuant to a stand-alone placement memorandum. One issue with this approach is that the NCS Amendments have also amended the disclosure requirements for placement memorandums to align these to disclosures required for a public issuance, i.e., more extensive disclosures. However, we understand from our discussions with the National Stock Exchange ("NSE") that while the amended Regulation 45 of the NCS Regulations does not provide for it, the comply or explain facility is also available for the disclosures under a placement memorandum. NSE has clarified that an Issuer can issue a placement memorandum under Regulation 45 of the NCS Regulations, and make disclosures under Schedule II of the NCS Regulations (as it was prior to the NCS Amendment, being a less extensive disclosure regime for private placements) on a comply or explain basis. The Issuer has to disclose on the cover page or the second page of the placement memorandum, the reason for not complying with the new regime brought about by the NCS Amendment. Please see paragraph 4 below for our observations on schedule I of the NCS Regulations. |
| 3. | Regulation 50B – Large Corporates | This provision has been introduced pursuant to the NCS Amendment and provides for additional requirements, as may be prescribed by SEBI, in respect of 'Large Corporates'. |
The requirements for an entity being classified as a 'Large Corporate' have been set out in the NCS Master Circular A Large Corporate is a listed entity which has its specified securities or debt securities or non-convertible redeemable preference shares listed on the stock exchange(s), has an outstanding long-term borrowing of INR 100 crores or more (excluding inter-corporate borrowings from parent and subsidiaries and external commercial borrowings from any entity), and has a credit rating of 'AA' or above. SEBI, at its meeting held on 21 September 2023, has approved changes to the framework for large corporates. SEBI has proposed to do away with the penal provisions (i.e., a penalty of 0.2% of the shortfall in meeting the 25% incremental borrowings such Large Corporates are required to undertake by way of issue of debt securities) and introduce a system based on "incentives and moderated disincentives". In order to ease compliance, SEBI has also decided to retain the requirement that compliance with the framework be met over a contiguous block of three years. They have also dispensed with the requirement to file a statement identifying themselves as a Large Corporate and a statement regarding compliance with the framework. |
| 4. | Additional disclosures to be made in the issue document (applicable to private placement) pursuant to the NCS Amendment | ||
| In the event there is a merchant banker or co-manager in relation to the issue, the details of such merchant banker or co-manager must be disclosed. | Given that most issuances done on a private placement basis do not have merchant bankers or co-managers to the issuance, this amendment may not have a material impact from a practical perspective. | ||
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The Issuer is required to provide a list of expenses in relation to the issue (including a break-up for each item of expense). The disclosure should also include details of the any fees payable separately in relation to the following (in terms of amount, as a percentage of total issue expenses and as a percentage of total issue size): (a) Lead manager(s) fees (b) Underwriting commission (c) Brokerage, selling commission and upload fees (d) Fees payable to the registrars to the issue (e) Fees payable to the legal advisors (f) Advertising and marketing expenses (g) Fees payable to the regulators including stock exchanges (h) Expenses incurred on printing and distribution of issue stationary (i) Any other fees, commission or payments under whatever nomenclature. |
Prior to the NCS Amendment, the Issuer was required to only disclose the fees payable to the debenture trustee for the issue. With the change brought about by the NCS Amendment, it is mandatory for the Issuer to disclose all the costs and expenses incurred in relation to the issue. Consequently, if the expenses provided from (a) to (h) are applicable, each of them will have to be disclosed separately. Paragraph (i) is widely worded to cover fees under any nomenclature. |
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| The financial statements to be included in the document should be audited and certified by the statutory auditor(s) who holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India. | This is a compliance requirement for the Issuer | ||
| The Issuer has to disclose the amounts of any contingent liability, including obligations to maintain debt service account, any put option, corporate guarantee or letter of comfort issued by the Issuer. This should also include the name of the counterparty (subsidiary, joint venture entity, group company, etc.) on behalf of whom it has been issued. |
Prior to the NCS Amendment, the Issuer was only required to disclose details of financial indebtedness (including corporate guarantee) availed in the preceding three years and the current year and if there were any defaults in the Issuer's obligations towards such financial obligations. The NCS Amendment has expanded the scope of such disclosure to clarify that financial indebtedness would also include letters of comfort and other contingent liabilities. While disclosing defaults, the Issuer also has to make disclosures in relation to any defaults in relation to commercial papers. Further, the Issuer must now disclose details of all put options, outstanding corporate guarantees and letters of comfort issued by it instead of restricting it to the preceding three years and the current year. |
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| The requirement of disclosures pertaining to wilful defaulters has been done away with. | |||
| The Issuer has to disclose directors' remuneration (payable by the Issuer, its subsidiary or associate company), and particulars of the nature and extent of their interests in the Issuer, its subsidiaries and associate companies (including the directors' shareholding in such companies). | This is a compliance requirement for the Issuer | ||
| The Issuer has to include details of commercial papers and bank fund-based facilities and any other borrowings from financial institutions or financial creditors in the format set out in the NCS Regulations. | Prior to the NCS Amendment, while the Issuer was required to disclose details of all its borrowings, the Issuer has to now include details of all bank fund-based facilities separately as well. There is also an additional disclosure to be made in relation to commercial papers. | ||
| The Issuer is required to procure prior consents from directors, auditors, trustees, bankers to issue, solicitors or advocates to the issue, legal advisors to the issue, lead managers to the issue, registrar to the issue, and lenders (if required, as per the terms of the agreement) and experts. These consents are required to be annexed to the offer document. |
This requirement was not present prior to the NCS Amendment (except the requirement of annexing the consent from the debenture trustee). This is an additional obligation on the Issuer. However, it is pertinent to note that no objection certificates to be given by lenders will also now be annexed to the offer document (which will be available in the public domain). |
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| A risk factor is required to be included to the effect that while the debentures are secured against a charge to the tune of 100% of the principal and interest amount in favour of debenture trustee, and it is the duty of the debenture trustee to monitor that the security is maintained, however, the possibility of recovery of 100% of the amount shall depend on the market scenario prevalent at the time of the security. | This is an additional risk factor which needs to be included | ||
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If the proceeds of the issue are used towards: (a) the purchase of any business or interest in any business; (b) purchase or acquisition of any immoveable property; and (c) acquisition by the Issuer of shares in any other body corporate; the Issuer has to make certain additional disclosures and provide a report by a chartered accountant covering profits and losses of the Issuer for 3 financial years preceding the issuance and the assets and liabilities of the Issuer no earlier than 120 days prior to the issuance. |
At the time when the usage of the proceeds of the debentures is being finalised, the Issuer will have to ensure that it is in compliance with the disclosures required under this paragraph. | ||
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The Issuer has to disclose the broad lending and borrowing policy of the Issuer. This should include a summary of the key terms and conditions of the term loans such as re-scheduling, prepayment, penalty and default. Further, in the event, the lending or borrowing is between the Issuer and its subsidiaries or associates, the Issuer has to disclose the terms and conditions of such term loans including rescheduling, prepayment, penalty, and default. |
This will have a material impact as the ambit of this disclosure is extensive, and will require the Issuer to disclose key conditions of all the financing arrangements it is a party to. This will require diligence to be carried out on the Issuer's financing arrangements, even if this is not a commercial requirement of the investors. | ||
| The Issuer has to include a list of its material contracts, along with summaries thereto. Further, the Issuer has to disclose the time and place at which the material contracts will be available for inspection from the date of the offer document until the date of closing of subscription list. | This will have a material impact as the ambit of this disclosure is extensive, and will require the Issuer to summarise all its material contracts. | ||
| The Issuer has to disclose the aggregate number of securities of the Issuer and its subsidiary companies purchased or sold by the promoter group, and by the directors of the Issuer which is a promoter of the Issuer, and by the directors of the Issuer and their relatives, within six months immediately preceding the date of filing the offer document with the registrar of companies. | This is a compliance requirement for the Issuer | ||
Footnotes
1. Certain transitory exemptions have been provided where the issuance is being made within the validity of a previously issued shelf placement memorandum
2. The KID constitutes the offer letter under the Companies Act, 2013 and must include all information specified in Form PAS-4.
3. "comply or explain" means that the issuer shall endeavour to comply and achieve full compliance, by filing a GID instead of a placement memorandum for private placement of non- convertible securities sought to be listed, until 31 March 2024. In case the entity is unable to achieve full compliance with the provisions, till such time, it shall explain the reasons for such non-compliance or partial compliance, and the steps initiated to achieve full compliance.
4. "material" means anything
which is likely to impact an investor's informed
decision.
PART B:
CHANGES TO THE NCS MASTER CIRCULAR AND REQUIREMENTS UNDER THE ODR
CIRCULAR
| Sr. No. | Provision under the relevant Circular | Changes to the relevant Circular | Impact |
| NCS Master Circular | |||
| 1. | Paragraph 9.1 of Chapter VIII – Specifications related to ISIN for debt securities | In case there is any modification in terms or structure of the issue, for example, change in terms of payment, change in interest pay-out frequency etc., the Issuer must inform the stock exchange and depository regarding the same. | Prior to the amendment, the Issuer was required to inform just the depository about such changes. Now, the stock exchanges where the debt securities are listed, must be informed along with the depository. However, even under the existing regime, any material modifications to the terms of the NCDs required the consent of the stock exchange(s). |
| 2. | Chapter XXIII – Nominee Directors |
This chapter was introduced in July 2023, and requires an Issuer having existing Listed NCDs was required to amend its articles by 30 September 2023 to provide for appointment a nominee director nominated by the debenture trustee to its board of directors. Further, for first time Issuers, the Issuers are required to provide an undertaking to the stock exchange(s), at the time of in-principle approval, that they will amend their articles of association within a period of 6 months from the date of listing of the debt securities. |
While the timeline of 30 September 2023, has passed, this is relevant for first-time Issuers. |
| 3. | Chapter XV – Introduction of LEI for Issuers who have listed and/or propose to list non-convertible securities, etc. |
This chapter was introduced in May 2023, and according to this chapter, Issuers having outstanding listed non-convertible securities as on 31 August 2023 were required to obtain and report the legal entity identifier ("LEI") code to the depositories and the centralized database of corporate bonds on or before 1 September 2023. Further, after 1 September 2023, the requirement is for Issuers to report the LEI code to the centralized database of corporate bonds and the depositories at the time of allotment of ISIN. |
This is an additional compliance requirement for Issuers at the time of allotment of ISIN. |
| ODR Circular | |||
| 4. |
The ODR Circular was issued to streamline the existing dispute resolution mechanism applicable in the Indian securities market, and to introduce online conciliation and online arbitration for resolution of disputes. The ODR Circular is applicable to, inter alia, disputes arising between any: (a) investors and listed companies (including their registrar and share transfer agents) or any of the specified intermediaries / regulated entities in securities market (as listed in Schedule A of the ODR Circular1); and (b) institutional or corporate clients and specified intermediaries / regulated entities in securities market (as listed in Schedule B of the ODR Circular2), at the option of the institutional or corporate clients. Schedule B includes debenture trustees and Issuers. Schedule B entities, the ODR Circular also provides an option for the clients to by harnessing any independent institutional mediation, conciliation and/or online arbitration institution in India. The ODR Circular provides that all agreements, contractual frameworks or relationships entered into by Market Participants (which includes listed companies, debenture trustees and Issuers of debentures) with investors/clients in the Indian securities market presently existing or entered into, after the date of the ODR Circular will be deemed to incorporate a provision to the effect that the parties agree to undertake online conciliation and/or online arbitration by participating in the ODR portal and/or undertaking dispute resolution in the manner specified in the ODR Circular. |
The applicability of the ODR Circular to disputes between debenture holders (or the debenture trustee acting on behalf of debenture holders) and the Issuer is unclear. The ODR Circular also applies to listed companies and their investors, but it is unclear if this is meant to cover entities which have issued Listed NCDs and are not equity listed (the LODR Regulations use the term "Listed Entity" which covers both equity and debt listed entities). Discussions with debenture trustees indicate that Issuers and debenture trustees are trying to obtain clarity on the scope of the circular. In any event this mechanism appears to be relevant to investor grievances and complaints which were earlier addressed under the SCORES3 mechanism of SEBI, rather than the substantive enforcement related provisions in the debenture documents. | |
Footnotes
1. Please see below the list of specified intermediaries / regulated entities: "1. AIFs – Fund managers 2. CIS – Collective Investment management company 3. Depository Participants 4. Investment Advisors 5. InvITs – Investment Manager 6. Mutual Funds – AMCs 7. Portfolio Managers 8. Registrars and Share Transfer Agents 9. REITs – Managers 10. Stock brokers".
2. Please see below the list of specified intermediaries / regulated entities: "1. Clearing Corporations and their constituents 2. Credit Rating Agency and rating clients 3. Custodians and their clients/FPIs 4. Debenture Trustees and Issuers 5. Designated Depository Participant and their clients/FPIs 6. KYC Registration Agency and their clients/intermediaries 7. Merchant Banker and issuers 8. Mutual Funds and Mutual Fund Distributors 9. Proxy Advisory and their clients 10. Proxy advisors and listed entities 11. Registrars and Share Transfer Agents and their clients 12. Research Analyst and their clients 13. Stock brokers and their Authorised Persons 14. Trading Members and Clearing Members 15. Vault Managers and beneficial owners".
3. SEBI complaints redressal system
PART C:
CHANGES TO THE NCD REGIME UNDER THE LODR REGULATIONS
| Sr. No. | Provision under the LODR Regulations | Changes to the LODR Regulations | Impact | ||||||||
| 1. |
Regulation 62A – Listing of subsequent issuances by a listed entity |
Regulation 62A is a new regulation governing issuance of NCDs by a listed entity. A listed entity is defined to include both entities which have equity instruments listed on stock exchanges as well as entities which have NCDs or certain other types of securities listed on stock exchanges. It provides that: (a) A listed entity, whose non-convertible debt securities are listed shall list all non-convertible debt securities, proposed to be issued on or after 1 January 2024, on the stock exchange(s). (a) A listed entity, whose subsequent issues of unlisted non-convertible debt securities are made on or before 31 December 2023 are outstanding on the said date, may list such securities, on the stock exchange(s). (b) A listed entity that proposes to list non-convertible debt securities on the stock exchange(s) on or after 1 January 2024, shall list all outstanding unlisted non-convertible debt securities previously issued on or after 1 January 2024, on the stock exchange(s) within three months from the date of the listing of the non-convertible debt securities proposed to be listed. An exemption has been provided for the following securities: (a) Bonds issued under section 54EC of the Income Tax Act, 1961 (43 of 1961), which are bonds issued by NABARD or NHAI which have the benefit of capital gains exemptions; (b) NCDs issued pursuant to an agreement entered into between the listed entity of such securities and multilateral institutions; and (c) NCDs issued pursuant to an order of any court or Tribunal or regulatory requirement as stipulated by a financial sector regulator namely, the Board, Reserve Bank of India, Insurance Regulatory and Development Authority of India or the Pension Fund and Regulatory Development Authority. The exemption is subject to the requirement that securities issued by the Listed Entity to multilateral institutions or pursuant to the order of a court or the specified financial sector regulators shall be locked in and held till maturity by the investors and shall be unencumbered. |
This is a significant development, as it in substance means that going forward, once an entity issues Listed NCDs and such Listed NCDs are subsisting, it cannot issue NCDs on an unlisted basis. Given that Listed NCDs are subject to the electronic book building mechanism regime, other compliance requirements and now additional disclosures, this will increase the disclosure and compliance obligations of Issuers materially. Issuers having issued Listed NCDs will lose the flexibility to issue NCDs on an unlisted basis even where they do not, from an end-use or other perspective, need to do a listed issuance. Corporate groups may therefore need to segregate and use different entities for listed and unlisted issuances. In terms of the sequencing and timing required under the new regulation, the following is contemplated:
|
Footnote
1. It can choose to issue unlisted NCDs. It does not need to list unlisted NCDs issued prior to 1 January 2024, but has an option to do so.
Originally published 9 October 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
