A. Introduction:
Securities and Exchange Board of India (“SEBI”, “Board”) vide its Consultation Paper dated May 19, 2021 has proposed to merge the SEBI Issue and Listing of Debt Securities) Regulations, 2008 (hereinafter referred as “ILDS Regulations”) and the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (hereinafter referred as “NCRPS Regulations”) into a single consolidated regulation – SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (hereinafter referred as “NCS Regulations”). The move is aimed at easing the compliance burden on listed entities and providing a consistent approach by harmonizing the laws relating to non-convertible securities which are currently spread across the Companies Act, 2013 (“Companies Act”), SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Debenture Trustees) Regulations, 1993 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018; and various circulars issued by SEBI.
In this article, we shall focus on the key amendments and recommendations proposed specifically in relation to private placement of debt securities.
B. Differentiation of ‘debt securities’ from ‘perpetual debt instrument’:
SEBI has acknowledged that these two terms were being used interchangeably by market participants and hence to distinguish between the two, the definition of ‘debt securities’ is proposed to be modified by inclusion of the words “fixed maturity period”. The proposed amended definition, will read as below:
“debt securities” means non-convertible debt securities with a fixed maturity period which create or acknowledge indebtedness and includes, debentures, bonds or any other security whether constituting a charge on the assets/properties or not, but excludes security receipts, securitized debt instruments, money market instruments regulated by Reserve Bank of India, and bonds issued by Government or such other bodies as may be specified by the Board;
C. Green Debt Securities:
The NCS Regulations introduces a new definition of ‘green debt security’ which seeks to separately categorise debt securities for raising funds for projects pertaining to renewable energy, sustainable, waste management, water management, land use etc. However, the NCS Regulations do not provide any further conditionalities regarding the issue of such green debt securities. The proposed definition is reproduced below for ease of reference:
“green debt security” means a debt security issued for raising funds that are to be utilised for project(s) and/or asset(s) falling under any of the following broad categories subject to the conditions as may be specified by Board from time to time.:
i. Renewable and sustainable energy including wind, solar, bioenergy, other sources of energy which use clean technology;
ii. Clean transportation including mass/public transportation;
iii. Sustainable water management including clean and/or drinking water, water recycling;
iv. Climate change adaptation;
v. Energy efficiency including efficient and green buildings;
vi. Sustainable waste management including recycling, waste to energy, efficient disposal of wastage;
vii. Sustainable land use including sustainable forestry and agriculture, afforestation;
viii. Biodiversity conservation; or
ix. any other category as may be specified by Board, from time to time.
D. Eligible Issuers under Regulation 6:
The NCS Regulations envisage a stricter eligibility criterion for issuers for private placement of debt securities in line with the existing norms for the public issue of debt securities. Hence, companies would become ineligible to issue privately placed debt securities in the following circumstances:
• if the issuer, any of its promoters, promoter group or directors are debarred from accessing the securities market or dealing in securities by the Board for the duration of the debarment.
• if any of the promoters or whole-time directors of the issuer is a promoter or whole-time director of any other company which is debarred from accessing the securities market or dealing in securities by the Board, except:
(i) in case of a person who was appointed as a director only by virtue of nomination by a debenture trustee in other company;
(ii) when the period of debarment is over.
• if any of its promoters or directors is a fugitive economic offender under Section 12 of the Fugitive Economic Offenders Act, 2018
E. Applicability and reduction of period for Call and Put Option under Regulation 19:
Currently, the ILDS Regulations lay down the procedure for exercise of call and put options in case of debt securities issued on public issue basis only. This is now proposed to be extended to privately placed debt securities. Also, the current provisions of the ILDS Regulations provide an option to an issuer to exercise the option to recall debt securities prior to maturity and an option to the investor to exercise the put option to redeem debt securities prior to maturity, after twenty-four months of issuance of debt securities. This provision is deemed to be restrictive and in order to provide more flexibility to the issuer as well as the investor, the stated period of twenty-four months is now proposed to be reduced to twelve months under the NCS Regulations. Further, it has been prescribed that any partial exercise of such right shall be done on proportionate basis only.
F. Electronic Book Provider (EBP) Platform Mechanism:
Electronic Book Provider (EBP) platform mechanism as prescribed under SEBI/HO/DDHS/CIR/P/2018/05 dated January 5, 2018, is currently functioning for the transparent issuance of debt securities on private placement basis. This platform is provided by a recognized stock exchange(s) or a recognised depository and facilitates a price discovery mechanism for privately placements majorly on a ‘over the counter’ basis. Presently, it is applicable for private placements of debt securities of INR 200 crore and more in a given financial year. In view of the recommendations of the Corporate Bonds and Securitization Advisory Committee of SEBI, the NCS Regulations propose the any issue of eligible securities proposed to be listed amounting to INR 100 crore or above in a financial year, shall be made through the EBP platform.
Further, the present timeline for filing a placement memorandum on the EBP platform of two working days before the issue opening date, is recommended to be revised to five working days before issue opening date for issuers accessing EBP platform for the first time.
The proposed NCS Regulations are indeed a welcome step in consolidating, aligning and enhancing readability of the law relating to ‘pure-play’ debt and quasi-debt financing and towards the ease of doing business. Issuers and other market participants stand to benefit from the potentially lowered compliance burden and clarity afforded by the proposed merging of all circulars into a single operational circular by the regulator. While the proposal is well-intentioned, efficiency inducing and espouses a clearly demarcated and harmonized piece of legislation, industry reaction and public discourse is awaited and it remains to be seen whether the resultant regulations meet the objectives of the regulator. In any case, the legislative intent must be backed by ample executive co-operation and operational clarity for successful implementation.
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