Chapter 6 Debt Funding-Indian Fund Based (Corporate Debt) – Corporate Funding and Listing in Stock Exchange ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Debt Funding-Indian Fund Based (Corporate Debt) – Corporate Funding & Listing in Stock Exchange Study Material
Question 1.
Write notes on the following:
(ii) Fixed income products (Dec 2012, 4 marks)
(iv) Investors in debt market (Dec 2012, 4 marks)
Answer
(ii) Fixed Income Products: These are investment vehicles which provide for fixed income returns on investments. Fixed Income Products includes Bank Fixed Deposits, Corporate Fixed deposits, Public Provident Fund, Kisan Vikas Patra, National Savings Certificate etc.
A bank basically has three types of deposits, i.e. time deposit, savings deposit and current account. NBFCs also accept various types of deposits.
(iv) Investors in Debt Market
Investors in debt markets are the entities who invest in fixed income instruments. The investors in debt markets are generally Banks, Financial Institutions, Mutual Funds, Insurance Companies, Provident Funds etc.
(a) Banks: They invest in all instruments ranging from T- bills, CPs and CDs to GOISECs, private sector debentures etc. Banks lend to corporate sector directly by way of loans and advances and also invest in debentures issued by the private corporate sector and in PSU bonds.
(b) Insurance Companies: The second largest category of investors in the debt market are the insurance companies.
(c) Provident funds: Provident funds are estimated to be the third largest investors in the debt market. Investment guidelines for provident funds are being progressively liberalized and investment in private sector debentures is one step in this direction.
(d) Mutual Funds: Mutual funds represent an extremely important
category of investors in debt market. World over, they have almost surpassed banks as the largest direct collector of primary savings from retail investors and therefore as investors in the wholesale debt market.
(e) Trust etc: Trust, Corporate Treasuries, Foreign Institutional and Retail Investors also invest in the debt market through financial institutions, governmental bodies or bank.
Question 2.
Discuss how the debt market and its instruments help the companies in raising funds. (June 2016, 5 marks)
Answer:
The debt market in India comprises mainly of two segments viz., the Government Securities Market consisting of instruments like Central and State Governments securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs). T-bills and the Corporate Securities Market consisting of FI bonds, PSU Bonds and Debentures/ Corporate bonds. Investors in debt market are entitled to invest in such fixed income instruments.
The investors in such instruments are generally Banks, Financial Institutions, Mutual Funds, Insurance Companies, Provident Funds etc. Debt markets are markets fot the issuance, trading and settlement, of fixed income securities of various types and features. Fixed income Securities can be issued by almost any legal entity like Central and State Governments, public bodies, statutory corporations, banks and institutions and corporate bodies. Thus this helps the companies to raise funds like Corporate Debentures. Fixed income Products and Interest Rate bonds etc.
Question 3.
Discuss briefly the rules and regulations relating to redemption and rollover of debt securities. (Dec 2012, 5 marks)
Answer
The redemption and roll-over of the debt securities, whether issued to the public or privately placed, are required to be made in accordance with the provisions of SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and redemption and roll-over of debt securities that are convertible, either partially or fully or optionally into listed or unlisted equity shall be guided by the disclosure norms applicable to equity or other instruments offered on conversion in terms of SEBI (Issue of capital and disclosure requirements) Regulations, 2018.
The redemption and rollover of the debt securities are required to fulfill certain conditions which are as follows:
- The issuer shall redeem the debt securities whether non- convertible or convertible in terms of the offer document.
- Roll-over of non convertible debt securities requires passing of a special resolution of holders of such securities and give twenty one days notice of the proposed roll over.
- Disclosure has been made in respect of the credit rating obtained for the debt securities.
Question 4.
Explain rollover of non-convertible portion of partly convertible debentures under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. (June 2013, 5 marks)
Answer:
The non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds ₹ 10 crore can be rolled over without change in the interest rate, subject to the compliance with the following conditions with respect to SEBI (ICDR) Regulation, 2018.
- 75% of the holders of the convertible debt instruments of the issuer have, through a resolution, approved the rollover through postal ballot;
- The issuer has along with the notice for passing the resolution, sent to all holders of the convertible debt instruments, an auditor’s certificate on the cash flow of the issuer and with comments on the liquidity position of the issuer;
- The issuer has undertaken to redeem the non- convertible portion of the partly convertible debt instruments of all holders of the convertible debt instrument who have not agreed to the resolution;
- Credit rating has been obtained from at least one credit rating agency registered with the Board within a period of 1 month prior to the due date of redemption and has communicated to the holders of the convertible debt instruments, before the rollover.
Question 5.
The debt market in India comprises mainly of two segments, i.e., the government securities market and corporate securities market. Discuss in brief. (Dec 2015, 5 marks)
Answer:
The debt market in India comprises mainly of two segments viz., the Government securities market consisting of Central and State Governments securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills and the corporate securities market consisting of FI bonds, PSU bonds, and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.
The trading of government securities on the stock exchanges is currently through Negotiated Dealing System using members of Bombay Stock Exchange (BSE) / National Stock Exchange (NSE) and these trades are required to be reported to the exchange. The bulk of the corporate bonds, being privately placed, were, however, not listed on the stock exchanges.
Two Depositories, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) maintain records of holding of securities in a dematerialized form. Records of holding of government securities for wholesale dealers like banks/Primary Dealers (P.Ds) and other financial institutions are maintained by the RBI.
Question 6.
Comment on the followings:
XYZ Limited a listed company has issued Partly convertible debentures in the past. Now it is planning for roll over of non-convertible portion of these debentures. As a Company Secretary advise the conditions to be fulfilled in this regard. (June 2017, 5 marks)
Answer:
Roll Over of Non Convertible Portion of Partly Convertible Debt Instruments:
The non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds ₹ 10 crores can be rolled over without change in the interest rate, subject to compliance with the provisions of Companies Act, 2013, and the following conditions:
(a) 75% of the holders of the convertible debt instruments of the issuer have, through a resolution through postal ballot, approved the rollover;
(b) the issuer has along with the notice for passing the resolution, sent to all holders of the convertible debt instruments, an auditors’ certificate on the cash flow of the issuer and with comments on the liquidity position of the issuer;
(c) the issuer has undertaken to redeem the non-convertible portion of the partly convertible debt instruments of all the holders of the convertible debt instruments who have not agreed to the resolution;
(d) credit rating has been obtained from at least one credit rating agency registered with the SEBI within a period of 1 month prior to the due date of redemption and has been communicated to the holders of the convertible debt instruments, before the roll over.
However, the creation of fresh security and execution of fresh trust deed is not mandatory if the existing trust deed or the security documents provide for continuance of the security till redemption of secured convertible debt instruments.
Further, whether the issuer is required to create fresh security and to execute fresh trust deed or not is to be decided by the debenture trustee.
Question 7.
Explain the following:
Securitised Debt Instrument. (Dec 2018, 3 marks)
Answer:
Securitized Debt Instrument: It means any certificate or instrument, by whatever name called, issued to an investor by any issuer who is a special purpose distinct entity possessing any debt or receivable, including mortgage debt assigned to such entity, and acknowledging the beneficial interest of the investor in such debt or receivable, including mortgage debt, as the case may be.
Securitized debt instruments are regulated by the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, SEBI (Issue and Listing of Securitised Debt Instrument and Security Receipts) Regulations, 2008, for listing on stock exchanges and the Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003.
Question 8.
Explain with a suitable example, day count convention for Debt Securities issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008. (June 2019, 5 marks)
Answer:
SEBI has provided certain clarifications on aspects related to day count convention for debt securities issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
(i) If the interest payment date falls on a holiday, the payment may be made on the following working day however the dates of the future coupon payments would be as per the schedule originally stipulated at the time of issuing the security.
Example:
Date of Issue of Corporate bonds: 1 July 2016 Date of Maturity: 30 June, 2018 Date of coupon payments: 1 January and 1 July Coupon payable: semi-annually
In this case, 1 January, 2017 is a Sunday, thus the coupon would be payable on 2 January, 2017 i.e. the next working day. However the calculation for payment of interest will be only till 31st December, 2016, which would have been the case if 1 January, 2017 were not a holiday. Also, the next dates of payment would remain 1 July, 2017 and 1 January, 2018 despite the fact that one of the interest payment was made on 2 January,2017.
(ii) In order to ensure consistency for interest calculation, a uniform methodology shall be followed for calculation of interest payments in the case of leap year, which shall be as follows:
In case of a leap year, if February 29 falls during the tenor of a security, then the number of days shall be reckoned as 366 days (Actual/Actual day count convention) for a whole one year period, irrespective of whether the interest is payable annually, half yearly, quarterly or monthly etc.
Example:
Date of issue of corporate bonds: 1 January, 2016
Coupon payable: Semi-annually
Date of coupon payments: 1 July and 1 January
In the above example, in case of the leap year (i.e, 2016), 366 days would be reckoned as the denominator (Actual/Actual), for payment of interest, in both the half year periods i.e. 1 Jan, 2016 to 1 Jul, 2016 and 1 Jul, 2016 to 1 Jan, 2017.
Question 9.
Discuss the measures taken by Government and Regulators to develop a vibrant Corporate Bond Market in India. (Dec 2019, 5 marks)
Answer:
A vibrant capital market, both equity and bond, has to play an increasingly pivotal role to facilitate fund mobilization for sustaining India’s projected economic growth momentum. The role of corporate bond market becomes even more important now, given the stress on the banking sector.
Keeping in view the larger complementary role that corporate bonds have to play along-side bank credit for financing economic activities, several policy measures have been taken by the Government and the Regulators to develop a vibrant corporate bond market.
Some important measures include:
- Framework for allowing banks to provide Partial Credit Enhancement for enhancing credit worthiness of corporate bonds.
- Information Repositories developed by Exchanges and Depositories to provide consolidated information on primary issuance and secondary market trades in corporate bonds.
- Electronic Book Building mechanism for providing enhanced transparency in issuance of debt securities on private placement basis.
- Enhanced standards for Credit Rating Agencies for timely monitoring of credit quality of bonds.
- Specifications related to International Securities Identification Number (ISINs) for debt securities to encourage liquidity and reduce fragmentation of issues.
- Tri-Party Repo trading on Exchanges to enhance liquidity and price discovery in corporate bonds.
- Time taken for listing of public issue of bonds reduced from 12 days to 6 days. And
- Doing away with the requirement of 1 % security deposit for public issue of debt securities.
Question 10.
On 30th May, 2017 SEBI came out with a circular stating the disclosure requirements for issuance and listing of Green Debt Securities in India. Explain the Disclosure Document and other requirements in this context. (Dec 2020, 5 marks)
Answer:
The issuer of a Green Debt Securities shall make following disclosures:
(i)Environmental objectives: A statement on environment objectives of the issue of Green Debt Securities;
(ii)Decision-making: Brief details of decision-making process issuer have followed/would follow for determining the eligibility of project(s) and/or asset(s), for which the proceeds are been raised through issuance of Green Debt Securities.
An indicative guideline of the details to be provided is as under:
- process followed/to be followed for determining how the project(s) and/or asset(s) fit within the eligible green projects categories;
- the criteria, making the project(s) and/or asset(s) eligible for using the Green Debt Securities proceeds; and
- environmental sustainability objectives of the proposed green investment.
(iii) Details of the system: Issuer shall provide the details of the system/procedures to be employed for tracking the deployment of the proceeds of the issue.
(iv) Details of the project(s) and/or asset(s) or areas where the issuer, proposes to utilise the proceeds of the issue of Green Debt Securities, including towards refinancing of existing green project(s) and/or asset(s), if any.
(v) Appoint an independent third party: The issuer may appoint an independent third party reviewer/ certifier, for reviewing/certifying the processes including project evaluation and selection criteria, project categories eligible for financing by Green Debt Securities, etc. Such appointment is optional and shall be disclosed in the offer document.
Question 11.
Advantages and disadvantages of taking loans against shares by promoters in a listed company. (Dec 2020, 5 marks)
Answer:
Generally, wherever the promoter decides to set up another venture, funds are required as promoter’s contribution.
Advantages of taking loans against shares by promoters in a listed company:
- Funds can be raised easily because the shares have liquidity and are easily saleable valuation is determined based on market price. After hair cut/ margin loan against equity is granted by Banks, NBFCs or other entities.
- Large funds can be raised.
- Share are pledged in favour of lender but voting rights remain with the promoter.
- Promoter can make repayment based on the availability of funds.
Disadvantages of taking loans against shares by promoters in a listed company:
- If the market price of the share goes down, the margin has to be maintained. The shortfall is to be met by either additional pledge of shares, or by making repayment of loan to the extent of shortfall.
- In case the promoter is not able to fulfil has commitment, the lender has a right to sell the shares to the extent of short fall as per terms and conditions of agreement.
- This situation does not leave any room sometimes with the promoter and the confidence of its shareholders goes down.
- Multiplier impact worsen the situation.
- The promoter has to be disclose details of pledge of its equity and all charges.
Question 12.
Explain Continuous Listing in context of corporate debts. (Dec 2020, 3 marks)
Answer:
Continuous Listing:
(1) All the issuer shall comply with the conditions of listing specified in the respective listing agreement for debt securities while making public issues of debt securities or seeking listing, of debt securities issued on private placement basis.
(1A) the listed issuer is also required to comply with the post listing requirements for entities that have listed their debt securities as specified under Chapter V of the SEBI (LODR) Regulations, 2015 and Circulars issued by SEBI under this regulations.
(2) Each rating obtained by the issuer shall be periodically reviewed by the registered credit rating agency and any revision in the rating shall be promptly disclosed by the issuer to the stock exchange(s) where the debt securities are listed. Submit half yearly financial statement with the stock exchange containing information as specified by SEBI.
(3) Any change in rating shall be promptly disseminated to investors and prospective investors in such manner as the stock exchange may determine from time to time.
(4) Debenture trustee must disclose the information to the investors and the general public by issuing a press release in any of the following events:
(a) Default by the issuer to pay interest on debt securities or redemption amount;
(b) Failure to create a charge on the assets;
(c) Revision of rating assigned to the debt securities
Question 13.
What do you understand by Green Debt Securities? Explain. (Aug 2021, 5 marks)
Answer:
A Debt Security shall be regard as “Green or Green Debt Securities”, if the funds raised through issuance of the debt securities aro to be utilised for project(s) and/ or asset(s) falling under any of the following broad categories:
- Renewable and sustainable energy including wind, solar, bioenergy, other sources of energy which use clean technology etc.;
- Clean transportation including mass/public transportation etc.;
- Sustainable water management including clean and/or drinking water, water recycling etc.;
- Climate change adaptation;
- Energy efficiency including efficient and green buildings etc.;
- Sustainable waste management including recycling, waste to energy, efficient disposal of wastage etc.;
- Sustainable land use including sustainable forestry and agriculture, afforestation etc.;
- Bio diversity conservation;
- Any other category as may be specified by SEBI, from time to time.
Question 14.
Discuss the obligations and duties of Electronic Book Provider in relation to issuance of debt securities. (June 2022, 3 marks)
Question 15.
A company is planning to place privately 10 years. 11.50% debentures. Most of such debentures would be issued to a venture capitalist who is looking for an exit route. Write a brief note advising the company as to how it can proceed for listing of such debentures on a recognised stock exchange. (Dec 2013, 5 marks)
Answer:
(1) Listing of Debt Securities: The issuer company should consider following points:
(a) Debt securities issued by a company on private placement basis on a recognized stock exchange subject to the following conditions:
- In compliance with the provisions of the Companies Act, Rules prescribed there under and other applicable Laws.
- Credit rating has been obtained from one or more registered credit rating agencies.
- Dematerialized form.
- Disclosures provided in SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 have been
complied with.
(b) The company shall comply with conditions of listing specified in the SEBI (LODR) Regulations, 2015 with the stock exchange where its debt securities are to be listed.
(c) The issuer shall make disclosures as specified in Schedule I of these regulations accompanied by the latest Annual Report of the issuer.
(2) Obligation of issuer company as per SEBI (LODR) Regulations, 2015: Chapter V of SEBI (LODR) Regulations provides for following obligations of issuer company which has issued debt securities (Non convertible):
| Reg. 50 | Intimation of interest on and redemption of debt-instruments to Stock-Exchange at least 11 working days before the due- date. |
| Reg. 51 | Disclosure of information having bearing on performance of the listed entity. |
| Reg. 52 | Preparation and submission of un-audited or audited financial result. |
| Reg. 53 | Disclosure in Annual – Report |
| Reg. 54 | Asset Cover |
| Reg. 55 | Credit Rating |
| Reg. 56 | Documents and intimation to debenture trustees. |
Question 16.
Attempt the following and support your answer with necessary reasons:
XYZ Ltd. issued 12.5% debentures amounting to ₹ 150 crores on private placement basis during the financial year 2013. Later on, it was found that these debentures were issued to 73 persons. A Sessions Court or Tribunal in Mumbai took cognizance of the same and suo moto initiated the proceedings against XYZ Ltd. The company pleaded that the Court/Tribunal has no locus stand in this regard and therefore, it cannot initiate any proceedings against it.
As per the Securities and Exchange Board of India Act, 1992 and other relevant laws, discuss whether the company’s pleading is tenable and whether the Court or Tribunal should drop the proceedings against the company. (June 2013, 5 marks)
Answer:
In the given case XYZ Ltd. has violated the requirement of “Private Placement” because in this case securities are offered to a selected group of persons not exceeding 49. Here the company has issued debentures to 73 persons which is clear violation of Regulations of SEBI (ICDR)
Regulation, 2018.
But the action of Mumbai Session Court of taking suo moto cognizance is not valid due to reasons given in Section 26 of SEBI Act,1992.
According to Sec. 26 “No Court/Tribunal shall take cognizance of any offence punishable under this Act or any rules or regulations made thereunder, except on compliant made by SEBI.” So, the issuer company’s pleading that the Court/Tribunal shall not initiate any proceeding against it, is valid. The Court/Tribunal shall drop the proceeding against the company.
Question 17.
The partly convertible debt instruments of ABC Ltd. are listed on BSE and NSE. ABC Ltd. is contemplating the roll over of the non convertible portion of the partly convertible debt instruments. As a company secretary of ABC Ltd. prepare a board note highlighting the conditions to be complied with by ABC Ltd. in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. (Dec 2017, 5 marks)
Answer:
The non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds ₹ 10 crores can be rolled over without change in the interest rate, subject to compliance with the provisions of Companies Act, 2013, and the following conditions –
(a) 75% of the holders of the convertible debt instruments of the issuer have, through a resolution through postal ballot, approved the rollover.
(b) the issuer has along with the notice for passing the resolution, sent to all holders of the convertible debt instruments, an auditors’ certificate on the cash flow of the issuer and with comments on the liquidity position of the issuer.
(c) the issuer has undertaken to redeem the non-convertible portion of the partly convertible debt instruments of all the holders of the convertible debt instruments who have not agreed to the resolution.
(d) credit rating has been obtained from at least one credit rating agency registered with the SEBI within a period of one month prior to the due date of redemption and has been communicated to the holders of the convertible debt instruments, before the roll over.
However, the creation of fresh security and execution of fresh trust deed is not mandatory if the existing trust deed or the security documents provide for continuance of the security till redemption of secured convertible debt instruments.
Further, whether the issuer is required to create fresh security and to execute fresh trust deed or not is to be decided by the debenture trustee.
Debt Funding-Indian Fund Based (Corporate Debt) Notes
1. Debt Market
Debt markets are markets for the issuance, trading and settlement of various types and features of fixed income securities. Fixed income securities can be issued by any legal entity like central and state governments, public bodies, statutory corporations, banks and institutions and corporate bodies.
The debt market in India comprises mainly of two segments viz., the Government securities market consisting of Central and State Governments securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills and the corporate securities market consisting of FI bonds, PSU bonds, and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.
2. Debentures
Debenture is a document evidencing a debt or acknowledging it and any document which fulfills either of these conditions is a debenture. They can be either convertible or non convertible into equity shares at a later point in time. Debenture is a written instrument acknowledging a debt to the Company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.
Section 2(30) of the Companies Act, 2013 defines a debenture which includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
3. Types of Debentures
(i) Secured Debentures: Secured debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default.
The secured debenture holders have greater protection. Holders of secured debentures remain convinced about the payment of interest and payment of principal in the event of redemption.
(ii) Unsecured Debentures: These debentures are also known as naked debentures. These debentures are not secured by way of charge on the company’s assets. Interest rate payable on unsecured debentures is generally higher than that which is payable on secured debentures.
(iii) Redeemable Debentures: Redeemable debentures are those which are payable on the expiry of the specific period (Maximum period 10 years from the date of issue) either in lump sum or in Installments during the life time of the company. Debentures can be redeemed either at par or at premium.
(iv) irredeemable Debentures: Irredeemable debentures are also known as Perpetual Debentures because the company does not give any undertaking for the repayment of money borrowed by issuing such debentures. These debentures are repayable on the winding-up of a company or on the expiry of a long period. Debentures may be for fixed terms or payable on demand. Debentures may be for fixed term of years or repayable on notice. They can legally be framed as payable to bearer.
(v) Convertible Debenture: These debentures are converted into equity shares of the company on the expiry of a specified period.
(vi) Non- Convertible Debenture: Non-convertible debentures do not have any option to convert the same into equity shares and are redeemed at the expiry of specified period(s).
(vii) Pertly Convertible Debenture: Partly convertible debentures are divided into two portions, viz.. convertle and non-convertible portion. The convertible portion is converted into equity shares of the company at the expiry of specified period. The nonconvertible portion is redeemed at the expiry of the specified period in terms of the issue.
(viii) Bearer Debentures: These debentures are payable to bearer of the debentures and transferable by mere delivery. These debentures are also known as unregistered debentures.
(ix) Registered Debentures; These debentures are not transferable by mere delivery of debenture certificates and shall be transferred as per the provisions of the Companies Act, by executing transfer deeds and the transfer registered by the company. Registered debentures are not negotiable instruments. A registered holder of a debenture means a person whose name appears both in the debenture certificate and in the register of debenture holders. Principal and interest amount, when due in respect of these debentures are payable to the registered holders thereof only.
4. Governing Framework for Debt Securities
The Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014
Section 71 of the Companies Act, 2013 prescribes the conditions for issue of debentures. A debenture is a legal document that represents a secure means by which a creditor can lend money to the debtor. A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
Debt securities which are convertible, either partially or fully or optionally into listed or unlisted equity shall be guided by the disclosure norms applicable to equity or other instruments offered on conversion in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
SEBI (Issue and Listing of Debt Securities) Regulations, 2008
SEBI (Issue and Listing of Debt Securities) Regulations, 2008 pertaining to issue and listing of debt securities which are not convertible, either in whole or part into equity instruments. They provide for a rationalized disclosure requirements and a reduction of certain onerous obligations attached to an issue of debt securities.
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”)
The listing of securities is ensured by way of an agreement which is entered into between a stock exchange and the issuing company. This agreement called listing agreement. All Listed entities shall comply with the listing conditions as stipulated in Listing Regulations to provide substantial information about the company to the stock exchanges on a daily basis.
RBI Guidelines
RBI guidelines allow banks to raise capital by issue of non-equity instruments such as Perpetual Non-Cumulative Preference Shares (PNCPSy and innovative Perpetual Debt Instruments (PDI). These instruments need to be in compliance with the specified criteria for inclusion in Additional Tier I Capital. Further, these instruments interalia should be able to absorb loss either through:
- conversion to common shares at an objective pre-specified trigger point or
- a write-down mechanism that allocates losses to the instruments at a pre-specified trigger point.
5. SEBI (issue and Listing of Non-Convertible Securities) Regulations, 2021
(1) The SEBI vide e-Gazette notification dated August 09, 2021, has notified the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021. These regulations shall come into force on the seventh day from the date of its publication in the Official Gazette. Unless otherwise provided, these regulations shall apply to the
(2) issuance and listing of debt securities and nonconvertible redeemable preference shares by an issuer by way of public issuance;
(3) issuance and listing of non-convertible securities by an issuer issued on private placement basis which are proposed to be listed; and
(4) listing of commercial paper issued by an issuer in compliance with the guidelines framed by the Reserve Bank of India.
The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 and the Securities and Exchange Board of India (Issue and Listing of Non Convertible Redeemable Preference Shares) Regulations, 2013 shall stand repealed from the date on which these regulations come to force. The objective to bring out these regulations is to simplify and to align the Regulations in line with the various circulars/guidance and various provisions of the regulations, issued by SEBI and improve the structure of the regulations in order to enhance readability. Also, to identity policy changes in line with the present market practices and the prevailing regulatory environment and to ease doing business.
(i) Applicability of this chapter
(1) This chapter shall apply to the issuance and listing of:
(a) debt securities and non-convertible redeemable preference shares by an issuer by way of public issuance;
(b) non-convertible securities by an issuer on private placement basis
(2) Unless otherwise provided in these regulations, an issuer making an offer of nonconvertible securities shall satisfy the conditions of these regulations as on:
(a) date of filing of the draft offer document with the Board or stock exchange(s);
(b) date of filing the offer document with the Board or stock exchange (s), as the case may be; and,
(c) date of filing the offer document with the Registrar of Companies.
(ii) Eligible issuers
(1) No issuer shall make an issue of non-convertible securities it as on the date of filing of draft offer document or offer document:
(a) the issuer, any of its promoters, promoter group or directors are debarred from accessing the securities market or dealing in securities by the Board;
(b) any of the promoters or directors of the issuer is a promoter or director of another company which is debarred from accessing the securities market or dealing in securities by the Board;
(c) the issuer or any of its promoters or directors is a wilful defaulter;
(d) any of the promoters or whole-time directors of the issuer is a promoter or whole-time director of another company which is a wilful defaulter;
(e) any of its promoters or directors is a fugitive economic offender or
(f) any fine or penalties levied by the Board /Stock Exchanges is pending to be paid by the issuer at the time of filing the offer document:
Provided that the:
- restrictions mentioned at (b) and (d) above shall not be applicable in case of a person who was appointed as a director only by virtue of nomination by a debenture trustee in other company.
- restrictions mentioned in (a) and (b) above shall not be applicable if the period of debarment is over as on date of filing of the draft offer document with the Board.
- restrictions mentioned at (c) and (d) shall not be applicable in case of private placement of non-convertible securities.
(2) No issuer shaH make a public issue of non-convertible securities if as on the date of filing of draft offer document or offer document, the issuer is in default of payment of interest or repayment of principal amount in respect of non-convertible securities, if any, for a period of more than six months
(iii) In-principle approval
The issuer shall make an application to one or more stock exchange(s) and obtain an in principle approval for listing of its non-convertible securities from the stock exchange(s) where such securities are proposed to be listed:
Provided that where the application is made to more than one stock exchange, the issuer shall choose one among them as the designated stock exchange.
(iv) Depositories
The issuer shall enter into an arrangement with a depository for dematerialization of the nonconvertible securities in accordance with the Depositories Act,1996 (22 of 1996) and regulations made thereunder and also take such steps to ensure that such securities are admitted on all the depositories.
(v) Debenture Trustee
The issuer shall appoint a debenture trustee in case of an issue of debt securities.
(vi) Registrar to the Issue
The issuer shall appoint a Registrar to the Issue, registered with the Board, which has established connectivity with all the depositories: Provided that if the issuer itself is a Registrar to the Issue, it shall not appoint itself as a Registrar to the Issue: Provided further that the lead manager shall not act as a Registrar to the Issue in which it is also handling the post-issue responsibilities.
(vii) Credit rating
The issuer shall obtain credit rating from at least one credit rating agency, which shall be disclosed in the offer document: Provided that where the credit ratings are obtained from more than one credit rating agency for the issue, all the ratings, including the unaccepted ratings, shall be disclosed in the offer document.
(viii) Creation of Recovery Expense Fund
The issuer shall create a recovery expense fund with the designated stock exchange, by depositing such amount and in such form and manner as may be specified by the Board.
(ix) Electronic Issuances
An issuer proposing to issue non-convertible securities through the on-line system of the stock exchange(s) and depositories shall comply with the relevant applicable requirements as may be specified by the Board
(x) Regulatory fees
(1) In case of public issue of debt securities and/or non-convertible redeemable preference shares, the issuer shall while filing a draft offer document with the stock exchange(s) forward a soft copy of the draft offer document to the Board for its records along with regulatory fees as specified in Schedule VI of these regulations.
(2) In case of non -convertible securities issued on a private placement basis, the designated stock exchange shall collect a regulatory fee as specified in Schedule VI of these regulations from the issuer at the time of their listing.
(xi) Day Count Convention
- The day count convention for calculation of interest/dividend payments for non- convertible securities shall be on Actual/Actual.
- All payments required to be made by an issuer shall be made on a working day.
- In case the due date of any amount payable by the issuer falls on a day which is not a working day, such payments shall be made in a manner as specified by the Board.
(xii) International Securities Identification Number
(1) An issuer issuing non-convertible securities shall comply with the conditions relating to the issue of International Securities Identification Number, as may be specified by the Board from time to time.
(2) Any default committed by the issuer shalt be reckoned at the International Securities Identification Number level notwithstanding the debt securities and/or non-convertible redeemable preference shares being issued under different offer documents.
(xiii) Listing Agreement.
Every issuer desirous of listing its non-convertible securities on a recognised stock exchange(s) shall execute an agreement with such stock exchange(s).
(xiv) Continuous Listing Conditions
All the issuers of non-convertible securities which are listed on stock exchange(s) shall comply with the listing regulations and/or such other conditions and disclosure requirements as may be specified by the Board from time to time
(xv) Trading of Non-Convertible Securities
(1) The trades in non -convertible securities listed on stock exchange(s) shall be cleared and settled through clearing corporation of stock exchange(s), subject to conditions as specified by the Board.
(2) In case of trades of non-convertible securities which have been traded over the counter, such trades shall be reported on any one of the reporting platforms of a recognized stock exchange having a nation-wide trading terminal or such other platform as may be specified by the Board.
(3) The Board may specify conditions for reporting of trades on the recognized stock exchange or such other platform as referred to in sub-regulation (2).
(xvi) Obligations of the Issuer
(1) The issuer shall treat all applicants to an issue of non-convertible securities in a fair and equitable manner as per the procedures as may be specified by the Board.
(2) The issuer shall not employ any device, scheme, or artifice to defraud in connection with issue or subscription or distribution of non-convertible securities which are listed or proposed to be listed on the recognized stock exchange(s).
(3) The issuer shall apply for Securities and Exchange Board of India Complaints Redress System (SCORES) authentication in the format specified by the Board and shall use the same for all issuance of non-convertible securities.
(4) In case of a public issue, the issuer shall provide all required information/ documents to the lead managers for conducting the due diligence, in the form and manner as may be specified by the Board.
(5) The issuer shall ensure that secured debt securities are secured by hundred percent security cover.
(xvii) Obligations of Debenture Trustee
(1) The debenture trustee shall be vested with the requisite powers for protecting the interest of holders of debt securities including a right to appoint a nominee director on the Board of the issuer in consultation with holders of such debt securities and in accordance with applicable law.
(2) The debenture trustees shall supervise the implementation of the conditions regarding creation of security for the debt securities, creation of recovery expense fund and debenture redemption reserve, as applicable.
(3) The debenture trustee shall monitor the security cover in relation to secured debt securities in the manner as specified by the Board.
6. Provisions applicable to Public Issue and Listing of Debt Securities and Non Convertible redeemable Preference Shares
(i) Other Conditions for public issue
(1) The issuer shall appoint one or more merchant bankers registered with the Board, as lead manager(s) to the issue.
(2) Where the issue is managed by more than one lead manager, the rights, obligations and responsibilities, relating to disclosures, allotment, refund and underwriting obligations, if any, of each lead manager shall be predetermined and disclosed in the draft, offer document and the offer document.
(3) Where there is only one lead manager it shall not be an associate of the issuer as provided under the Securities and Exchange Board 0f India (Merchant Bankers) Regulations, 1992:
(4) The issuers shall not make a public issue of debt securities and non-convertible redeemable preference shares for providing loan to or acquisition of shares of any entity who is part of the promoter group or group companies
(ii) Issuance of green debt securities
An issuer desirous of issuing and listing of green debt securities shall comply with the conditions as may be specified by the Board.
(iii) Filing of draft offer document
(1) No issuer shall make a public issue of debt securities and/or non-convertible redeemable preference shares unless a draft offer document has been tiled with all the stock exchanges on which
such securities are proposed to be listed, .through the lead manager.
(2) The draft otter document filed with the stock exchange(s) shall be made public by posting the same on the website of the stock exchange(s) for seeking public comments for a period of seven working days from the date of filing the draft offer document with stock exchange(s).
(3) The draft offer document shall also be displayed on the website of the issuer and the lead manager(s).
(4) The lead manager(s) shall ensure that the draft offer document clearly specifies the names and contact particulars including the postal and email address and telephone number of the compliance officer who shall be a Company Secretary of the issuer.
(5) The lead manager shall ensure that all comments received on the draft offer document are suitably addressed prior to the filing of the offer document with the Registrar of Companies.
(iv) Advertisements for Public issues
(1) The issuer shall make an advertisement in an english national daily and regional daily with wide circulation at the place where the registered office of the issuer is situated, on or before the issue opening date and such advertisement shall, amongst other things, contain the disclosures as specified in Schedule V.
(2) No issuer shall issue an advertisement which is misleading or which contains any information in a distorted manner or which is manipulative or deceptive.
(3) The advertisement shall be truthful, fair and clear and shall not contain a statement, promise or forecast which is untrue or misleading.
(4) Any advertisement issued by the issuer shall not contain any matters which are extraneous to the contents of the offer document and the advertisements shall not display models, celebrities, fictional characters, landmarks, caricatures or the likes for solicitation of the public issue.
(5) The advertisement shall solicit investment only on the basis of information contained in the offer document.
(v) Abridged Prospectus and application forms
(1) The issuer and lead manager shall ensure that:
(a) every application form and the abridged prospectus is in the format as specified by the Board;
(b) the abridged prospectus shall not contain matters which are extraneous to the contents of the offer document;
(c) adequate space shall be provided in the application form to enable the investors to till in various details like name, address, etc.
(2) The issuer may provide the facility for subscription of application in electronic mode.
(3) The abridged prospectus shall be in the format as specified in Part B of Schedule I of these regulations
(vi) Price Discovery and Book building
(1) The issuer may determine the price and/or coupon of debt securities and non-convertible redeemable preference shares in consultation with the lead manager.
(2) The issue of debt securities and non-convertible redeemable preference shares may be at fixed price and fixed coupon or the issuer may determine the demand and price or coupon of the debt securities and non-convertible redeemable preference shares through book building process in accordance with the procedure as may be specified by the Board.
(vii) Minimum subscription.
(1) Minimum subscription for a public issue shall not be less than seventy-five percent of the base issue size or as may be specified by the Board:
(2) In the event of non-receipt of minimum subscription, all blocked application money shall be unblocked forthwith, but not later than eight working days from the date of closure of the issue or such time as may be specified by the Board.
(viii) Allotment of securities and payment of interest.
(1) The issuer shall ensure that in case of listing of debt securities and non-convertible redeemable preference shares issued to public, allotment of securities offered to public shall be made within such timeline as may be specified by the Board.
(2) Where the debt securities and non-convertible redeemable preference shares are not allotted and/or application monies are not unblocked within the period stipulated in sub-regulation (1) above, the issuer shall undertake to pay interest at the rate of fifteen percent per annum to the investors.
(ix) Mandatory listing of a public issue of debt securities and non-convertible redeemable preference shares
(1) An issuer desirous of making an otter of debt securities and non-convertible redeemable preference shares to the public shall make an application for listing to stock exchange(s) in terms of sub-sections (1) and (2) of Section 40 of the Companies Act, 2013 (18 of 2013).
(2) In the event of failure to list such securities within such days from the date of closure of issue as may be specified by the Board (scheduled listing date), all application moneys received or blocked in the public issue shall be refunded or unblocked forthwith within two working days from the scheduled listing date to the applicants through the permissible modes of making refunds and unblocking of funds.
(3) The issuer shall file the following documents along with the listing application to the stock exchange and with the debenture trustee (in case of debt securities):
(a) Offer Document;
(b) Memorandum of Association and Articles of Association;
(c) Copy of the requisite board/ committee resolutions authorizing the borrowing and the list of authorised signatories for the allotment;
(d) Copy of last three years Annual Reports;
(e) Reports about the business or transaction to which the proceeds of the securities are to be applied directly or indirectly;
7. Additional conditions applicable to a Public Issue and Listing of Debt Securities
(I) Roll-over of debt securities
(1) The issuer shall redeem the debt securities ¡n terms of the offer document.
(2) Where the Issuer intends to roll-over debt securities of a particular International Securities identification Number, it shall do so only upon giving fifteen days notice for the proposed roil over.
(3) The roll-over shall be approved by a majority of holders holding not less than three fourths in value through postal ballot or e-voting of such debt securities in a duty convened meeting as per the offer document.
(4) The notice referred to in sub- regulation (2) shall contain disclosures with regard to rationale for roll-over and at least one credit rating, which shall be obtained from a credit rating agency within six months prior to the due date of redemption.
(5) The issuer shall, prior to sending the notice to holders of debt securities, file a copy of the notice and proposed resolution with the stock exchange(s) where such debt securities are listed, for dissemination of the same to public on its website.
(6) The existing trust deed may be continued it. It provides for such continuation or the same may be amended or fresh trust deed may be executed at the time of such roll over.
(7) The issuer shall on completion of the roll over, intimate the stock exchange(s) about the roll-over of the debt securities.
(8) The issúer shall create and maintain adequate security in respect of such debt securities to be roiled over.
(ii) Due Diligence by Debenture trustee
The debenture trustee shall, at the time of filing the draft offer document with the stock exchange(s) and prior to opening of the public issue of debt securities, furnish to the Board and stock exchange(s), a due diligence certificate in the form at as specified in Schedule IV of these regulations.
(iii) Filing of Shell Prospectus and Tranche Prospectus.
(1) Without prejudice to regulation 27 of these regulations, the following issuers may tile shelf prospectus under Section 31 of the Companies Act, 2013(18 of 2013) for public issuance of their debt securities:
(a) Public financial institutions as defined under clause (72) of Section 2 of the Companies Act, 2013 (18 of 2013) and scheduled banks as defined under clause (e) of Section 2 of the Reserve Bank of India Act, 1934; or
(b) Issuers authorized by the notification of the Central Board of Direct Taxes to make public issue of tax free secured bonds, with respect to such tax free bond issuances; or
(c) Infrastructure Debt Funds — Non-BankIng Financial Companies regulated by the Reserve Bank of India; or
(2) The issuer who has filed shelf prospectus shall file a copy of tranche prospectus with the stock exchange(s) and the Board, immediately on tiling the same with the Registrar of Company.
(3) The shelf prospectus shall contain the following disclosures:
(a) disclosures specified in Schedule I of these regulations;
(b) disclosures specified in the Companies Act (18 of 2013), as applicable; and
(c) additional disclosures as may be specified by the Board.
(4) The tranche prospectus shall contain details of the issue and material changes, if any, in the information including the financial information provided in the shelf prospectus or the earlier tranche prospectus, as applicable.
(iv) Retention of Over Subscription
An issuer shall be allowed to retain over-subscription up to a maximum of hundred percent of the base issue size or any lower limit as specified in the prospectus subject to necessary corporate authoization, credit rating and any other condition as may be specified by the Board:
(v) Creation of security for secured debt securities
(1) While creating a charge or security, the issuer shall have the option to create charge or security over the properties or assets (movable, immovable, tangible, intangible), shares or any interest thereon, of the issuer or its subsidiaries or Its holding companies or its associate companies.
(2) The charge created in respect of the secured debt securities shall be disclosed in the offer document along with an undertaking that the assets on which charge or security has been created to meet the hundred percent security cover is free from any encumbrances.
8. Listing of Private Placement of Debt Securities and Non-Convertible Redeemable Preference Shares
(i) Listing Application
(1) Where the issuer has disclosed the intention to seek listing of debt securities and nonconvertible redeemable preference shares issued on private placement basis, the issuer shall forward the listing application along with the disclosures as per this regulation to the stock exchange(s) within such days as may be specified by the Board from the date of closure of the issue:
Provided that in case of delay in listing of such securities beyond such time period as may be specified by the Board from the date of closure of the issue, the issuer shall pay an additional interest/dividend at the rate as may be specified by the Board from time to time, over and above the coupon/dividend applicable for such securities.
(2) The issuer shall file the following documents along with the listing application to the stock exchange and with the debenture trustee (in case of debt securities):
(a) Placement Memorandum;
(b) Memorandum of Association and Articles of Association;
(c) Copy of the requisite board/ committee resolutions authorizing the borrowing and list of authorised signatories for the allotment of securities;
(d) Copy of last three years Annual Reports;
(e) Statement containing particulars of, dates of, and parties to all material contracts and agreements;
(ii) Disclosures In respect of Private Placements
(1) The issuer making a private placement of debt securities and non-convertible redeemable preference shares and seeking listing thereof on a recognised stock exchange shall make the following disclosures in the placement memorandum:
(a) disclosures specified in Schedule II of these regulations;
(b) disclosures specified in the Companies Act, 2013 (18 of 2013), as applicable;
(c) additional disclosures as may be specified by the Board.
(2) The disclosures as provided in sub-regulation (1) shall be made on the websites of stock exchange(s) where such securities are proposed to be listed and shall be available for download in PDF or any other format as may be specified by the Board.
(3) The issuer shall ensure that the audited financial statements contained in the placement memorandum and tranche placement memorandum shall not be more than six months old from the date of filing placement memorandum or the issue opening date, as applicable: Provided that in case of:
(a) listed issuers (whose non-convertible securities or specified securities are listed on recognised stock exchange(s)), who are in compliance with the listing regulations;
(b) the issuers of non-convertible securities, who are subsidiaries of entities who have listed their specified securities, and are in compliance with the listing regulations,
(iii) Allotment of securities
The issuer shall ensure allotment of debt securities and non-convertible redeemable preference shares issued on a private placement basis and credit to the dematerialised account of the investors, is made within such time as may be specified by the Board.
9. Additional provisions for Listing of Debt Securities issued on Private Placement Basis
(i) Filing of shelf placement memorandum
(1) An issuer making a private placement of debt securities and seeking listing thereof on a stock exchange(s) may file a shelf placement memorandum.
(2) The shelf placement memorandum shall indicate a period not exceeding one year as the period of validity of such memorandum which shall commence from the date of opening of the first offer of debt securities under that memorandum
(ii) Creation of security
(1) While creating a charge or security, the issuer shall have the option to create charge or security over the properties or assets (movable, immovable, tangible, intangible), shares or any interest thereon, of the issuer or its subsidiaries or its holding companies or its associate companies.
(2) The charge created in respect of the secured debt securities shaft be disclosed in the oiler document along with an undertaking that the assets on which charge or security has been created to meet the hundred percent security cover is free from any encumbrances
(iii) Consolidation and re-issuance
An issuer may carry out consolidation and re-issuance of its debt securities, in the manner as may be specified by the Board from time to time subject to the fulfilment of the following conditions:
(a) the Articles of Association of the issuer shall not contain any provision, whether express or implied, contrary to such consolidation and re-issuance;
(b) the issuer has obtained fresh credit rating for each re-issuance from at least one credit rating agency registered with the Board and is disclosed;
(c) such ratings shall be reviewed on a periodic basis as specified by the Board and the change, if any, shall be disclosed;