Chapter 11 Non-Convertible Redeemable Preference Shares – Corporate Funding and Listing in Stock Exchange ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Non-Convertible Redeemable Preference Shares – Corporate Funding & Listing in Stock Exchange Study Material
Question 1.
Discuss the various conditions required to be fulfilled for listing of Non-Convertible Redeemable Preference Shares. (June 2019, 3 marks)
Answer:
As per Regulation 17 of the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013, an issuer may list its non-convertible redeemable preference shares issued on private placement basis on a recognized stock exchange subject to the following conditions:
- The issuer has issued such non-convertible redeemable preference
- Credit rating has been obtained in respect of such non-convertible redeemable preference shares from at least one credit rating agency registered with SEBI.
- must be in dematerialized form.
- The minimum application size for each investor is not less than ten lakh rupees.
- The issuer shall create a capital redemption reserve in accordance with the provisions of the Companies Act, 2013.
- The disclosure as provided in Regulation 18 of the SEBI NCRPS regulations have been made.
- The minimum application size for each investor is not less than ten lakh rupees; and
- The issue is in compliance with sub-regulation (3) and (4) of Regulation 4.
- Where the application is made to more than one recognised stock exchange, the issuer shall choose one of them as the designated stock exchange.
As per SEBI (Issue and Listing of Non-Convertible Securities) Regulation 2021
(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 of India (Merchant Bankers) Regulations, 1992: Provided that in case the lead manager is an associate of the issuer, it shall disclose itself as an associate of the issuer and its role shall be limited to marketing of the issue. Such lead manager shall not issue any due diligence certificate, in relation to the issue of such debt securities and/or non-convertible redeemable preference shares: Provided further that in case there is more than one lead manager, at least one lead manager to the issue shall not be an associate.
(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: Provided that where the issuer is a Non-Banking Finance Company, Housing Finance Company or a Public Financial Institution the aforesaid restriction shall not apply and appropriate disclosures shall be made as specified in the Schedule I of these regulations.
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.
Filing of draft offer document
(1) No issuer shall make a public issue of debt securities and non-convertible redeemable preference shares unless a draft offer document has been filed with all the stock exchanges on which such securities are proposed to be listed, through the lead manager.
(2) The draft offer document filed with the stock exchange(s) shall be made public by posting the šame 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.
Question 2.
Explain the relevant applicable requirements as specified by SEBI for an issuer prôposing to issue Non-Convertible Redeemable Preference Shares to the public through the online system of the stock exchange. (Dec 2019, 3 marks)
Answer:
The issuer may provide the facility for subscription of application in electronic mode.
An issuer proposing to issue non-convertible redeemable preference shares to the public through the on-line system of the designated stock exchange shall comply with the relevant applicable requirements as may be specified by SEBI, which are as under:
All the investors applying in a public issue shall use only Application Supported by Blocked Amount (ASBA) facility for making payment i.e. writing their bank account numbers and authorising the banks to make payment in case of allotment by signing the application forms. An investor, intending to subscribe to a public issue, shall submit a completed bid-cum application, form to Self-Certified Syndicate Banks (SCSBs), with whom the bank account to be blocked is maintained or any of the following intermediaries:
- A syndicate member (or sub-syndicate member)
- A stock broker registered with a recognised stock exchange
- A depository participant (‘DP‘)
- A registrar to an issue and share transfer agent (‘RTA’)
General Conditions to issue non-convertible redeemable preference shares
1. No issuer shall make any public issue of non-convertible redeemable preference shares if as on the date of filing of draft offer document or final offer document.
(a) the issuer or the person in control of the issuer or its promoter or its director is restrained or prohibited or debarred by the Board from accessing the securities market or dealing in securities; or
(b) the issuer or any of its promoters or directors is a wilful defaulter or it is in default of payment of interest or repayment of principal amount in respect of non-convertible redeemable preference shares issued by it to the public, if any, for a period of more than six months.
2. No issuer shall make a public issue of non-convertible redeemable preference shares unless the following conditions are satisfied, as on the date of filing of draft offer document and final offer document:
(a) it has made an application to one or more recognized stock exchanges for listing of such securities being issued and where the application is made to more than one recognized stock exchange, the issuer shall choose one of them as the designated stock exchange. In case any of such stock exchanges have nationwide trading terminals, the issuer shall choose one of them as the designated stock exchange. The issuer is however free to choose a different stock exchange as a designated stock exchange for any subsequent public issue.
(b) it has obtained in-principle approval for listing of its non-convertible redeemable preference shares on the recognized stock exchanges where the application for listing has been made.
(c) it has obtained a credit rating from at least one credit rating agency registered with SEBI and is disclosed in the offer document. In case the issuer company has obtained credit ratings from more than one credit rating agency, all the ratings, including the unaccepted ratings, shall be disclosed in the offer document.
(d) it has entered into an arrangement with a depository registered with SEBI for dematerialization, of the non-convertible redeemable preference shares that are proposed to be issued to the public, in accordance with the Depositories Act, 1996 and regulations made there under.
(e) the minimum tenure of the non-convertible redeemable preference shares shall not be less than three years.
(f) the issue has been assigned a rating of not less than AA- or equivalent by a credit rating agency registered with SEBI
(3) The issuer shall create a capital redemption reserve in accordance with the provisions of the Companies Act, 2013.
(4) The issuer shall not issue non-convertible redeemable preference shares for providing loan to or acquisition of shares of any person who is part of the same group or who is under the same management, other than to
subsidiaries of the issuer; Explanation: For the purpose of this regulation, the terms “part of the same Group and “under the same management” shall have the same meaning as provided in the explanation to Regulation 23 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
(5) In case of public issue of non-convertible redeemable preference shares, the issuer shall appoint one or more merchant bankers registered with SEBI at least one of whom shall be a lead merchant banker.
As per SEBI (Issue and Listing of Non-Convertible Securities) Regulation 2021
1. No issuer shall make an issue of non-convertible securities if 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.
2. 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.
3. 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.
4. Debenture Trustee
The issuer shall appoint a debenture trustee in case of an issue of debt securities.
5. 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.
6. 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.
7. 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.
8. 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.
9. Regulatory fees
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.
10. International Securities Identification Number
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.
11. 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).
12. 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.
13. Trading of Non-Convertible Securities
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.
14. Obligations of the Issuer
- 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.
- 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).
15. 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.
Question 3.
Explain the benefits to a company from listing its security on an international stock exchange. (Dec 2019, 5 marks)
Answer:
A company may choose to list its shares in a stock exchange of a country other than that in which the company is based. Firms may adopt international listing to obtain advantages that include lower cost of capital, expanded global shareholder base, greater liquidity in the trading of shares, prestige and publicity. Decision makers also need to be satisfied that the benefits exceed possible costs, such as listing costs, exposure to legal liabilities, taxes and various trading frictions, and reconciliation of financial statements with varying national standards. Because of the benefits of being cross-border listed, more and more companies are getting themselves listed on stock exchange markets based outside of their home countries. Here are more benifits of such a move.
1. Increased Market Liquidity:
International listing enables companies to trade its shares in numerous time zones and multiple currencies. This increases the issuing company’s liquidity and gives it more ability to raise capital.
2. Market Segmentation:
Market segmentation is the practice of dividing a large market into clear segments with similar needs. International listing enables firms to divide foreign investor markets into segments which are easy to access. Companies seek to list internationally because they anticipate gaining from a lesser cost of capital. This arises because their stocks become more available to foreign investors. Their access to these stocks may otherwise be restricted due to international investment barrier.
3. Capital needs and growth opportunities:
Companies in emerging markets need to use international listing to raise capital to continue to grow beyond their home market.
4. Wider shareholder base:
International listing provides access to a larger pool of potential investors (both retail and institutional). Wider shareholder base are less risky.
5. Better Investor Protection:
Companies need to comply with the provisions of all the regulatory aspects of the listing of those countries, where sought to be listed. Investors will therefore find themselves more protected and comfortable to invest in these companies.
6. Secure Clearing:
A stock exchange provides a reliable and secure clearing mechanism. Listing on a foreign stock exchange is possible only alter creating robust and advance clearing system.
7. Other benefits:
Higher visibility/brand awareness, increased opportunities for mergers and acquisitions, entering markets with better investment protection reduces costs and creates bonding (a signal of corporate governance).
Question 4.
Prepare a flow chart for issuance of Non-convertible Redeemable Preference Shares under SEBI (Non-convertible Redeemable Preference Shares) Regulations, 2013. (Aug 2021, 5 marks)
Answer:
Flow Chart for Issuance of Non-Convertible Redeemable Preference Shares under the SEBI (Non-Convertible Redeemable Preference Shares) Regulations, 2013 is as Under:
- File an application to one or more stock exchanges for listing of non convertible redeemable preference shares and get in-principle approval
- Obtain Credit Rating including the unaccepted ratings obtained from more than one credit rating agencies shall be disclosed in the offer document
- Enter into an agreement with a depository for dematerialization of the non-convertible redeemable preference shares in accordance with the Depositorieš Act, 1996 and regulations made thereunder
- Appoint one or more Merchant banker and lead merchant bankers and create capital redemption account under Companies Act, 2013
- Draft & Final offer document shall be displayed on websites of stock exchange and shall be available for download in PDF/HTML formats
- Make an advertisement in one English national daily newspaper and one Hindi national daily newspaper with wide circulation on or before the issue opening date
- Išsuer shall decide the price and amount of Minimum subscription of non-convertible redeemable preference shares in consultation with the lead merchant banker and disclose the same in the offer document
- In case of Non-receipt of minimum subscription, all application monies received in the public issue shall be refunded forthwith to the applicants. In the event, the application monies are refunded beyond 8 days, then such amounts shall be refunded together with interest at such rate which shall not be less than 15% per annum.
Question 5.
Explain the conditions for Listing of Non-convertible Redeemable Preference Shares issued on private placement basis on a recognized stock exchange. (Aug 2021, 3 marks)
Answer:
An issuer may list its non-convertible, redeemable preference shares issued on private placement basis on a recognized stock exchange subject to the following conditions as provided under the SEBI (Issue & Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013:
(a) the issuer has issued such non-convertible redeemable preference shares in compliance with the provisions of the Companies Act, 2013 rules prescribed thereunder and other applicable laws;
(b) credit rating has been obtained in respect of such non-convertible redeemable preference shares from at least one credit rating agency registered with the SEBI.
(c) the non-convertible redeemable preference shares proposed to be listed are in dematerialized form;
(d) the disclosures as provided in Regulation 18 of the SEBI (Non-Convertible Redeemable Preference Shares) Regulations, 2013 have been made;
(e) the minimum application size for each investor is not less than ten lakh rupees;
(f) the issuer shall create a capital redemption reserve in accordance with the provisions of the Companies Act, 2013;
(g) the issuer shall not issue non-convertible redeemable preference shares for providing loan to or acquisition of shares of any person who is part of the same group or who is under the same management, other than to subsidiaries of the issuer, and
(h) where the application is made to more than one recognised stock exchange, the issuer shall choose one of them as the designated stock exchange.
The issuer shall comply with conditions of listing of such non-convertible redeemable preference shares as specified in the Listing Agreement with the stock exchange where such non-convertible redeemable preference shares are sought to be listed.
1. 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 he 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;
2. 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,
3. 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.
Question 6.
Dharmadhi Bank wants to issue Perpetual Non-Cumulative Preference Shares. Can a bank issue such instruments?(Dec 2021, 3 marks)
Answer:
Regulation 3 of the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 extends the applicability of Regulations to issue and listing of Perpetual Non-Cumulative Preference Shares and Perpetual Debt Instrument, issued by banks on private placement basis in compliance with Guidelines issued by Reserve Bank of India.
- The provisions of Chapter VI of SEBI NCRPS Regulations may, apply to the issuance and listing of Perpetual Non-Cumulative Preference Shares and Innovative Perpetual Debt Instruments by Banks.
- No issuer other than a Bank shall issue these instruments.
- RBI guidelines allow banks to raise capital by issue of non-equity instruments such as Perpetual Non-Cumulative Preference Shares and Innovative Perpetual Debt Instruments.
- These instruments need to be in compliance with the specified criteria for inclusion in Additional Tier I Capital. A Bank may issue such instruments subject to the prior approval and in Compliance with the Guidelines issued by Reserve Bank of India:
1. If a bank is incorporated as a company under Companies Act, 2013, it shall, in addition, comply with the provisions of Companies Act, 2013 and/or other applicable statues.
2. The bank shall comply with the terms and conditions as may be specified by the Board from time to time and shall make adequate disclosures in the offer document regarding the features of these instruments and relevant risk factors and if such instruments are listed, shall comply with the listing requirements.
Conclusion:- In the above situation, Dharmadhi Bank can issue perpetual non-convertible preference -shares subject to fulfilment of the conditions as stated above.
Question 7.
What are conditions for issuance and listing of Non¬Equity Regulatory Capital Instruments by Banks? Enumerate in brief. (June 2022, 3 marks)
Important Definitions [Regulation 2]:
Question 8.
Define the important terms used under Regulation 2 of SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.
Answer:
| Non-Convertible Redeemable Preference Share | “Non-convertible redeemable preference share” means a preference share which is redeemable in accordance with the relevant provisions of the Companies Act, 2013 (18 of 2013) and does not include a preference share which is convertible into or exchangeable With equity shares of the issuer at a later date, at the option of the holder or not; |
| Perpetual Non-Cumulative Preference Share | “Perpetual non-cumulative preference share” means a perpetual non-cumulative preference share issued in accordance with the guidelines framed by the Reserve Bank of India; |
Question 9.
Short notes on listing of Commercial Paper.
Answer:
- Issuers desirous of listing of commercial paper shall comply with the conditions as may be specified by the Board from time to time.
- The designated stock exchange shall collect a regulatory fee as specified in Schedule VI of these regulations from an issuer of commercial paper at the time of their listing.
- 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 issuance and listing of commercial paper.
Question 10.
Short notes on Roll over of Debt Securities.
Answer:
Roll-over of debt securities
(1) The issuer shall redeem the debt securities in 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 roll 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 duly 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 if 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 issuer shall create and maintain adequate security in respect of such debt securities to be rolled over
Non-Convertible Redeemable Preference Shares Notes
1. Definition of NCRPS
“Non-convertible redeemable preference share” means a preference share which is redeemable in accordance with the relevant provisions of the Companies Act, 2013 (18 of 2013) and does not include a preference share which is convertible into or exchangeable with equity shares of the issuer at a later date, at the option of the holder or not;
2. Regulations of NCRPS
Presently issue and listing of Non-Convertible Redeemable Preference Share are regulated by SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021