Joseph JimmyPartner
Archana RawatCounsel
Ritwik SrivastavaAssociate
Key Developments
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Revisions in the framework for the electronic book provider platform
The electronic book provider (EBP) platform was launched by the Securities and Exchange Board of India (SEBI) in 2016 to provide an electronic platform for bidding in relation to debt securities issued on private placement basis. This was to fulfil the need for a more efficient and transparent platform which incorporated a better price discovery mechanism for debt securities.
A SEBI circular dated 10 October 2022 (EBP Circular) brought in important amendments to the framework on EBP platform under the ‘Operational Circular for issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper’, issued by SEBI on 10 August 2021 (Operational Circular). These amendments came into effect on 1 January 2023.
Nature of the amendments Erstwhile framework Revised framework Issue size A debenture issuance of INR 100 crores or more was required to be undertaken on the EBP platform. The threshold has been reduced to INR 50 crores. This is a crucial step towards mandating EBP platform for debenture issuances. Size of the green shoe option No restriction on size of green shoe option. Green shoe option of up to five times of base issue size permitted. Bidding through arrangers To bid for an amount of more than INR 15 crores or 5% of the base issue size, whichever is lower, eligible investors must bid themselves and not through an arranger acting on their behalf. The threshold of INR 15 crores has now been revised to INR 100 crores or 5% of the base issue size (whichever is lower). Additionally, representations were made to SEBI to enable issuers of debt securities to obtain an assurance from certain prospective investors (identified upfront) to subscribe to a certain portion of the base issue size. In view of this, SEBI has introduced a concept of ‘anchor portion’ which can be offered to an identified investor(s) outside the EBP platform. For this, certain disclosures are required to be made by issuers to SEBI, including details of the anchor investor(s) and the quantum allocated to such investor(s).
These amendments indicate SEBI’s intention to mandate EBP as the mechanism to undertake the majority, if not all, of corporate debt securities issuances. It will be interesting to watch if this will help in tapping into the future potential of the Indian corporate debt securities market.
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Timeline for listing of debt securities issued on a private placement basis
Another regulatory change was introduced by SEBI through its circular dated 30 November 2022 titled ‘Review of timelines for listing of securities issued on a private placement basis’ (SEBI Listing Circular).
The SEBI Listing Circular aims to standardise the process and timelines for issuance and listing of non-convertible securities, securitised debt instruments, security receipts, municipal debt securities and commercial paper on private placement basis, through the EBP platform or otherwise. A significant amendment introduced by this circular is to reduce the time period for listing debt securities from T+4 working days to T+3 working days (where T is the date of closure of issue).
These amendments should help to make the process of issuance and listing of debt securities more efficient, and to expedite the availability of debt securities for subsequent trading.
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Reduction in denomination for debt securities and non-convertible redeemable preference shares
The face value mandated by SEBI for each listed debt security/non-convertible redeemable preference share issued on a private placement basis has been reduced to INR 1 lakh from INR 10 lakhs. This change was brought in by SEBI circular dated 28 October 2022. Further, the trading lot for such securities/preference shares has been reduced to INR 1 lakh.
This should improve access for retail investors and increase their participation in the corporate bond market in India.
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SEBI board meeting - amendments proposed to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021
SEBI has proposed the following changes to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations):
- Issuers of listed debt securities must incorporate provisions for appointment of nominee directors in their constitutional documents and the existing debenture trust deed(s).
- SEBI has clarified that the public issue of debt securities under the NCS Regulations must be kept open for a minimum of three working days and a maximum of ten working days.
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In the context of the regulatory framework applicable to ‘green debt securities’, SEBI has proposed:
- expanding the definition of the term ‘green debt securities’ to cover new modes of sustainable finance in relation to pollution prevention, pollution control, eco-efficient products, etc.
- Introducing additional categories of green bonds including blue bonds, yellow bonds and transition bonds, to further promote sustainable financing.
- Implementing certain dos and don’ts relating to green debt securities under the NCS Regulations to provide safeguards against risks posed by ‘greenwashing’ (i.e., the use of proceeds of green debt securities for purposes other than sustainable finance) and promote sustainable finance in India.
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National Company Law Tribunal, Mumbai - whether corporate debtor undertaking is ‘financial debt’
The National Company Law Tribunal (NCLT), Mumbai bench, in Axis Bank Limited v Nageswara Rao, considered the question of whether an undertaking executed by a corporate debtor (without having specifically undertaken an obligation to pay the debt of the principal debtor) would constitute a ‘financial debt’ under the Insolvency and Bankruptcy Code, 2016 (IBC). The brief facts of this case were as follows:
- Axis Bank Limited (ABL) had subscribed to commercial papers issued by Reliance Home Finance Limited (RHFL).
- In order to protect its interest, ABL had obtained an ‘obligor undertaking’ executed by Reliance Capital Limited (RCL) (the corporate debtor who was subjected to the corporate insolvency resolution process under the IBC) to ensure that any dilution of the corporate debtor’s stake in Reliance Nippon Life Asset Management Limited (Reliance Nippon) would be used for payments due under the commercial papers subscribed to by ABL. A stake sale was undertaken by RCL and the amounts realised by RCL from such stake sale were not utilised by RCL towards its payment obligations under the ‘obligor undertaking’. ABL issued various notices to RCL to comply with its obligations under the ‘obligor undertaking’.
- Once RCL was admitted into the corporate insolvency resolution process, ABL filed its claim as a ‘financial creditor’ of RCL on two occasions. In the first instance, ABL’s claim specifying RCL as a guarantor was rejected by the administrator on the ground that, as per the terms of the ‘obligor undertaking’, RCL had not issued a guarantee to discharge the obligations of RHFL in case of a default by RHFL.
- Subsequently, ABL filed another claim as a ‘financial creditor’ of RCL, which was also rejected by the administrator on the ground that the ‘obligor undertaking’ was an undertaking for the purpose of using proceeds from the sale of Reliance Nippon shares in a certain manner and not for payment/repayment of financial debt of RHFL.
NCLT held that the ‘obligor undertaking’ cannot be classified as a guarantee or indemnity to qualify as ‘financial debt’ as defined under the IBC. The tribunal observed that one of the essential attributes of a guarantee under the Indian Contract Act, 1872 is a promise to perform a third party’s liability in the event of such third party’s default. The tribunal held that this essential attribute of guarantee was not satisfied in the instant case since RCL did not undertake to perform RHFL’s obligations under the commercial papers.
While rejecting the argument of ABL that the indemnity obligations of RCL under the ‘obligor undertaking’ would qualify as a financial debt, the tribunal held that such indemnity provisions only relate to a breach of the ‘obligor undertaking’ itself. It further held that the indemnity provision was not an indemnity issued in respect of RHFL's obligations under the commercial papers and was therefore not a ‘financial debt’ as understood under IBC.
Lastly, the tribunal reiterated the position of law laid down by the Supreme Court in Anuj Jain v Axis Bank1 that a disbursal of money against time value is the sine qua non of financial debt, and since there was no disbursal of debt by ABL to RCL for consideration against the time value of money, ABL cannot be categorised as a ‘financial creditor’ of RCL.
Amid rising interest rates on a global front and fears of global recession, the government has, in the Union Budget 2023 announced measures to support the banking sector, especially in relation to setting up of the National Financial Information Registry which is proposed to facilitate efficient lending, promote financial inclusion and enhance financial stability. It will also be interesting to watch how the Reserve Bank of India and SEBI aim to tackle the impact of inflationary pressures on the Indian economy and Indian debt securities market in the coming quarters. Further, a potential revamp of the IBC is underway as the Ministry of Corporate Affairs has invited public comments on certain subjects which have an impact on the functioning of the IBC.
[1] 2020 8 SCC 401
