Joseph JimmyPartner

Varsha YogishSenior Associate

Yajat BansalAssociate

Key Developments

• Securities and Exchange Board of India approves amendments to provisions for listing and delisting of non-convertible debentures

  The Securities and Exchange Board of India (SEBI), in its board meeting on 28 June 2023, has approved certain changes to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to alleviate the following concerns.

  • Opacity and differences in the commercial terms for listed debt instruments and unlisted debt instruments (including dissimilar interest rates and maturity periods) that adversely impact the investors.
  • Unlisted security holders cannot avail of benefits of securities being listed on a stock exchange, including free transferability, established grievance redressal mechanism, counterparty risk or misuse in trading and regulated disclosures.
  • Procedural issue of multiple International Securities Identification Numbers (ISIN) being generated for issuances without clarity on the nature of the issuance and possible mis-selling that may lead to confusion.

  The key changes aimed at ensuring transparency in disclosures, promoting price discovery, and avoiding ISIN level confusion or possible mis-selling in the debt market are as below.

  • Entities having outstanding listed non-convertible debentures (NCD) (as on 31 December 2023) must list their subsequent issuances of NCDs at the stock exchanges.
  • Entities with listed debt securities having outstanding unlisted NCDs as on 31 December 2023, will have the option (but not the obligation) to list the unlisted NCDs. This option will act as an exception to the general principle under the relevant SEBI circular that requires debt securities to be listed within specified timelines, i.e., shortly after their issuance.
  • Entities having listed debt securities may delist such securities after obtaining approval from 100% of the security holders of debt securities and complying with the relevant disclosure norms.

  In view of comments received through public consultation, the following classes of debt securities will be exempted from the aforesaid requirements:

  • Capital Gains Tax debt securities issued under Section 54 EC of the Income Tax Act, 1961;
  • Non-convertible securities issued pursuant to an agreement entered between the listed entity of such securities and multilateral institutions, which are locked-in and held till maturity and, accordingly, unencumbered; and
  • Non-convertible debt securities which are issued pursuant to an order of any court or tribunal or regulator (namely, SEBI, Reserve Bank of India (RBI), Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development Authority or Insolvency and Bankruptcy Board of India).

  These provisions will be effective from 1 January 2024, and the official revised regulations in this regard are awaited. The requirement of mandatory listing of future NCDs is likely to support the visibility and reliability of entities offering debt securities for the benefit of investors. However, it increases the compliance burden for listed issuances. Given this, it would be interesting to follow the market practice that may evolve on the issuance of listed debt securities and if the stakeholders may resort to other avenues of financing to avoid compliance for debt securities under this proposed amendment.

• Reserve Bank of India issues framework for acceptance of green deposits by regulated entities

  The RBI has issued a framework for the acceptance of green deposits by identified key regulated entities (RE) to achieve transparency and accountability in the green finance sector. Green deposits are akin to interest-bearing fixed deposits that are earmarked for financing identified green activities and projects by the REs.

  The salient features of this framework are:

  • Green activities/projects: Pending a binding official Indian green taxonomy, the proceeds from green deposits may be utilised by REs to extend financing to borrowers for the following eligible green activities or projects, namely:

    • promoting energy efficiency in resource utilisation,
    • reducing carbon emissions and greenhouse gases,
    • promoting climate resilience and/or adaptation, and
    • valuing and improving natural ecosystems and biodiversity.

    The framework specifically excludes utilising the proceeds in certain sectors, including nuclear power generation, projects with core energy sources being fossil-fuel based and hydropower plants larger than 25 MW.

  • Governance: REs must have a comprehensive board-approved financing policy and framework on green deposits, including the definition of green activities, the criteria for selecting green projects, and the process for monitoring, reporting and verifying the use of proceeds.
  • Third-party verification assessment: The allocation of proceeds and internal controls of the REs must be subject to independent third-party verification and impact assessment on an annual basis. The REs would need to justify reasons for non-compliance (if any) with the framework, and all such reports in connection with the verification and assessment must be displayed on the REs’ websites. Such third-party verification and audit would ensure that the REs are monitored and are meeting the compliance requirements of the framework.

  • Reporting and disclosures: The REs will, by way of an annual report, apprise its board within three months of the end of the given financial year of all the relevant details, including:

    • amount raised under green deposits during the previous financial year;
    • list of green activities or projects to which proceeds have been allocated and the amounts allocated to such activities or projects; and
    • copy of the third-party verification or assurance report and the impact assessment report.

    Certain details, as specified in the framework, will also need to be recorded in the REs’ audited annual financial statements.

  This framework is unprecedented and has the potential to be a catalytic policy instrument in achieving the RBI’s targets for sustainable finance and restricting greenwashing in the regulated lending ecosystem. It will also encourage the channelling of funds from stakeholders into sustainable projects, which is essential for addressing the issue of climate change.

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