Joseph JimmyPartner

Archana RawatCounsel

Aditya ShuklaAssociate

Key Developments

• Disclosure requirements for public issue and private placement of non-convertible securities aligned

  The Securities and Exchange Board of India (SEBI) has brought forth certain key amendments to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations) on 6 July 2023. The primary objective of these amendments is to facilitate the ease of doing business by streamlining the disclosure requirements for issuance of listed non-convertible securities on a private placement basis and bringing them at par with the disclosure requirements applicable to public issuance of non-convertible securities.

  Some of the salient features of the changes brought by these amendments to the NCS Regulations are as follows:

  • The earlier requirement of filing a standalone private placement memorandum for each issue of listed non-convertible securities has been replaced with two separate disclosure formats.

    A general information document (GID) comprising an all-encompassing issue limit must be filed for private placement of non-convertible securities. Further, a key information document (KID) containing salient features of the issue must be filed for subsequent offers of non-convertible securities thereunder. The KID will be valid for one year from the first offer opening date of the GID. Any private placement within this validity period may be made by filing a KID for each subsequent issuance. A key point to note is that even if an issuer has filed a shelf prospectus for public issue, it can be used as a GID for a private placement under the validity period.

  • SEBI has allowed the listed companies until 31 March 2024 to undertake issuance of listed non-convertible securities on a ‘comply or explain basis’. On and from 1 April 2024, the above disclosure formats would be mandatory.
  • Additional disclosure requirements such as obtaining lenders’ consent or no-objection for the proposed issuance (if applicable as per the terms of the lending documents), breakup of the issue-related expenses, summaries of material contracts of the issuer and broad lending and borrowing policy of the issuer have also been introduced.

• Proposal to bring flexibility in framework for ‘large corporates’ for the issue of debt securities

  In its board meeting dated 21 September 2023, SEBI approved the proposal to provide flexibility to large corporates for meeting their financing needs from the debt market. The term ‘large corporates’ refers to listed entities which have outstanding long-term borrowings of INR 1,000 crores and above and have a credit rating of ‘AA and above’ (LC).

  While the revised SEBI regulations and master circular on non-convertible securities are awaited, it appears from the minutes of this meeting that SEBI has resolved some important issues in relation to the framework for LCs. Some of the key features of these relaxations are:

  • Increase in the threshold for classification as LC from INR 100 crores to INR 1,000 crores.
  • A period of three contiguous years is to be considered to evaluate compliance with minimum incremental borrowing from the debt market.
  • Removal of penalty on LCs which fail to raise a certain percentage of incremental borrowing from the debt market, and introduction of ‘incentives and moderated disincentives’ approach for any non-compliance.

• Mandatory listing of non-convertible debt securities by listed entities

  Entities that have listed non-convertible debt securities (NCD) outstanding after 1 January 2024 and that propose to issue NCDs thereafter are now required by SEBI to undertake only listed issuances for such NCDs, subject to certain exceptions and conditions. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 have been amended on 19 September 2023 to give effect to this requirement.

  Operational aspects of the transition from unlisted NCDs to listed NCDs are unclear at this stage. Clarification will be required from SEBI, stock exchanges, and depositories to facilitate such listing uniformly, particularly since all listed NCDs above a prescribed threshold must be issued through the electronic bidding platform.

  (To read our detailed update on these amendments, click here.)

• Penal charges in loan accounts to be used as a credit discipline tool rather than a credit enhancement tool

  The Reserve Bank of India, on 18 August 2023, issued certain amendments to the framework applicable to penal charges in relation to loan accounts. These changes will come into effect from 1 January 2024 and have been introduced in the backdrop of misuse of penal interest/penal charges provisions by lending institutions as a credit enhancement tool rather than a credit discipline tool.

  Some noteworthy changes are:

  • A board approved policy on penal charges should be formulated by each regulated entity.
  • Penalty for non-compliance of any material terms and conditions of a loan agreement should be classified as ‘penal charges’ and not ‘penal interest’. Capitalisation of the penal charges shall not be permitted.
  • No additional component to the rate of interest should be introduced to circumvent the guidelines on penal charges.

• Factoring transaction with seller of receivables, on a recourse basis, is classified as a ‘financial debt’ under the Insolvency and Bankruptcy Code, 2016

  The National Company Law Appellate Tribunal (NCLAT), in its order dated 4 July 2023, in the matter of Mr. Ritesh Kumar Agarwal v M/s India Factoring and Finance Solutions Pvt. Ltd. (India Factoring), has ruled that a creditor who has purchased certain receivables “on a recourse basis” from the corporate debtor would be classified as a “financial creditor” vis-à-vis such corporate debtor.

  The factual matrix involved a factoring agreement entered between the corporate debtor and India Factoring in relation to the assignment of certain receivables which were due and payable by a third party, IL&FS Transport and Network Limited (ITNL), to the corporate debtor. The corporate debtor also drew a bill of exchange in favour of India Factoring for discharge of payment obligations in relation to the receivables due and payable by ITNL. Upon failure of ITNL to comply with its payment obligations on the due date under the bill of exchange, India Factoring called upon the corporate debtor to pay the due amounts under the factoring agreement. As the corporate debtor failed to pay such amounts in full, an application for initiation of corporate insolvency resolution process was filed by India Factoring against the corporate debtor.

  One of the questions for consideration before the NCLAT was whether the amounts due under the factoring transaction would be classified as a ‘financial debt’ under Section 5(8)(e) of the Insolvency and Bankruptcy Code, 2016 (IBC).

  The NCLAT held that since the terms of the factoring agreement indicate that the parties agreed to provide recourse against the corporate debtor, such factoring arrangement would be a ‘financial debt’ as understood under Section 5(8)(e) of the IBC.

The recent changes introduced by SEBI are aimed at facilitating the ease of doing business and enhancing transparency through stricter disclosure requirements. However, the lack of clarity on the manner and scope of these disclosure requirements may act as a deterrent for listed entities and other market participants to tap into the potential of the Indian corporate debt securities market.

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