Avanti KaleSenior Associate
Indian capital markets, including the debt segment, have seen significant activity in the past quarter. Various issuers accessed the capital markets through initial public offerings (IPOs) and many others tapped the debt markets for raising funds through public issues of non–convertible debentures. The Securities Exchange Board of India (SEBI) made amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (SEBI ICDR Regulations) to reduce compliance burden for issuers and promoters, and streamline disclosure requirements. Additionally, it introduced the SEBI (Issue and Listing of Non–Convertible Securities) Regulations, 2021 (NCS Regulations), which overhauled the extant debt regulations in entirety. Further, the International Financial Services Centres Authority (IFSCA) notified the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (IFSCA Regulations) which provide a consolidated issuance and listing framework at IFSCs for accessing capital markets.
SEBI (Issue and Listing of Non–Convertible Securities) Regulations, 2021 notified
The NCS Regulations notified on 9 August 2021, overhauled the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, in entirety. The proposed shift is expected to ensure that there is a structured regulation governing the issuance of all debt securities and to provide greater flexibility to issuers to tap the securities market.
Broadly, the changes in the NCS Regulations pertain to (i) aligning the provisions of the NCS Regulations with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Companies Act, 2013 and the Companies (Prospectus and Allotment of Securities) Rules, 2014, (ii) combining certain existing circulars issued by SEBI with respect to disclosures in debt offer documents with the NCS Regulations; (iii) introduction of certain new important concepts such as promoter group, issuance of debt securities by REITs and InvITs on a private placement basis, provision of e–voting; and (iv) consolidating under a single regulation the requirements for issuance of different types of debt securities such as non–convertible redeemable preference shares, perpetual non–convertible preference shares, non–convertible debentures and commercial papers on a public or private placement basis.
A key change introduced by the NCS Regulations is that Indian companies which have been in existence for less than 3 years are now permitted to raise debt through listing of debt securities on a private placement basis.
Another notable change is the removal of restriction of four issuances in a year through one shelf prospectus. This should help frequent issuers who were earlier required to file shelf prospectus multiple times.
Similarly, the NCS Regulations reduce the period for exercise of call and put option from 24 months to 12 months for a public issue of debt securities. This time limit is now applicable to the debt securities issued on a private placement basis as well. Previously, in case of private placement of debt securities the call and put option were entirely guided by the terms of the issue.
Also, the regulations permit the issuers to file shelf prospectus post curing default in payment of interest/dividend/redemption amount which should result in more issuers accessing the debt market for raising funds.
Companies intending to list their debt securities, will have to provide financial statements that are not less than 6 months old. Further, recent amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR) mandate companies with listed debt securities to disclose their financial statements on a quarterly basis to the stock exchange.
Electronic debt bidding platform will be mandatory for issuance of eligible listed securities amounting to INR 1 billion or above in a financial year.
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 amended
The SEBI LODR were amended on 3 August 2021 and 7 September 2021. Some of the key changes notified are as follows.
Applicability of corporate governance provisions to listed entities with high value debt
Certain corporate governance provisions have been made applicable for entities whose outstanding value of listed non–convertible debt securities is INR 500 crore or above. The key provisions made applicable to these entities are in relation to the constitution of board of directors, appointment of adequate independent directors on the board of directors, constitution of statutory committees and obligations of independent directors.
Further, the intimation requirements for debt listed entities have now been aligned with the intimation requirements for the equity listed entities, to a certain extent. For instance, the stock exchanges will have to be informed about the approval of financial results, any alteration to the rights of debt securities holders, etc.
Criteria for independent directors
One of the criteria for appointment of independent directors has been modified. Now, an independent director of a listed company cannot have a material pecuniary relationship with the issuer, its holding, subsidiary or associate company, promoters, directors for preceding two years (as opposed to the earlier requirement of preceding one year).
Nomination and remuneration committee
The committee is now required to comprise at least two-thirds members as independent directors as opposed to the earlier requirement of 50% members as independent directors.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 amended
The SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2021 were notified on 13 August 2021. The amendments streamline disclosure requirements and should provide added incentive for IPOs by reducing regulatory obligations. Some of the key changes notified are as follows.
Reduction in lock-in requirements of shareholders and promoters
Previously, promoters of issuers opting for an IPO were required to contribute a minimum of 20% of the post-IPO share capital towards promoters’ contribution (MPC), which was to be locked-in for a period of three years from the date of commencement of commercial production or from the date of allotment in the IPO, whichever was later. Further, the shareholding of the promoters in excess of the MPC, and all other pre-IPO shareholders of the Company (except for employees who held shares through the vesting of ESOPs), was required to be locked-in for a period of one year from the date of allotment in the IPO.
SEBI has reduced this lock-in requirement to 18 months in case of the MPC, and to six months in case of the shareholding of the promoters in excess of the MPC (provided a majority of the fresh issue proceeds are not employed towards capital expenditure - in case they are, the previous provisions continue to apply). Further, the lock-in requirement for all pre-IPO shareholders (apart from promoters) has been reduced to six months from the date of allotment. Exemptions from such lock-in were previously available to certain categories of VCFs, AIFs and FVCIs, provided their shareholding was held for a period of one year. Such holding period requirement has also been reduced to six months.
Rationalisation of ‘group company’ disclosures
SEBI has rationalised and limited the disclosure requirements relating to ‘group companies’ of the issuer to names, registered office address, common pursuits and any pending litigation involving the group company which has a material impact on the issuer company. Further, financial information pertaining to group companies, which was previously required to be included in the offer documents, must now be uploaded on the website of the group companies.
Changes to definition of ‘promoter group’
The definition of ‘promoter group’ has been changed. Earlier, this definition included body corporates in which a group of individuals or companies, or combinations thereof were acting in concert, which held 20% or more of the equity share capital in such body corporate and also held 20% or more of the equity share capital of the issuer. This criterion has been deleted.
International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 notified
The IFSCA, on 16 July 2021, notified the IFSCA Regulations, which supersede the SEBI (International Financial Services Centres) Guidelines, 2015. The IFSCA Regulations provide a consolidated issuance and listing framework at the IFSCs (under the jurisdiction of the IFSCA, as the erstwhile regulations were prescribed by SEBI) for accessing capital markets by various entities. Several different capital raising avenues through IFSC stock exchanges have been introduced such as (i) Special Purpose Acquisition Vehicles, (ii) IPOs, (iii) further public offers, (iv) secondary listings, (v) depository receipts, and (vi) debt securities.
While some uncertainty remains about the lasting impact of the pandemic, the outlook for capital markets seems largely favourable. Over the next few months, SEBI is likely to come up with a regulatory framework for the creation of a Social Stock Exchange for fund raising by social enterprises. We also expect SEBI to amend the existing regulatory framework for delisting of equity shares pursuant to open offer to make it easier for listed companies to undertake M&A transactions.
SEBI is looking at further streamlining regulations and easing disclosure requirements and compliances which bears a positive outlook for issuers who are looking to tap into the debt or equity capital markets. This shift should help in further liberalising the regulatory framework and combat the fluctuations arising from global economic uncertainty.