Dawn of A New Regime Governing Indian Debt Securities Market

The regulatory changes introduced by SEBI, elevates the Indian debt market’s efficiency and transparency with the global standards and is set to attract a diverse pool of investors leading to growth of the Indian debt securities market.

The Securities and Exchange Board of India (“SEBI”) has, in the last quarter, introduced a slew of pivotal measures geared towards strengthening the existing investor protection regime and fortifying the architecture of the debt securities market in India.

Unified Disclosures for Private Placement and Public Issue

SEBI has vide the Second SEBI NCSs Amendment¹ unified the disclosures for public issuance and private placement of non-convertible debt securities. The Second SEBI NCSs Amendment has been introduced to reduce the asymmetry in disclosures between public issuances and private placement of Non-Convertible Securities (“NCSs”) and eliminate repetition in related disclosures. This alignment in disclosures, however, will put additional burden of making elaborate disclosures on entities proposing to issue NCSs by way of private placement.

Introduction of General Information Document and Key Information Document

The Second SEBI NCSs Amendment has also introduced the concept of General Information Document (“GID”) and Key Information Document (“KID”). The GID is required to be filed by an entity seeking to list its NCSs or commercials papers on the stock exchange, as its first issuance. Such GID will remain valid for a period of one year from the date of opening of the first issuance of NCSs/ commercial paper being offered there under. Thereafter, the entity will only be required to file a document with minimal disclosures, i.e. the KID, for every subsequent issuance it proposes to undertake during the validity period of the GID.

While the GID is intended to function as a comprehensive dossier which will contain disclosures pertaining to the issuer and the key terms of the NCSs/ commercial papers being offered there under, the KID shall contain the material changes since filing of the GID along with the specific commercial terms of the NCSs/ commercial paper being issued there under. Introduction of the concept of GID and KID will prevent multiplicity of placement memoranda being filed by entities and will further reduce the cost of operations involved in issuance and listing of NCSs and commercial papers.

At present, the compliance for filing the GID along with the KIDis on a ‘comply or explain’ basis and will be mandatory from March 31, 2024 onwards. However, directions in relation to the manner in which the justification for such non-compliance is required to be disclosed is yet to be issued by SEBI.

Listing of Subsequent Issuances

SEBI has vide the Fourth SEBI LODR Amendment², made it mandatory for entities whose NCSs are listed on a stock exchange to list all subsequent NCSs it proposes to issue from January 1, 2024 onwards. A listed entity having unlisted NCSs outstanding as on January 1, 2024 may however, opt to list such NCSs on any stock exchange.

Further, the Fourth SEBI LODR Amendment requires a listed entity proposing to list NCSs on the stock exchanges from January 1, 2024 onwards, to list all outstanding unlisted NCSs previously issued by it, within three months of listing of the proposed NCSs.

This move is aimed at providing an impetus to the retail investors to participate in the uncharted Indian bond markets, facilitating transparency in price discovery of NCSs and for providing material information about the issuer and the issue to such inhibited retail investors. Yet, however, it imposes significant restrictions on entities seeking to access debt markets for targeted fundraising through issuance of unlisted debt securities, which have less stringent compliance requirements vis-à-vis the listed debt securities.

Fund Raising by Large Corporates

SEBI vide the Large Corporates Circular³ has revised chapter XII of SEBI’s ‘Master Circular for Issuance NCSs⁴, which sets out the framework for issuance of debt securities by certain ‘Large Corporates’, that meet the criteria set out therein. The Large Corporates Circular will come into effect from April 1, 2024, for entities following April-March as their financial year; and January 1, 2024, for entities following January-December as their financial year.

The Large Corporates Circular mandates Large Corporates to raise a minimum of twenty-five percent of its qualified borrowings, as set out under the Large Corporates Circular, in a financial year, through issuance of debt securities that are required to be met over a contiguous period of three financial years, failing which such large corporates will provide a one-time explanation in their annual report for financial year 2024.

The Large Corporates Circular also provides incentives to the Large Corporate in the form of reduced annual listing fees and credit in the form of reduction in contribution to the Core Settlement Guarantee Fund of LPCC, in the event there is a surplus in the requisite Qualified Borrowing of the Large Corporate.

The circular also provides for corresponding dis-incentives, in the event there is a shortfall in the requisite qualified borrowing of the Large Corporate. This move is aimed at operationalizing the announcement made by Central Government in Union Budget for the year 2018-19, which, inter-alia, required SEBI to consider mandating, beginning with large corporates, to meet one-fourth of their financing needs from the debt markets. Additionally, mandating Large Corporate to raise debt by way of issuance of debt securities will further aid in bolstering growth of the Indian debt securities market.

Dispute Resolution in the Indian Securities Market

SEBI, vide the ODR Master Circular, has streamlined the existing dispute resolution mechanism in the Indian securities market under the aegis of the stock exchanges and depositories by establishing a common online dispute resolution portal for online conciliation/ arbitration. This conciliation and arbitration mechanism is available for resolution of disputes arising between the investors and a host of regulated entities identified under the ODR Master Circular. Prior to the circular, the dispute resolution mechanism extended only to the depository participants, stockbrokers, commodity brokers, listed companies and registrars and transfer agents. This transformative approach, adopted by SEBI, of leveraging technology to address disputes, promises a more swift and efficient approach for resolution of such disputes arising in the Indian debt securities market.

The regulatory changes introduced by SEBI, elevates the Indian debt market’s efficiency and transparency with the global standards. With enhanced disclosure requirements for public as well as private placement of debt securities, reduced cost of operations and streamlined online dispute resolution framework, the revised landscape is set to attract a diverse pool of investors and promote development of the debt securities market. As India positions itself as a global financial hub, these amendments signify the nation’s commitment to fostering a robust, investor-friendly debt securities market.

Nevertheless, the amendments will have to be examined from the perspective of listed entities issuing debt securities, whereby such entities will have to mandatorily list the debt securities. This move will contribute to the ever-increasing compliance burden on the part of such listed entities.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.