[Nikita Singh and Aishana are third year BSW LLB students at Gujarat National Law University, Gandhinagar]
As a response to the Budget’s (2023-24) emphasis on simplifying regulations, reducing compliance costs, and fostering a business-friendly environment, financial sector regulators are actively reviewing existing frameworks. A dedicated working group i.e. Corporate Bonds and Securitization Advisory Committee, has been established to propose measures enhancing the ease of doing business for listed debt issuers, particularly focusing on evaluating provisions within the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (LODR Regulations) and the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations). To further the goal of promoting ease of business in India, the Securities and Exchange Board of India (SEBI) introduced a consultation paper on December 9, 2023, addressing amendments to the NCS Regulations and LODR Regulations, along with the introduction of fast-track public issuance of debt securities.
In this post, the authors shall aim to explore the paper’s background, rationale, main proposals, expected impacts, challenges, limitations, and recommendations. Further, it offers insights into its potential implications for India’s debt securities market development and ease of doing business.
Background and Rationale of the Consultation Paper
The debt securities market in India has been growing steadily over the years, with the outstanding amount of corporate bonds reaching Rs 36.3 lakh crore as of March 31, 2021, accounting for 19.7% of the country’s gross domestic product (GDP). However, the debt securities market still faces several challenges, such as: (i) low retail participation, (ii) high cost and time involved in issuance and listing, (iii) complex and cumbersome regulatory requirements, and (iv) lack of adequate liquidity and transparency.
These challenges hamper the growth potential and efficiency of the debt securities market, and also affect the ability of issuers to raise funds at competitive rates and meet their financing needs. To address these challenges and boost the debt securities market, SEBI has been undertaking various initiatives, such as: (i) the introduction of the electronic book mechanism, (ii) the consolidation and re-issuance of debt securities, (iii) the standardization of disclosure requirements, and (iv) the rationalization of stamp duty rates. This is to simplify and streamline the regulatory framework and processes for issuance and listing of debt securities, and to introduce a new mode of public issue of debt securities, namely, the ‘fast track public issuance’.
The NCS Regulations and LODR Regulations, established by SEBI, delineate guidelines for the issuance and listing of non-convertible securities, encompassing instruments like non-convertible debentures (NCDs), redeemable preference shares, and perpetual debt instruments. The NCS Regulations amalgamate existing regulations into a unified framework, simplifying and streamlining processes related to debt securities. Simultaneously, the LODR Regulations offer relaxations and streamline listing obligations for listed debt issuers, eliminating redundant disclosures already made by the issuer’s listed equity entity. They introduce the innovative concept of fast-track public issuance, facilitating expedited public issues for consistent issuers. Fast track public issuance of debt securities is a new mode of public issue of debt securities that was proposed in the Budget 2023-24. It is intended to enable frequent issuers with a consistent track record to make public issues of debt securities with reduced time, cost, and effort.
Main Proposals of the Consultation Paper and their Expected Impacts
The consultation paper introduces key proposals aiming to amend provisions in the NCS Regulations and LODR Regulations, alongside the innovative concept of fast-track public issuance of debt securities. Notable proposals include reducing the denomination for privately placed debt securities to Rs 10,000, specifically for issues with a merchant banker’s appointment. This is anticipated to enhance retail investor participation, broadening the investor base and mitigating risk. Additionally, modifications to the due diligence certificate format under regulations 40 and 44 of NCS Regulations aim to simplify and align the certification process with equity issuances, ensuring consistency in the regulatory framework. The proposal to make the publication of financial results in newspapers optional reflects a commitment to digital transformation, reducing costs for issuers and aligning with sustainability goals.
The introduction of fast-track public issuance presents a paradigm shift, enabling frequent issuers to expedite the process with reduced time, cost, and effort. Notably, the retention limit of up to five times the base issue size provides flexibility in fund-raising, and streamlined procedures such as shortened timelines for seeking public comments contribute to quicker access to capital. Furthermore, the extension of the Generic Information Document (GID) and Key Information Document (KID) concepts for a common document in fast-track public issues and private placements simplifies disclosure requirements. The GID and KID now supersede the previous practices of (i) utilizing shelf placement memorandum and tranche placement memorandum, and (ii) issuing a placement memorandum for each distinct NCD issuance. The GID encompasses the information and disclosures outlined in Schedule I of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (LODR Second Amendment Regulations). It is to be submitted to the stock exchanges during the initial issuance. The KID serves as a replacement for the placement memorandum in subsequent NCD issuances, presenting details of the offer of non-convertible securities covered by the key information document. It includes financial information if the data in the GID is over six months old, as well as any material changes in the information initially provided in the GID. The common document encompasses generic information about the issuer, debt securities, and risk factors, while specific issue details are disclosed through GID and KID. This approach standardizes disclosure, ensuring that relevant information is provided to investors without unnecessary duplication. These proposals collectively aim to enhance efficiency, reduce burdensome procedures, and align regulatory practices with global standards, contributing to the development of the debt securities market in India. Connecting with these regulatory efforts, the consultation paper aligns with SEBI’s broader strategy to enhance the ease of doing business and stimulate the debt securities market
Challenges and Limitations of the Proposals
While the proposed amendments in the consultation paper offer notable advantages to the debt securities market, they present potential challenges and limitations. One concern is the risk of information asymmetry between issuers and investors, arising from the streamlined disclosure and compliance requirements in the fast-track public issue. This could lead to incomplete disclosure by issuers, jeopardizing investor decision-making. To address this, clear materiality guidelines and disclosure standards, alongside robust monitoring and enforcement mechanisms by SEBI and the stock exchange, are imperative for safeguarding investor interests and market integrity.
Another challenge stems from the proposed retention limit of up to five times the base issue size for fast-track public issues, which may introduce a risk of market manipulation and there arises an apprehension that issuers might artificially inflate demand, influencing pricing and inducing scarcity in the secondary market. Mitigating this risk requires transparent criteria and methodologies for determining the base issue size, retention limit, and pricing, ensuring thorough disclosure to both investors and regulators.
Additionally, the proposed relaxations raise concerns regarding investor protection. Streamlining regulatory and compliance requirements may limit investors’ access to updated information about issuers and debt securities, potentially impeding their ability to exercise rights in case of default or dispute. To address this, it is crucial to ensure that investors receive adequate and timely information, coupled with access to effective grievance redressal and dispute resolution mechanisms. This multifaceted approach is necessary for achieving a balanced regulatory framework that fosters market growth while safeguarding investor interests and market integrity.
The forward-thinking proposals in the consultation paper could be strengthened by specific recommendations. Firstly, there is a call for clear and consistent materiality guidelines in fast-track public issues, aligning them with international best practices and ensuring regular updates. Secondly, it is suggested that credit rating agencies and merchant bankers should have more prominent roles in these issues, offering independent assessments, monitoring rating changes, conducting thorough due diligence, and serving as underwriters and market makers for secondary market support. With these recommendations, the authors aim to reinforce the consultation paper’s proposals, establishing a regulatory framework that ensures investor protection, market integrity, and fosters growth and sustainability in India’s debt securities market.
Conclusion
The consultation paper issued by SEBI on review of provisions of NCS Regulations and LODR Regulations for ease of doing business and introduction of fast track public issuance of debt securities is a welcome step towards boosting the debt securities market in India. The proposed relaxations and innovations are expected to enhance the participation of retail investors, reduce the cost and time involved in the issuance and listing process, and encourage frequent issuers with a good track record to tap the debt securities market. However, the proposals also pose some challenges and limitations, such as the potential risks of information asymmetry, market manipulation, and investor protection, which need to be addressed and mitigated by adopting clear and consistent materiality guidelines and disclosure standards, enhancing the role and responsibility of credit rating agencies and merchant bankers, and ensuring effective monitoring and enforcement by SEBI and the stock exchange. The consultation paper was open for public comments till December 31, 2023, and we hope that the final regulations shall reflect the feedback and suggestions of the stakeholders and the best practices of the global debt securities market.
– Nikita Singh & Aishana