The Securities and Exchange Board of India (SEBI), by way of the SEBI (Issue and Listing of Non-Convertible Securities) (Second Amendment) Regulations, 2023 (NCS Amendment), brought into effect certain changes to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2023 (NCS Regulations). The NCS Regulations set out the regime applicable to various securities, including non-convertible debentures (NCDs) issued by way of private placement and listed on a stock exchange in India (Listed NCDs) by a company (Issuer).
The key amendments enforced vide the NCS Amendment can be categorized as follows:
- introduction of General Information Document (GID) and Key Information Document (KID) (instead of a placement memorandum) for private placement of non-convertible securities;
- introduction of a common schedule of disclosures for public as well as privately placed issue of securities. As a result, there are a number of additional disclosures required to be made by the Issuer in relation to a privately placed issuance as compared to the existing requirements; and
- disclosure of issue expenses. The amendments require greater detail to be included in relation to issue expenses, including all types of fees paid.
Further, on September 19, 2023, SEBI amended the SEBI (Listing Obligations and Disclosure Requirement) Regulation, 2015 (LODR Regulations) and introduced a new Regulation 62A. The key change introduced is that effectively, on and after January 1, 2024, if an entity has any Listed NCDs outstanding or issues any Listed NCDs, then all other issuances after January 1, 2024 also need to be listed and the entity will not have the option of issuing NCDs which are unlisted.
CHANGES TO THE NCS REGULATIONS
| S. No. | Provision under the NCS Regulations | Change pursuant to the NCS Amendment | Impact |
| 1. | New Regulation 50A –
GID and KID |
Regulation 50A has been introduced pursuant to the NCS Amendment, specifying that an Issuer proposing to make an issuance of Listed NCDs on a private placement basis is required to file a GID with the stock exchange(s).
The GID includes the disclosures required under the NCS Regulations and will be valid for a period of 1 year from the first issuance under such GID and will apply to all Listed NCDs issued during that period.
A separate KID then has to be filed for each issuance, specifying the details of the issuance, and material changes to the information set out in the KID. This replaces the earlier requirement of each issuance being carried out under a separate placement memorandum. This requirement is applicable on a mandatory basis after March 31, 2024.
A GID is required to contain the following disclosures: (a) disclosure specified in schedule I of the NCS Regulations; (b) disclosures specified in the Companies Act, 2013 (as applicable); and (c) any other additional disclosure that SEBI may specify. The GID may indicate the amount of monies which the Issuer proposes to raise during the validity period of the GID, but this is not mandatory. The board and shareholders resolutions specifying the current borrowing limits of the Issuer are required to be attached to the GID. The details required to be included in the KID are: (a) details of the offer of non-convertible securities in respect of which the KID is being issued; (b) financial information, if such information provided in the GID is more than 6 months old; (c) material changes, if any, in the information provided in the GID; and (d) any material developments not disclosed in the GID, since the issue of the GID relevant to the offer of non-convertible securities in respect of which the KID is being issued.
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The previous regime provided for two types of placement memorandums. For frequent Issuers, there was the option of filing a shelf placement memorandum and for each issuance, a tranche placement memorandum. However, this was at the Issuer’s option, and was not mandatory. Issuers who did not wish to file a shelf placement memorandum could carry out each issuance on a stand-alone basis by filing a placement memorandum for that issuance.
Under the new regime, it is mandatory for all Issuers to file a GID (valid for one year) and KID for each issuance.
Based on our discussions with the stock exchanges, we understand that even for the first issuance, the Issuer is required to file a KID, along with the GID. They have also clarified that the GID is not required to contain any issuance specific information and such issuance specific information is required to be contained in the KID.
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| Additional disclosures to be made in the issue document (applicable to private placement) pursuant to the NCS Amendment | |||
| 2. | In the event there is a merchant banker or co-manager in relation to the issue, the details of such merchant banker or co-manager must be disclosed | Given that most issuances done on a private placement basis do not have merchant bankers or co-managers to the issuance, this amendment may not have a material impact from a practical perspective.
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| 3. | The Issuer is required to provide a list of expenses in relation to the issue (including a break-up for each item of expense). The disclosure should also include details of the any fees payable separately in relation to the following (in terms of amount, as a percentage of total issue expenses and as a percentage of total issue size):
(a) Lead manager(s) fees. (b) Underwriting commission. (c) Brokerage, selling commission and upload fees. (d) Fees payable to the registrars to the issue. (e) Fees payable to the legal advisors. (f) Advertising and marketing expenses. (g) Fees payable to the regulators including stock exchanges. (h) Expenses incurred on printing and distribution of issue stationary. (i) Any other fees, commission or payments under whatever nomenclature. |
Prior to the NCS Amendment, the Issuer was required to only disclose the fees payable to the debenture trustee for the issue. With the change brought about by the NCS Amendment, it is mandatory for the Issuer to disclose all the costs and expenses incurred in relation to the issue.
Consequently, if the expenses provided from (a) to (h) are applicable, each of them will have to be disclosed separately. Paragraph (i) is widely worded to cover fees under any nomenclature. |
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| 4. | The financial statements to be included in the document should be audited and certified by the statutory auditor(s) who holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India. | Previously, it was not mandatory that the Chartered Accountant issuing the statutory auditor certificate shall hold a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India.
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| 5. | The Issuer has to disclose the amounts of any contingent liability, including obligations to maintain debt service account, any put option, corporate guarantee or letter of comfort issued by the Issuer. This should also include the name of the counterparty (subsidiary, joint venture entity, group company, etc.) on behalf of whom it has been issued | Prior to the NCS Amendment, the Issuer was only required to disclose details of financial indebtedness (including corporate guarantee) availed in the preceding three years and the current year and if there were any defaults in the Issuer’s obligations towards such financial obligations.
The NCS Amendment has expanded the scope of such disclosure to clarify that financial indebtedness would also include letters of comfort and other contingent liabilities. While disclosing defaults, the Issuer also has to make disclosures in relation to any defaults in relation to commercial papers.
Further, the Issuer must now disclose details of all put options, outstanding corporate guarantees and letters of comfort issued by it instead of restricting it to the preceding three years and the current year.
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| 6. | The requirement of disclosures pertaining to wilful defaulters has been done away with.
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| 7. | The Issuer has to disclose directors’ remuneration (payable by the Issuer, its subsidiary or associate company), and particulars of the nature and extent of their interests in the Issuer, its subsidiaries and associate companies (including the directors’ shareholding in such companies).
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Prior to the NCS Amendment, this disclosure was limited to public issuances of debt securities. | |
| 8. | The Issuer has to include details of bank fund-based facilities and any other borrowings from financial institutions or financial creditors in the format set out in the NCS Regulations. | Prior to the NCS Amendment, while the Issuer was required to disclose details of all its borrowings, the Issuer has to now include details of all bank fund-based facilities separately as well.
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| 9. | The Issuer is required to procure prior consents from directors, auditors, trustees, bankers to issue, solicitors or advocates to the issue, legal advisors to the issue, lead managers to the issue, registrar to the issue, and lenders (if required, as per the terms of the agreement) and experts. These consents are required to be annexed to the offer document. | This requirement was not present prior to the NCS Amendment (except the requirement of annexing the consent from the debenture trustee). This is an additional obligation on the Issuer.
However, it is pertinent to note that no objection certificates to be given by lenders will also now be annexed to the offer document (which will be available in the public domain).
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| 10. | A risk factor is required to be included to the effect that while the debentures are secured against a charge to the tune of 100% of the principal and interest amount in favour of debenture trustee, and it is the duty of the debenture trustee to monitor that the security is maintained, however, the possibility of recovery of 100% of the amount shall depend on the market scenario revalentt at the time of the security.
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This is an additional risk factor which needs to be included. | |
| 11 | The Issuer has to disclose the broad lending and borrowing policy of the Issuer. This should include a summary of the key terms and conditions of the term loans such as re-scheduling, prepayment, penalty and default.
Further, in the event, the lending or borrowing is between the Issuer and its subsidiaries or associates, the Issuer has to disclose the terms and conditions of such term loans including rescheduling, prepayment, penalty, and default.
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This will have a material impact as the ambit of this disclosure is extensive, and will require the Issuer to disclose key conditions of all the financing arrangements it is a party to.
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| 12 | The Issuer has to include a list of its material contracts, along with summaries thereto. Further, the Issuer has to disclose the time and place at which the material contracts will be available for inspection from the date of the offer document until the date of closing of subscription list.
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This will have a material impact as the ambit of this disclosure is extensive, and will require the Issuer to summarize all its material contracts.
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| 13. | The Issuer has to disclose the aggregate number of securities of the Issuer and its subsidiary companies purchased or sold by the promoter group, and by the directors of the Issuer which is a promoter of the Issuer, and by the directors of the Issuer and their relatives, within six months immediately preceding the date of filing the offer document with the registrar of companies.
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Prior to the NCS Amendment, this disclosure was limited to public issuances of debt securities. | |
SEBI has also introduced Section 51 (1) (A) which specifies that: “An issuer that has filed a general information document under these regulations and subsequently intends to issue commercial paper and seeks listing thereof, during the validity period of such general information document, shall file a key information document with the disclosures as may be specified by the Board.” Hence, if an Issuer has filed a GID, then any subsequent issuance of Listed CPs shall happen only through filing of relevant KID under the issued GID.
Additionally, as specified above, SEBI amended the LODR Regulations and introduced Regulation 62A to govern listing of issuance of non-convertible debt securities by a listed entity. The key change introduced is that effectively, on and after January 1, 2024, if an entity has any Listed NCDs outstanding or issues any Listed NCDs, then all other issuances after January 1, 2024 also need to be listed and the entity will not have the option of issuing NCDs which are unlisted.
| Change pursuant to the LODR Amendment | Impact | ||||||||
| Regulation 62A is a new regulation governing issuance of NCDs by a listed entity. A listed entity is defined to include both entities which have equity instruments listed on stock exchanges as well as entities which have NCDs or certain other types of securities listed on stock exchanges. It provides that:
(a) a listed entity, whose non-convertible debt securities are listed shall list all non-convertible debt securities, proposed to be issued on or after 1 January 2024, on the stock exchange(s); (b) A listed entity, whose subsequent issues of unlisted non-convertible debt securities are made on or before 31 December 2023 are outstanding on the said date, may list such securities, on the stock exchange(s); and (c) A listed entity that proposes to list non-convertible debt securities on the stock exchange(s) on or after 1 January 2024, shall list all outstanding unlisted non-convertible debt securities previously issued on or after 1 January 2024, on the stock exchange(s) within three months from the date of the listing of the non-convertible debt securities proposed to be listed. |
This is a significant development, as it in substance means that going forward, once an entity issue Listed NCDs and such Listed NCDs are subsisting, it cannot issue NCDs on an unlisted basis.
Given that Listed NCDs are subject to the electronic book building mechanism regime, other compliance requirements and now additional disclosures, this will increase the disclosure and compliance obligations of Issuers materially.
Issuers having issued Listed NCDs will lose the flexibility to issue NCDs on an unlisted basis even where they do not, from an end-use or other perspective, need to do a listed issuance. Corporate groups may therefore need to segregate and use different entities for listed and unlisted issuances.
In terms of the sequencing and timing required under the new regulation, the following is contemplated:
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For High Debt Listed Entities: Every debt listed entity having outstanding value of listed non-convertible debt securities of Rs. 500 crore and above as on March 31, 2021 has to comply with the certain corporate governance provisions from Regulation 16 to Regulation 27 of LODR. By way of an amendment, the compliance / explain basis liberty was extended till March 31, 2024. Such entities shall be in compliance with Regulation 16 to 27 of LODR going forward.