Private Placement of Debt Securities – An Analysis under the Draft SEBI Rules (Issue and Listing of Non-Convertible Securities), 2021 – Company Law/Commercial Law

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A. Presentation:

Securities and Exchange Board of India (“SEBI”, “Board”) in its consultation paper dated 19th May 2021 has proposed to merge the SEBI Regulations on Issuance and Listing of Debt Securities, 2008 (hereinafter referred to as “ILDS Regulations”) and the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (hereinafter referred to as the “NCRPS Regulations”) into a single consolidated regulation – SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (hereinafter referred to as the “NCS Regulations”). The move aims to ease the compliance burden on listed entities and provide a consistent approach by harmonizing the laws relating to non-convertible securities which are currently spread across the Companies Act 2013 (“Companies Act”), SEBI ( listing Obligations and Disclosure Requirements), 2015, SEBI (Debenture Trustees) Regulations, 1993 SEBI (Issue of Capital and Disclosure Requirements), 2018; and various circulars issued by SEBI.

In this article, we will focus on the main changes and recommendations offered specifically in relation to private placement of debt securities.

B. Differentiation of “debt securities” from “perpetual debt securities”:

SEBI has recognized that these two terms are used interchangeably by market participants and therefore to distinguish between the two it is proposed to amend the definition of “debt securities” by including the words “period fixed term”. The proposed amended definition will read as follows:

“Debt Securities” means fixed term non-convertible debt securities which create or acknowledge indebtedness and include debentures, bonds or any other security whether or not a charge on assets/properties, excluding receipts of securities, securitized debt securities, money market instruments regulated by the Reserve Bank of India and bonds issued by the government or any other body specified by the Board;

C. Green Debt Securities:

The NCS Regulation introduces a new definition of “green debt security” which aims to separately classify debt securities for raising funds for projects related to renewable energy, sustainable development, waste management, water, land use, etc. However, the NCS Regulation does not provide any other conditionality regarding the issuance of these green debt securities. The proposed definition is reproduced below for convenience:

“Green Debt Instrument” means a debt instrument issued to raise funds to be used for projects and/or assets falling within one of the following broad categories, subject to such terms as may be specified by the Board at any moment to time. :

I. Renewable and sustainable energy, including wind, solar, bioenergy, other energy sources using clean technologies;

ii. Clean transport, including public/public transport;

iii. Sustainable water management, including clean and/or potable water, water recycling;

iv. adaptation to climate change;

iv. Energy efficiency, including efficient and green buildings;

v. Sustainable waste management, including recycling, energy recovery from waste, efficient waste disposal;

vii. Sustainable land use, including sustainable forestry and agriculture, afforestation;

viii. Conservation of biodiversity; or

ix. such other categories as may be specified by the Board from time to time.

D. Eligible Issuers under Regulation 6:

The NCS Regulation provides a stricter eligibility criterion for issuers for the private placement of debt securities, in line with the existing standards for the public issuance of debt securities. Accordingly, companies would become ineligible to issue debt securities placed in a private placement under the following circumstances:

  • if the issuer, one of its promoters, group of promoters or administrators is prohibited from accessing the securities market or from trading in securities by the Board for the duration of the prohibition.

  • if any of the issuer’s promoters or full-time directors is a full-time promoter or director[1]time director of any other company prohibited from accessing the securities market or from trading in securities by the Board, with the exception of:

(i) in the case of a person who has been appointed as a director solely pursuant to the appointment by a debenture trustee of another company;

(ii) when the exclusion period has ended.

  • whether any of its promoters or administrators is a fugitive economic offender under section 12 of the Fugitive Economic Offenders Act 2018

E. Applicability and Reduction of Period for Call and Put Options Under Regulation

19:

Currently, the ILDS Regulation defines the procedure for exercising call and put options in case of debt securities issued solely on the basis of a public issue. It is now proposed to extend this possibility to debt securities placed by the private sector. In addition, the current provisions of the ILDS regulations provide an option for an issuer to exercise the call option of the debt securities prior to maturity and an option for the investor to exercise the put option to repurchase the debt securities before maturity, after twenty-four months of issuing debt securities. This provision is considered restrictive and in order to give more flexibility to the issuer as well as to the investor, it is now proposed to reduce the period from twenty-four months to twelve months within the framework of the NCS Regulation. Furthermore, it has been prescribed that any partial exercise of this right must be done only on a proportional basis.

F. Electronic Book Provider Platform (EBP) Mechanism:

The Electronic Book Provider Platform (EBP) mechanism, as prescribed by SEBI/HO/DDHS/CIR/P/2018/05 of January 5, 2018, is currently operating for the transparent issuance of debt securities on the basis of a private placement. This platform is provided by one or more Recognized Exchanges or a Recognized Custodian and facilitates a price discovery mechanism for private placements primarily on an “OTC” basis. Currently, it applies to private placements of debt securities of INR 200 crore and above in a given financial year. Taking into account the recommendations of SEBI’s Corporate Bonds and Securitization Advisory Committee, the NCS Regulation proposes that any issue of eligible securities proposed to be listed in an amount equal to or above INR 100 crore in a financial year is carried out via the EBP platform.

In addition, it is recommended to revise the current deadline for filing a placement memorandum on the EBP platform from two working days before the opening date of the issue to five working days before the opening date of the issuance for issuers accessing the EBP platform for the first time.

The draft NCS regulation is indeed a welcome step in consolidating, aligning and improving the readability of the law relating to “pure play” debt and quasi-debt financing and towards the ease of doing business. Issuers and other market participants should benefit from the potentially reduced compliance burden and clarity offered by the proposed merger of all circulars into a single operational circular by the regulator. Although the proposal is well-intentioned, inducing efficiency and espouses clearly delineated and harmonized legislation, industry reaction and public discourse are awaited and it remains to be seen whether the resulting regulations meet the regulator’s objectives. In all cases, legislative intent must be backed by broad executive cooperation and operational clarity for successful implementation.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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John A. Bogar