Background
Securities Exchange Board of India (SEBI), with an intent to strengthen and deepen the bond market, along with introducing a framework for borrowings by Large Corporates (LCs) in 2018, also introduced corporate governance requirements for High-Value Debt Listed Entities (HVDLEs) in 2021.
The framework for LCs was introduced pursuant to the proposal in the Union Budget speech 2018-19, wherein it mandated the LCs to meet about "one-fourth of their financing needs from the debt market" 1which came into effect from April 1, 2019, by way of a circular issued on November 26, 2018.2 Under the said framework, listed entities, satisfying the prescribed criteria for their long-term borrowings, were mandated to raise 25% of their incremental borrowings by issuance of debt securities.
In 2021, SEBI by an amendment in the Listing Obligations and Disclosure Requirements Regulations, 2015 (LODR Regulations) introduced corporate governance requirements for HVDLEs. As per the LODR Regulations, an HVDLE is an entity that has: (i) listed non-convertible debt security; (ii) an outstanding principal value of non-convertible security of 500 crores or more; and (iii) been listed on a recognized stock exchange.
Harmonization of SEBI's NCS & LODR Regulations
In 2023, SEBI amended the SEBI (Issue and Listing of Non-Convertible Securities) Regulations (NCS Regulations) and introduced Chapter V B (Requirements for LCs) under which, it provided the requirement for LCs under Regulation 50B to comply with requirements stipulated by SEBI. According to SEBI's Master Circular for issue and listing of Non-convertible Securities, Securitized Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper (NCS Master Circular) an LC is an entity that has: (i) its specified securities or debt securities listed on recognized stock exchanges; (ii) outstanding long-term borrowings of Rs. 100 crores or above; and (iii) credit rating of AA and above.
Even though the concept of LCs was introduced in 2018, SEBI constituted a working group3 in 2023 to review the framework for LCs and inter alia suggested the following recommendations to be incorporated into the LC Framework:
Increase in the threshold of outstanding long-term borrowings from 100 crores to 500 crores or above.4 Their rationale was to bring uniformity in the NCS Master Circular and LODR Regulations by keeping the threshold the same for the LCs and HVDLEs. Moreover, this would also provide a breather for the companies as it would give them time to prepare themselves for compliance requirements under these provisions once the framework becomes applicable to them.5
Removal of the criterion of minimum credit rating of AA+ for identifying any entity as an LC.6 This was recommended because, if the threshold of long- term outstanding borrowing increases from 100 crores to 500 crores, most of the entities, would anyways fall under the bracket of credit rating AA and above. Furthermore, if the criterion is removed, it would instil uniformity between the NCS and the LODR Regulations as even HVDLEs does not entail any credit rating criterion.
SEBI, vide circular dated October 19, 2023,7 notified a revised framework for LCs (LC Framework) effective from April 01, 2024.8 In the revised LC Framework, SEBI brought a change in the prerequisites for an entity to be an LC.
To be an LC, the entity has to satisfy these three conditions: (i) entities (except Scheduled Commercial Banks) to have their specified securities, debt securities, non-convertible redeemable preference shares listed on a recognized stock exchange; (ii) to have outstanding long-term borrowings of Rs. 1000 crore and above (earlier, the limit was Rs. 100 crores); and (iii) to carry a credit rating of AA/AA+/AAA of unsupported bank borrowings or plain vanilla bonds (highest rating to be considered in case of multiple ratings).
SEBI's attempt to Harmonization: An Analysis
Is the value of HVDLE high enough?
According to SEBI, the outstanding corporate bonds as of December 2023, are about 45.5 lakh crores represented by 34149 outstanding instruments of 6071 issuers.9 This means that the average issue size would be approximately 131 crores.10 If the total value of the outstanding bonds in the corporate sector is nearly 45.5 lakh crores, the amount of Rs 500 crores as prescribed by SEBI for HVDLE, is a significant amount which means it is "high enough" to be considered as an HVDLE.
Debt listing vs Equity listing: The same regulatory framework?
Debt markets are markets for the issuance, trading and settlement of various types and features of fixed-income securities. In the debt market, the issuer of securities is either a corporation or a government that needs funds for a specific period. Whereas, in the equity market, the issuer is a corporation looking to gain funds from the public for the long term. One of the main reasons why corporations prefer debt listing compared to equity listing is that in the former, the management by listing its debt, does not dilute its control in the company whereas, when the company lists its equity, which represents ownership, it ends up diluting its control over the company.
According to SEBI, the public issue of bonds for 2023-2024 is around Rs. 17,953 crores11 whereas the private placement of bonds for 2023-2024 is approximately Rs. 7,36,689 crores.12 This shows that the majority of bonds are issued by way of private placement. Whereas equity listing is achieved by way of public offer. As the majority of bonds are issued by way of private placement and equity is listed by way of public offer, SEBI by introducing regulations for HVDLE and LCs, has equated the debt-listed entity with that of an equity-listed entity substantially extending the same regulatory requirement for debt listed and equity listed entities. For instance, at this moment, under the LODR Regulations, a debt-listed entity has to comply with the requirements laid down under Chapter V. Subsequently, an equity-listed entity has to comply with the requirements laid down under Chapter IV. However, as SEBI introduced a new sect through its Amendment Regulations, i.e., for HVDLEs, they need to comply with requirements provided under both, Chapter IV and Chapter V. Thus, this shows that SEBI has tried to extend the same regulatory framework for debt listed and equity listed entities.
Public Comments for HVDLE: Lost in the process?
It is to be noted that usually whenever SEBI ought to notify an amendment, it goes through an entire process which includes forming a working group that issues a consultation paper which is then open for public comments. Lastly, after receiving the public comments, SEBI decides to accept or reject the proposals provided under the consultation paper and then notifies the amendment.
However, while issuing the Fifth Amendment Regulations, SEBI after the board meeting, without forming a working group and asking for public comments, had notified Amendment Regulations which extended the applicability of corporate governance requirements under Chapter IV to HVDLEs. However, on February 08, 2023, SEBI issued a "Consultation Paper on Review of Corporate Governance Norms for a High Value Debt Listed Entity" wherein public comments were sought. However, while notifying the Amendment Regulations and introducing HVDLEs under Chapter IV of the LODR Regulations, no public comments were sought.
Increase in the threshold for Large Corporates: A smart decision?
SEBI in its consultation paper for LCs had proposed to increase the threshold of the borrowing from 100 crores to 500 crores (as it is for HVDLEs) to imbibe uniformity between the NCS and the LODR Regulations. However, even though SEBI accepted the proposal, instead of raising the threshold from 100 crores to 500 crores, it raised it to 1000 crores.
The threshold for long-term borrowing increased to 1000 crores, excluding several entities previously covered under the LC Framework. Consequently, these entities are exempt from the obligations and disclosure requirements mandated by the revised framework, while still retaining the ability to borrow as extensively as LCs were permitted to before the changes. This adjustment offers these entities an advantage by granting them flexibility in borrowing without the associated obligations and disclosures now required under the revised LC framework.
Conclusion
The intersection of HVDLEs and LCs under SEBI's framework reflects a complex regulatory landscape aimed at strengthening the bond market in India. Mandating LCs to meet a portion of their financing needs from the debt market and further extending corporate governance requirements to HVDLEs, signifying an effort to enhance transparency, investor protection and market depth.
The efforts made by SEBI are commendable as it is a step forward to strengthen the bond market. Though it is high on promise but adjudging whether the rewards will meet the expectations or not, only time will tell.
Footnotes
1.Para 104, Union Budget 2018 – 19 speech, https://www.indiabudget.gov.in/budget2018-2019/ub2018- 19/bs/bs.pdf
2.Fund raising by issuance of Debt Securities by Large Entities, November 26, 2018; SEBI/HO/DDHS/CIR/P/2018/144, https://www.sebi.gov.in/legal/circulars/nov-2018/fund-raising-by-issuance-of-debt-securities-by-large-entities_41071.html
3. Point 4.1, SEBI Consultation Paper on Review of framework for borrowings by large corporates, August 2023
4. Point 5.1.2, Id
5. Point 5.1.3, supra at 3.
6. Point 5.3.2, supra at 3.
7. Ease of doing business and development of corporate bond markets –revision in the framework for fund raising by the issuance of debt securities by large corporates (LCs), SEBI/HO/DDHS/DDHS- RACPOD1/P/CIR/2023/172, https://www.sebi.gov.in/legal/circulars/oct-2023/ease-of-doing-business-and- development-of-corporate-bond-markets-revision-in-the-framework-for-fund-raising-by-issuance-of-debt- securities-by-large-corporates-lcs-_78237.html
8. Point 3.1, Id
9. SEBI, Outstanding corporate bonds – From Sep 2020 quarter, Issues and Redemptions and Total Outstanding Corporate Debt, https://www.sebi.gov.in/statistics/corporate-bonds/outstandingcropbond.html
10. Total outstanding bond issuances / number of outstanding instruments
11.Public Issue Data of Corporate Debt, Data for 2023-24, https://www.sebi.gov.in/statistics/corporate- bonds/publicissuedata.html
12. Private Placement Data of Corporate Bonds, Data for 2023-2024, https://www.sebi.gov.in/statistics/corporate- bonds/privateplacementdata.html
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.