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Securities and Exchange Board of India (SEBI), with the objectives of enhancing transparency, improving price discovery, reducing the time taken for private placement of debt securities and improving liquidity in the corporate bond market as opposed to the "over the telephone" market, has attempted to lay down the groundwork to modernise and simplify the issue procedure for listed private placement of debt securities by introducing the electronic book building process for debt securities on 21 April 2016 (EBM Circular). The electronic book building mechanism for listed privately placed securities will be effective from 1 July 2016.
Applicability based on Issue Size and Number of Investors
The electronic book mechanism will be mandatory for all listed private placements of debt securities which: (a) have an issue size exceeding `5,000 million; and (b) seek listing on a recognised stock exchange in India. The issue size of `5,000 million is inclusive of a green shoe option i.e., an issue size of `4,000 million with a green shoe of `1,500 million need to comply with the EBM Circular.
The electronic book building mechanism shall not be mandatory for: (a) fixed rate issuances which are targeted at a single investor (other than an arranger acting as an underwriter) irrespective of the issue size; and (b) issue size of less than `5,000 million.
For listed private placements of debentures below `5,000 million, additional disclosure requirements have been introduced i.e., the issuer has to disclose the coupon, yield, amount raised, number and category of investors in the prescribed format (not made available yet) to the electronic book provider (i.e., a recognised stock exchange) or another body notified by SEBI.
As on date, the requirements of the EBM Circular will not apply to unlisted private placement of debt securities.
Participants involved and their roles in Electronic Book Building for Debt Securities
| Participants | Definition | Roles and responsibilities |
| Electronic Book Provider (EBP) | A recognised stock exchange after obtaining approval from SEBI to act as EBP. |
|
| Issuer | Includes any company, public sector undertaking or statutory corporation which makes or proposes to make an issue of debt securities in accordance with the SEBI (Issue and Listing of Debt Securities) Regulations 2008, as amended, or which has its securities listed on a recognized stock exchange or which seeks to list its debt securities on a recognized stock exchange. |
|
| Arranger and Sub-Arranger (Category I Participants) | Arranger includes
merchant bankers, RBI registered primary dealers or any other
registered intermediaries as notified by SEBI. Sub-Arranger is any broker registered with SEBI and appointed by an Arranger. |
|
| Institutional Investors | Institutional Investors
includes a qualified institutional buyer (QIB) or family trust or
systematically important NBFCs registered with Reserve Bank of
India or intermediaries registered with SEBI, all with net-worth of
more than five thousand million rupees, as per the last audited
financial statements (Category II Participants). Non-Institutional Investors include HNIs, non-QIBs, individuals in each case only those persons eligible to invest in such debt securities (NIIs). |
|
Procedure for Electronic Book Building
| Pre-Bidding Procedure |
|
| Bidding Procedure |
|
| Post Bidding Procedure |
|
Comment
With the goal of developing the debt market in India and attracting more foreign investment in the listed debt segment, such changes in the regulatory framework are a welcome move.
However, with the increase in requirements such as appointment of an Arranger, employing services of the EBP, and the KYC obligations, the issue process is likely to increase the cost in terms of arranger's fee, EBP fee and KRA fee consequentially increasing the cost of borrowing.
Certain aspects, such as the detailed operational procedures to be laid down by the stock exchanges, the period of the bidding process, potential issues of pre-registration of participants to a maximum of 200 per year, leave scope for fine-tuning the framework.
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