NCS Regulations versus ILDS Regulations

Comparitive between consolidate framework and erstwhile provisions relating to private placement.

Henil Shah | Assistant Manager and Parth Ved | Executive corplaw@vinodkothari.com

SEBI vide its notification dated August 09, 2021 introduced SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’), NCS Regulations have merged the provisions of SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (‘ILDS Regulations’), and SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (‘NCRPS Regulations’). The notified regulations in ambits covers framework pertaining to issue of non-convertible debentures (‘NCDs’), non-convertible preference shares (‘NCPS’), perpetual debt securities (‘PDIs’), and listed commercial paper.

The NCS regulations shall be effective from 7th day from the date of their publication in the official gazette i.e. 16th August, 2021.

In this article, we present a comparison between the erstwhile ILDS regulations and NCS Regulations from the point of view of a private placement of NCDs.

NCS Regulations v/s ILDS Regulations

Sr.No NCS Regulations ILDS Regulations Our Remarks  
 1Reg. 5: Eligible Issuer 

(1)   No issuer shall make an issue of non-convertible securities if as on the date of filing of draft offer document or offer document:

a.       the issuer, any of its promoters, promoter group or directors are debarred from accessing the securities market or dealing in securities by the Board;

b.      any of the promoters or directors of the issuer is a promoter or director of another company which is debarred from accessing the securities market or dealing in securities by the Board

c.       the issuer or any of its promoters or directors is a wilful defaulter;

d.      any of the promoters or whole-time directors of the issuer is a promoter or whole-time director of another company which is a wilful defaulter

e.       any of its promoters or directors is a fugitive economic offender; or

f.        any fine or penalties levied by the Board /Stock Exchanges is pending to be paid by the issuer at the time of filing the offer document:

g.       Provide that the:

(i)    restrictions mentioned at (b) and (d) above shall not be applicable in case of a person who was appointed as a director only by virtue of nomination by a debenture trustee in other company.

(ii)  restrictions mentioned in (a) and (b) above shall not be applicable if the period of debarment is over as on date of filing of the draft offer document with the Board.

(iii)   restrictions mentioned at (c) and (d) shall not be applicable in case of private placement of non-convertible securities

(2)    No issuer shall make a public issue of non-convertible securities if as on the date of filing of draft offer document or offer document, the issuer is in default of payment of interest or repayment of principal amount in respect of non-convertible securities, if any, for a period of more than six months.

 

 ILDS Regulations didn’t laid out any specific eligibility criteria for the issue to list its NCDs issued on private placement basis.

Under the NCS Regulations, the condition that the issuer shall not be debarred from accessing the securities market or dealing in securities has been extended to promoter group entity as well. Further, certain additional conditions such as the promoter or WTD shall not be a promoter or WTD of a company which is a wilful defaulter, no promoters or directors shall be fugitive economic offenders or no fines or penalties are pending at the time of filing of offer document have been inserted.

Associating payment of fines and penalties with listing might not be a feasible idea; as there might be situations where the issuer may have raised disputes/concerns on liability to pay such fines/penalties.

2Reg. 6: In-principal approval

The issuer shall make an application to one or more stock exchange(s) and obtain an in-principle approval for listing of its non-convertible securities from the stock exchange(s) where such securities are proposed to be listed:

Provided that where the application is made to more than one stock exchange, the issuer shall choose one among them as the designated stock exchange.

 

 

 

Reg. 19(3): Mandatory listing

Where the issuer has disclosed the intention to seek listing of debt securities issued on private placement basis, the issuer shall forward the listing application along with the disclosures specified in Schedule I to the recognized stock exchange within fifteen days from the date of allotment of such debt securities.

Under ILDS Regulations there was no specific requirement to obtain in-principal approval form stock exchange for listing, an application along with disclosure specified in the regulations did the trick.

However, moving forward the issuers will be required to obtain a prior in-principal approval for listing.

Actionable: Going forward issuers will be required to obtain in-principal approval.

 3Reg. 8: Debenture Trustee

 

The issuer shall appoint a debenture trustee in case of an issue of debt securities.

There was no clarity under ILDS w.r.t appointment of debenture trustee for private placement of debt securities. Notification of NCS regulations brings clarity on appointment of debenture trustee.
4Reg. 12: Electronic Issuances

An issuer proposing to issue non-convertible securities through the on-line system of the stock exchange(s) and depositories shall comply with the relevant applicable requirements as may be specified by the Board.

Applicability of issuance through EBP platform in case of private placement comes from SEBI circular dated. Considering the benefits of EBP platform SEBI in its Consultation Paper, proposed to reduce the limit from 200 Crores to 100 Crores. Accordingly, changes are being carried out under para  of Operational Circular for issue and listing of Non-Convertible (NCS) Securitised Debt Instruments (SDI) Security Receipts (SR), Municipal Debt Securities and Commercial Paper (CP) dated August 10, 2021 (‘Operational Circular’)
5Reg. 15: Rights to recall or redeem prior to maturity

 

Framework for right to recall and right to redemption prior to maturity.

 

 

 

ILDS Regulations, provided framework for right to recall (i.e. Call Option) and right of redemption (i.e. Put Option) prior to maturity, in case of public issue of NCDs. In case of private placement of NCDs, the same was entirely guided by the terms of issue.

However, the NCS regulations have now stipulated that provisions relating to call and put option shall equally apply in case of public issuances as well as private placement.

This seems to take away the flexibility that issuers enjoyed in certain cases for issuers of privately placed debentures for example, where an interest rate in case of delay on part of the issuer could be avoided or kept at a minimal rate, the same will be charged at 15% interest rate.

Aside, also note that put option is a feature only applicable in case of NCDs and not NCPs.

6Reg. 18(1): Trust Deed

 

The issuer and the debenture trustee shall execute the trust deed within such timelines as may be specified by the Board.

 

 

 

Timeline and format for execution of debenture trust deed was not expressly mentioned for private placement in the ILDS.

The NCS Regulations have aligned with requirement for SEBI circular dated November 03, 2021.

It may be noted that reg.59(3) of NCS Regulations save all the circulars, etc. issued under previous regulations as if the same were issued under NCS Regulations.

7Reg. 23(3): Obligations of the Issuer  

The issuer shall apply for Securities and Exchange Board of India Complaints Redress System (SCORES) authentication in the format specified by the Board and shall use the same for all issuance of non-convertible securities.

The requirement was not specifically mentioned in the ILDS Regulations, however the requirement of registering on SCORES also comes from SEBI (Listing Obligation and Disclosure Requirement), 2015.
8Reg. 43(2): Creation of Security

The charge created in respect of the secured debt securities shall be disclosed in the offer document along with an undertaking that the assets on which charge or security has been created to meet the hundred percent security cover is free from any encumbrances and in case the assets are encumbered, the permissions or consent to create first, second or pari passu charge on the assets has been obtained from the existing creditors to whom the assets are charged, prior to creation of the charge:

Provided that sub regulation (2) shall not apply if the charge is created on additional assets other than the assets comprising of hundred percent security cover.

 

Reg. 21B: Creation of Security 

 

The issuer shall give an undertaking in the Information Memorandum that the assets on which charge is created are free from any encumbrances and in cases where the assets are already charged to secure a debt, the permission or consent to create a second or pari-passu charge on the assets of the issuer has been obtained from the earlier creditor.

The regulations provide that in case of additional security cover (that is, beyond 100%), sub-reg (2) shall not apply. it may imply that the issuer need not give an undertaking with respect to the additional security cover being free of encumbrances or the issuer having obtained prior consents.

However, it must be noted that where additional security cover so provided is a subject asset under any other financing agreements entered into with any other person or lenders, the agreement may provide for obtaining prior consent of such lender

In that case, it might be impractical (and also, not in accordance with law) to say that the issuer can proceed to create encumbrance without obtaining consent of the lender therefore, irrespective of whether any undertaking is given in the offer document, the issuer would need to comply with any contractual covenants wrt to such “additional” security cover

 

9Reg. 44(1): Listing Application

The  issuer  shall  forward  the  listing application along with the disclosures as per this regulation to the stock exchange(s) within such days as may be specified by the Board from the date of closure of the issue:

Reg. 19(3): Mandatory Listing 

 

Where the issuer has disclosed the intention to seek listing of debt securities issued on private placement basis, the issuer shall forward the listing application along with the disclosures specified in Schedule I to the recognized stock exchange within fifteen days from the date of allotment of such debt securities.

The provision in the NCS regulation is aligned with timelines for listing notified via SEBI circular dated October 05, 2020 now subsumed into Operational Circular.
10Reg. 44(3) & (4):  Due diligence

(3) Debenture trustee shall submit a due diligence certificate to the stock exchange in the format as specified in Schedule IV of these regulations.

(4) The stock exchange(s) shall list the debt securities only upon receipt of the due diligence certificate from the debenture trustee as per format specified by the Board.

Regulation 44 provides for:

  1. The issuer has made adequate provisions for and/or has taken steps to provide for adequate security for the debt securities to be issued.
  2. The issuer has obtained the permissions / consents necessary for creating security on the said property (ies).
  3. The issuer has made all the relevant disclosures about the security and also its continued obligations towards the holders of debt securities.
  4. All disclosures made in the offer document with respect to the debt securities are true, fair and adequate to enable the investors to make a well informed decision as to the investment in the proposed issue.

 

  1. The format of Schedule IV provides for format of due diligence certificate to be given by the debenture trustee before opening of the issue.
  2. This certification was not specifically present under ILDS Regulations for private placements; however, in case of November 03, 2020 circular due diligence required due diligence to be undertaken by the debenture trustee in case of issuance of secured debentures. Therefore, NCS Regulations now have a specific clause for due diligence in case of private placement also. 
  3. Similar requirement was applicable for public issues under reg. 6(8) of ILDS Regulations.
  4. This certification is required to be given at the time of filing of private placement memorandum/ information memorandum/ before opening of the issue and at the time of filing of listing application by issuer  in case of private placement; however, for public issues, this certificate is given at the time of at the time of filing the draft offer document with the stock exchange(s) and prior to opening of the public issue of debt securities.

 

11Reg. 47(2): Filing of shelf placement memorandum

 The shelf placement memorandum shall indicate a period not exceeding one year as the period of validity of such memorandum which shall commence from the date of opening of the first offer of debt securities under that memorandum, and in respect of a second or subsequent offer of such debt securities issued during the period of validity of that memorandum, no further placement memorandum is required.

Reg. 21A(2): Filing of Shelf Disclosure Document

An issuer filing a Shelf Disclosure Document under sub-regulation (1), shall not be required to file disclosure document, while making subsequent private placement of debt securities for a period of 180 days from the date of filing of the shelf disclosure document.

The time validity of shelf prospectus in case of private placement of debt securities has been increased from 180 days to 1 year.

 

This is a welcome move, as this will eliminate hassles for frequent issuers to file shelf prospectus multiple times.

 

 

Disclosure Requirements:

The NCS Regulations provides for a separate sets of disclosure requirements in case of both public issue and private placement. Template for disclosure required to be made in case of private placement of NCS are provided in the schedule of the NCS regulations. Following is a comparison of disclosure required to be made in terms of NCS Regulations vs ILDS Regulations and NCRPs Regulations. In general the NCS widens the purview of information to be disclosed for the purpose of enhancing disclosure being made further streamlining aligning the same.   

Sr. No NCS Regulation (Schedule II)ILDS Regulations (Schedule I)NCRPS Regulations

(Schedule I)

11. Instructions

Following general instructions for preparation of draft offer document are specified:

  1. All information shall be relevant and updated as on the date of the offer document.
  2. Source of all statements & claims shall be disclosed.
  3. Terms such as “market leader”, “leading player”, etc. shall be used only if these can be substantiated by citing a proper source.
  4. Use simple English and technical terms if any, w.r.t. business shall be clarified in simple terms.
  5. There shall be no forward-looking statements that cannot be substantiated.
  6. Consistency shall be maintained in the style of disclosures.
  7. For currency of presentation, only one standard financial unit shall be used.
There were no such specific instructions.There were no such specific instructions.
Para 2.2: The front page shall contain:

  1. Name, logo, CIN, PAN, date and place of incorporation, registration number issued by any regulatory authority, address of registered and corporate offices, telephone number, website, email.
  2. Name, telephone number, email of compliance officer, CS, CFO and Promoters.
  3. Name, addresses, logo, telephone number, email and contact person of debenture trustee, CRA,
  4. Name, logo, address of Registrar to the issue (RTA) along with its telephone number, fax number, website and email address.
  5. Date and type of placement memorandum.
  6. Nature, number, price and amount of securities offered and issue size (base issue or green shoe),
  7. Aggregate amount proposed to be raised through all the stages of offers of NCS through shelf placement memorandum
  8. Issue schedule – Date of opening, closing, earliest closing (if any) of issue.
  9. Credit rating (along with cross reference of press release) and all ratings obtained for the private placement.
  10. Name of stock exchange where securities are proposed to be listed.
  11. Details about eligible investors.
  12. Coupon / dividend rate and payment frequency, redemption date and amount and details of debenture trustee.
  13. Nature and issue size, base issue and green shoe option, if any, shelf or tranche size, each as may be applicable.
  14. Details about underwriting including amount underwritten.
  15. Inclusion of compliance clause w.r.t. EBP platform, if applicable.
There was no specific requirement to state the following information on front page.

Para 3.A.a: However, following disclosures were to be made where relevant:

Name and address of the following:

  1. Registered and corporate office of issuer;
  2. Compliance officer, CFO of issuer;
  3. Arrangers, if any;
  4. Trustee of the issue;
  5. RTA;
  6. Credit Rating Agency(ies) of the issue;
  7. Auditors of the issuer.
Para II.A: A prominent disclosure in bold writing on the cover page of offer document stating the following:

“Instruments offered through the offer document are non-convertible redeemable preference shares and not debentures/bonds. They are riskier than debentures / bonds and may not carry any guaranteed coupon and can be redeemed only out of the distributable profits of the company or out of the proceeds of a fresh issue of shares made, if any, by the company for the purposes of the redemption”

 

Para II.B.i: However, following disclosures were to be made where relevant:

Name and address of the following:

  1. Registered and corporate office of issuer;
  2. Compliance officer, CFO of issuer;
  3. Arrangers, if any;
  4. Trustee of the issue;
  5. RTA;
  6. Credit Rating Agency(ies) of the issue;
  7. Auditors of the issuer.
2Para 2.3.1: Insertion of clause relating to Issuer’s Absolute Responsibility as per the text provided in Schedule II.There was no such clause specified in the regulations but issuer generally put a disclaimer clause.There was no such clause specified in the regulations but issuer generally put a disclaimer clause.
3Para 2.3.2: Details of Promoters of the Issuer:

A complete profile of all the promoters, including their name, date of birth, age, personal addresses, educational qualifications, experience in the business or employment, positions/posts held in the past, directorships held, other ventures of each promoter, special achievements, their business and financial activities, photograph, PAN.

A declaration confirming that the PAN, Aadhaar Number, Driving License Number, Bank Account Number(s) and Passport Number of the promoters and PAN of directors have been submitted to the stock exchanges on which the non-convertible securities are proposed to be listed, at the time of filing the draft offer document.

Para 3.A.h: Earlier, only promoter holding as on the latest quarter end was required to be disclosed.

Declaration confirming submission of information pertaining  to personal details of promoters/ directors of promoters to SEs is a new requirement.

Para II.B.viii: Earlier, only promoter holding as on the latest quarter end was required to be disclosed.

Declaration confirming submission of information pertaining  to personal details of promoters/ directors of promoters to SEs is a new requirement.

4Para 2.3.4: Name(s) and in-principle approval of the stock exchange(s) where the NCS are proposed to be listed and in case of more than one stock exchange, specify the designated stock exchange.

The issuer shall specify the stock exchange where the recovery expense fund is being/has been created as specified by SEBI.

Para 3.A.p: Names of all the recognised stock exchanges where the debt securities are proposed to be listed clearly indicating the designated stock exchange.Para II.B.xii: Names of all the recognized stock exchanges where NCRPS are proposed to be listed clearly indicating the designated stock exchange
5Para 2.3.6: Name, logo, address, website, email, telephone number and contact person of debenture trustee, CRA, RTA, Statutory Auditor, legal counsel, Guarantor, arranger, if any.Para 3.A.a: Earlier, details w.r.t. Legal counsel and Guarantor was not included in the regulation.

Further, the requirement of putting a logo, though not expressly mentioned, was anyways followed.

Para II.B.i: Earlier, details w.r.t. Legal counsel and Guarantor was not included in the regulation.

Further, the requirement of putting a logo, though not expressly mentioned, was anyways followed.

6Para 2.3.8 Financial Information 

A columnar representation of the audited financial statements on a standalone and consolidated basis for a period of 3 completed years.

Combined financial statements need to be disclosed for the periods when such historical financial statements are not available if the issuer being a listed REIT/listed InvIT has been in existence for a period less than three completed years.

Issuers (other than unlisted REITs / InvITs) who are in existence for less than 3 years may disclose financial statements subject to the following conditions:

i. The issue is made on the EBP platform irrespective of the issue size; and

ii. The issue is open for subscription only to QIB.

Listed issuers may disclose unaudited financial information for the stub period instead of audited financial statements in the format as prescribed in LODR Regulations with limited review report, subject to necessary disclosures in the placement memorandum.

7Para 2.3.10.c: Equity share capital history for the last three years:

  1. Date of allotment
  2. No. of equity shares
  3. Face value
  4. Issue price
  5. Consideration (Cash, other than cash, etc)
  6. Nature of allotment
  7. Cumulative no. of equity shares, equity capital and equity share premium
  8. Remarks
Para 3.A.c.iii: Equity share capital history for the last five years:

  1. Date of allotment
  2. No. of equity shares
  3. Face value
  4. Issue price
  5. Consideration (Cash, other than cash, etc)
  6. Nature of allotment
  7. Cumulative no. of equity shares, equity capital and equity share premium
  8. Remarks
Para II.B.iii.3:Equity share capital history for the last five years:

  1. Date of allotment
  2. No. of equity shares
  3. Face value
  4. Issue price
  5. Consideration (Cash, other than cash, etc)
  6. Nature of allotment
  7. Cumulative no. of equity shares, equity capital and equity share premium
  8. Remarks
8Para 2.3.10.f: Details of the shareholding of the Company as at the latest quarter end, as per the format specified under LODR regulations.Para 3.A.d.i:Details of the shareholding of the Company as on the latest quarter end was to be provided as per format specified in the Schedule.Para II.B.iv.1: Details of the shareholding of the Company as on the latest quarter end was to be provided as per format specified in the Schedule.
9Para 2.3.10.g: % comparison of top 10 holders of NCS with total NCS outstanding to be disclosed along with name, total no. of equity shares and no. of shares in demat form..Para 3.A.g.iv: Only the name of the top 10 debenture holders and their holding amount was required to be disclosed.Para II.B.iv.2: Only the name of the top 10 debenture holders and their holding amount was required to be disclosed.
10Requirement of providing the amount of corporate guarantee issued by the Issuer along with name of the counterparty (like name of the subsidiary, JV entity, group company, etc) on behalf of whom it has been issued has been omitted.Para 3.A.g.v: The amount of corporate guarantee issued by the Issuer along with name of the counterparty (like name of the subsidiary, JV entity, group company, etc) on behalf of whom it has been issued was required to be specified.Para II.B.vii.4: The amount of corporate guarantee issued by the Issuer along with name of the counterparty (like name of the subsidiary, JV entity, group company, etc) on behalf of whom it has been issued was required to be specified.
11Para 2.3.13.e: ISIN of outstanding Commercial Paper needs to be disclosed along with maturity date and amount.Para 3.A.g.vi: Only outstanding amount and maturity dates of Commercial Paper were required to be disclosed.Para II.B.vii.5: Only outstanding amount and maturity dates of Commercial Paper were required to be disclosed.
12Para 2.3.15: Where the issuer is a NBFC or HFC additional disclosures on Asset Liability Management (ALM) shall be provided for the latest audited financials:

  1. Details w.r.t. lending done out of the issue proceeds of earlier issuances of debt securities (whether public issue or private placement) by NBFC.
  2. Portfolio Summary of borrowings made by NBFC.
  3. Quantum and percentage of Secured vs. Unsecured borrowings.
  4. Any change in promoters holding in NBFC during last FY beyond the threshold prescribed by RBI.
  5. Segment wise break up and Type of loans.
  6. Geographical location wise details of borrowers.
  7. Segment wise details of Gross NPA.
  8. Residual maturity profile wise details of assets and liabilities into several bucket.
  9. Disclosure of latest ALM statements to stock exchange.
13Para 2.3.25: Risk factors 

Risk factors shall be disclosed in the descending order of materiality.

It should include but not limited to:

  1. Risks in relation to NCS.
  2. Risks in relation to the security created in relation to the debt securities, if any.
  3. Refusal of listing of any security of the issuer during last three years by any of the stock exchanges in India or abroad.
  4. Limited or sporadic trading of NCS of the issuer on the stock exchanges.
  5. In case of outstanding debt instruments or deposits or borrowings, any default in compliance with the material covenants such as creation of security as per terms agreed, default in payment of interest, default in redemption or repayment, non-creation of DRR, default in payment of penal interest wherever applicable.
  6. If secured, any risks in relation to maintenance of security cover or full recovery of the security in case of enforcement.
Disclosure of risk factors is required to be  provided in terms of summary sheet however, no specific pointers were pointed out.Reg.23(5): The banks were required to disclose relevant risk factors in case of issue of Perpetual Non-Cumulative Preference Shares and Perpetual Debt Instruments.

 

You may also refer to our following articles on related subjects

  • Consolidation of SEBI regulations on non-convertible securities

https://vinodkothari.com/2021/08/consolidation-sebi-non-convertible-securities/ 

  • Presentation on Corporate Bonds and Debentures

https://vinodkothari.com/2021/03/presentation-corporate-bonds-debentures/

  • SEBI’s stringent norms for secured debentures

https://vinodkothari.com/2020/11/sebis-stringent-norms-for-secured-debentures/

  • Market-Linked Debentures – Real or Illusory?

https://vinodkothari.com/2021/01/market-linked-debentures-real-or-illusory/

  • FAQs on Commercial Paper

https://vinodkothari.com/2019/11/faqs-on-commercial-paper/

Our  our Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered though the below link:

https://www.taxmann.com/bookstore/product/6330-law-and-practice-relating-to-debentures-and-corporate-bonds

 

 

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