SEBI mandates timely disclosure of ‘default’: intends to fill credit information gaps

By Vallari Dubey, (vallari@vinodkothari.com)

The Securities and Exchange Board of India (‘SEBI’) has vide circular dated 4th August, 2017[1], issued a set of additional disclosures for default in payment of interest/repayment of principal amount on loans from banks/financial institutions, debt securities etc. the same are to be complied with by all listed entities,

The circular is issued by SEBI, by virtue of ‘the power to remove difficulties’ granted under Regulation 101 of Chapter XII of LODR Regulations, 2015. This circular shall take effect from 1st October, 2017.

Background

As per the existing disclosure requirements, a listed entity is required to intimate or bring it into records of public and/or the stock exchange, the details of any material event or action as specified in the regulations.

Existing disclosures in case of ‘default’

Disclosures by entities which has listed its specified securities[2]

Regulation 30 deals with disclosure of any events/information which, in the opinion of the board of directors of the listed entity are considered material.

The events specified in Para A, Part A of Schedule III are deemed material events, and the listed entity is required to disclose the same to the stock exchange as soon as reasonably possible and not later than twenty four hours from the date of occurrence of event/information. Further, the listed entity shall make disclosures updating material developments with respect to the disclosures already made. The disclosures are also required to be hosted on the website of the company for a minimum period of 5 years.

Inter-alia the events mentioned, para 6 reads as:

  1. Fraud/defaults by promoter or key managerial personnel or by listed entity or arrest of key managerial personnel or by listed entity or arrest of key managerial personnel or promoter.

It may be noted that the term ‘default’ is not defined for the purpose of disclosure under this para.

Disclosures by listed entities which has listed its non-convertible debt securities or non-convertible redeemable preference shares or both

Regulation 51 deals with disclosure of information having a bearing on the performance/operation of the listed entity and/or price sensitive information.  Sub-regulation (2) refers to Part B Schedule III and the events specified therein shall be promptly disclosed to the stock exchanges.

Inter-alia the events mentioned, para 1, 4, 9 and 11 read as:-

  1. Expected default in timely payment of interests/preference dividend or redemption or repayment amount or both in respect of the non-convertible debt securities and non-convertible redeemable preference shares and also default in creation of security for debentures as soon as the same becomes apparent;

 

  1. Any action that shall affect adversely payment of interest on non-convertible debt securities or payment of dividend on non-convertible redeemable preference shares including default by issuer to pay interest on non-convertible debt securities or redemption amount and failure to create a charge on the assets;

 

  1. Delay/ default in payment of interest or dividend / principal amount/redemption for a period of more than three months from the due date;

 

  1. Any instance(s) of default/delay in timely repayment of interests or principal obligations or both in respect of the debt securities including, any proposal for re scheduling or postponement of the repayment programmes of the dues/debts of the listed entity with any investor(s)/lender(s).

 

Explanation – For the purpose of this sub-para, ‘default’ shall mean Non-payment of interest or principal amount in full on the pre-agreed date and shall be recognized at the first instance of delay in servicing of any interest or principal on debt.

Additional disclosures to be made w.e.f. 1st October, 2017

Pursuant to the said circular, disclosures in the format prescribed therein (not covered under the existing disclosure regime) are required to be made. As stated in the circular, the disclosures seek to imbibe a culture of discipline amongst the listed entities and facilitate to fill the existing gaps in terms of credit and default information of listed entities, in respect of loans and borrowings from banks. Such detailed information which is to be provided, along with strict timelines, will prove to be fruitful to the banks and other stakeholders, in cases where any application is initiated against any listed entity before the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016.The disclosures shall be made when the listed entity has committed “default” in its obligation towards any of the following:-

  1. Debt securities (including commercial papers)
  2. Medium Term Notes (MTNs)
  3. Foreign Currency Convertible Bonds
  4. Loans from banks and financial institutions
  5. External Commercial Borrowings (ECBs)
  6. Any other case as and when required

For the purpose of the aforesaid, default shall mean non-payment of interest or principal amount at a pre-agreed date.

Information to Credit Rating Agencies (CRAs)

All information pertaining to ‘default’ by the listed entities shall also be supplied to Credit Rating Agencies. Reference may be made to the recent SEBI circular dated 30th June, 2017[3]. The circular clarifies the applicability of the obligation on the Debenture Trustee to monitor and share information about default in payment of interest/principal amount, with registered CRAs. Another circular on the same date was issued[4], laying down a comprehensive monitoring and review mechanism for ratings given by CRAs; the circular also provide for submission of No Default Statement by the issuer to the CRA on a monthly basis.

A tabular comparison of disclosures before and after October 1, 2017

An effective date of 1st October, 2017 has been provided in the circular to enable enough flexibility to the listed entities, to set up proper systems in place for compliance of the disclosures to be made therein.


[1] http://www.sebi.gov.in/legal/circulars/aug-2017/disclosures-by-listed-entities-of-defaults-on-payment-of-interest-repayment-of-principal-amount-on-loans-from-banks-financial-institutions-debt-securities-etc_35538.html

[2] Regulation 2 (zl) defines: ‘specified securities’ means ‘equity shares’ and ‘convertible securities’ as defined under clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;

[3] http://www.sebi.gov.in/legal/circulars/jun-2017/clarification-on-monitoring-of-interest-principal-repayment-and-sharing-of-such-information-with-credit-rating-agencies-by-debenture-trustees_35219.html

[4] http://www.sebi.gov.in/legal/circulars/jun-2017/monitoring-and-review-of-ratings-by-credit-rating-agencies-cras-_35220.html

 

Concurrence of Pledgee Sufficient For Creating Pledge

Introduction

The Securities and Exchange Board of India (SEBI) vide its notification dated July 25th, 2017[1] has come up with SEBI (Depositories and Participants) (Second Amendment) Regulations, 2017 (hereinafter referred to as “DP Second Amendment Regulations, 2017”) substituting sub-regulation (3) of regulation 58 of the SEBI (Depositories and Participants) Regulations, 1996[2] (hereinafter referred to as “DP Regulations, 1996). Read more

SEBI aligns DT Regulations with Act, 2013, by Vignesh Iyer

The Securities and Exchange Board of India (SEBI) on July 13, 2017 issued the SEBI (Debenture Trustees) (Amendment) Regulations, 2017 (Amendment Regulations)[1] in order to amend the SEBI (Debenture Trustees) Regulations, 1993 (Principal Regulations)[2] and make the reference to the corresponding provisions of the Companies Act, 2013 (Act, 2013) instead of the erstwhile reference of Companies Act, 1956 (Act, 1956). Read more

SEBI amends ILDS Regulations, clarifies on AOA amendment

 

SEBI vide notification dated March 24, 2015[1] had provided framework for consolidation and re-issuance of debt securities under Regulation 20A of SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (‘ILDS Regulations’) subject to fulfillment of certain conditions. One of the conditions was to have an enabling Read more

Representation to SEBI on Exemptions related to ISINs for Debt Securities

To,

Ms. Richa G. Agarwal

Deputy General Manager

Investment Management Department

Securities and Exchange Board of India

 

Sub: Representation on the exemptions related to International Securities Identification Number (ISINs) for debt securities issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and clarity on initial reporting.

Ref: SEBI Circular No. CIR/IMD/DF-1/ 67/2017 (‘SEBI Circular’) issued on June 30, 2017.

Dear Madam,

Indian Securitisation Foundation (ISF)

ISF is a not-for-profit entity representing the securitisation industry in India. The membership of the Foundation includes banks, NBFCs, microfinance institutions, other issuers and investors and securitisation professionals for promoting interest of securitisation and fixed income securities in India. As ISF is dedicated to the cause of promoting securitisation, asset-based financing and related areas in India, we humbly submit our recommendations herein below on the captioned subject which may have significant impact on the intent of the circular.

1.    SEBI Circular

Para 2.2 of the SEBI Circular provides for exemption from applicability of ISINs. The text of the exemption is as follows:

2.2. Exemptions from applicability of ISINs:

The following classes of debt securities issued for raising regulatory capital are exempted from the applicability of provisions of this circular:

XX

Tier II bonds issued by Non-Systemically Important Non-Deposit taking Non-Banking Financial Company issued as per RBI “Master Direction-Non-Banking   Financial Company-Non-Systemically important Non-deposit taking Company (Reserve Bank) Directions, 2016”dated September 01, 2016. (Emphasis Supplied)

2.    NBFC-ND-SI Directions

Para 6 of the Non-Banking Financial Company -Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (‘NBFC-ND-SI Direction’) provides that every applicable NBFC shall maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 15 percent of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items.

3.    NBFC-ND-NSI Directions

Para 46 and 48 of the Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 (‘NBFC-ND-NSI Directions’) requires every NBFC-IFC (Non-Banking Finance Company – Infrastructure Finance Companies) and NBFC-MFI (Non-Banking Finance Company – Micro Finance Institutions), respectively, to maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 15 percent of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items.

4.    Our Representation

  • Including Tier-II bonds issued by NBFC-ND-SI in exemption category – Considering the provisions of law, following scenario emerges as far as applicability of capital adequacy is concerned:
  1. Applicable NBFCs as defined under para 2 of the NBFC-ND-SI Directions are required to comply with the capital to risk assets ratio thereby necessarily required to maintain tier-I and tier-II capital.
  2. NBFC-IFC-NSI and NBFC-MFI-NSI complying with the provisions of NBFC-ND-NSI Directions are required to with the capital to risk assets ratio thereby necessarily required to maintain tier-I and tier-II capital.
    1. Every other NBFC-ND-NSI is required to maintain a leverage ratio.

As evident from the text of the SEBI Circular, only those companies have been exempted from applicability of ISINs which issues debt securities for raising regulatory capital; however, it seems that the SEBI Circular have inadvertently missed adding NBFC-ND-SI within the exemption list.

Therefore, it is a humble request to consider including the following:

“2.2.8. Tier II bonds issued by Systemically Important Non-Deposit taking Non-Banking Financial Company issued as per RBI “Non-Banking Financial Company -Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016” dated September 01, 2016.”

  • Clarity with respect to initial reporting requirement – Para 3.1.1. of the SEBI Circular requires the issuer to submit the data in the format prescribed under the said para. The SEBI Circular does not specify to whom such data shall be submitted, i.e., to recognized stock exchange only or to recognized stock exchanges as well as a depository or to SEBI. In this regard, we request you to kindly clarify as to whom the submission shall be made.

Thanking you

For Indian Securitisation Foundation

Sd/-

(Vinod Kothari)

SEBI formalises guidelines for issuance of Green Debt Securities in India, by Abhirup Ghosh

The Securities and Exchange Board of India (SEBI) on 30th May, 2017 came out with a circular stating the disclosure requirements for issuance and listing of Green Debt Securities in India (hereinafter referred to as “Circular”)[1]. Earlier in December, 2015, SEBI had come out with a concept paper for issuance of Green Bonds in India (hereinafter referred to as “Concept Paper”)[2]. The Concept Paper brought out the need for enhanced disclosures for issuance of green bonds so as to differentiate it from other form of debt securities issued and listed in India and the Circular is largely in line with the concept paper. Read more

Amendments to the SEBI (Debenture Trustee) Regulations, 1993 by Somesh Lund

The Securities and Exchange Board of India (SEBI) in its board meeting held on 26 April 2017 [1] has approved the amendments to the SEBI (Debenture Trustee) Regulations, 1993[2] (hereinafter referred to as “Regulations”)as proposed in the consultative paper issued on 16 February 2017[3].The consultative paper was placed on SEBI’s website and suggestions were invited.

The Companies acts, 2013, as well as the SEBI regulations, prescribe the framework pertaining to debenture trustees. This led to several overlaps and ambiguities. Thus with a view to address this issue, SEBI formed a task force comprising of SEBI officials and representatives of the debenture trustees to conform the Debenture Trustee Regulations with the Companies Act,2013.

Read more

SEBI’s proposal for more stringent Monitoring of Utilization of Issue Proceeds, by Somesh Lund, 22nd May, 2017

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009[1] (ICDR Regulations) requires that while raising funds from the public, the company has to mention the object for raising the fund.

Thus to maintain the integrity of the above clause, SEBI in its board meeting conducted on April 26, 2017[2]  has proposed stringent rules and provisions to have better oversight on the utilization of funds raised through the public. This is a measure to keep a check on the misuse of these funds.

The Major changes proposed are:-

  • Appointment of Monitoring agency
Present Requirement every company issuing securities in excess of Rs. 500 crore has to appoint a Monitoring agency
Proposed Requirement every company issuing securities in excess of Rs. 100 crore has to appoint a Monitoring agency;
Rationale for Proposal To determine if the funds raised are utilized for the prescribed purpose. By decreasing the limit a larger number of companies will fall under the net of Monitoring agencies
  • Frequency of report by monitoring agency report
Present Requirement Monitoring Agency is required to submit its report to the issuer half-yearly.
Proposed Requirement Monitoring Agency is required to submit its report to the issuer quaterly
Rationale for Proposal Gives SEBI better oversight and timely information
  • Timely submission of Monitoring Agency Report
Present Requirement No such requirement exist
Proposed Requirement Report to be submitted within 45 days from end of the quarter.
Rationale for Proposal Such disclosure will help investors and other concerned persons to obtain timely information.
  • Disclosure of the Monitoring Agency Report on Company’s website
Present Requirement Disclosure of the Monitoring Agency Report on companies website not mandatory
Proposed Requirement Disclosure of the Monitoring Agency Report on companies website is mandatory
Rationale for Proposal Companies Act, 2013 prescribes that prior approval from shareholders is required for any change of object. Thus it is very important that the shareholders get regular update on utilization of issue proceeds.
  • The Board of Directors comments on the findings of the monitoring agency.
Present Requirement No such requirement exist
Proposed Requirement It is mandatory for the Board of director’s comments on the findings of the monitoring agency.
Rationale for Proposal Creates onus on the Board of Directors to insure that the funds are utilized for the prescribed purpose.

Conclusion

These measures will help SEBI to monitory the utilization of funds as all deviations, other than the purpose for which the fund was raised, are to be reported by the monitoring agency. If the funds are utilized for any other purpose the report will also mention if the prerequisite approvals from board/shareholders have been obtained.

[1] http://www.sebi.gov.in/legal/regulations/apr-2017/sebi-issue-of-capital-and-disclosure-requirements-regulations-2009-last-amended-on-march-6-2017-_34697.html

[2] http://www.sebi.gov.in/media/press-releases/apr-2017/sebi-board-meeting_34761.html

The author can be contacted at: corplaw@vinodkothari.com