–  By Corporate Law Division, Team Vinod Kothari & Company (corplaw@vinodkothari.com)

– Updated 17th February, 2023

Table of Contents

Background

Applicability

Meaning of entities having listed securities

Outstanding Long Term Borrowing

Credit Rating

Compliances required under LCB Framework

Incremental borrowings

Disclosure requirements

Penal provisions

Background

The Government as well as the capital markets regulator SEBI have been working towards the upliftment of the bonds market in the country. . Whether it is the introduction of an electronic bidding platform for privately placed debt securities or consolidation of ISIN of debt instruments, SEBI has taken various steps towards the accomplishment of the budget announcement by the Government for the year 2018-19. Accordingly, our country’s bond market is almost at par with the banking loans to stand at Rs. 34,05,776 crores as compared to Rs. 35,64,976 crores^[1] as on 30th September, 2021.

SEBI in its continued effort for deepening the bond market, issued a “Circular” dated November 26, 2018 identifying certain categories of listed entities as Large Corporate Borrowers (“LCB”) and mandating a certain percentage of its borrowings through the issuance of debt securities, and thereby providing a framework thereof (“LCB Framework”).This Circular, inter alia, was consolidated into and made part of the Operational Circular for  issue and  listing of  Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper dated August 10, 2021 (updated till April 13, 2022) (“Operational Circular”). Our article Will SEBI succeed in trying to create a much needed vibrant Bond Market? provides our analysis of the LCB Framework. Further, our resource page on long-term bond markets can be accessed here.

We have attempted to briefly discuss the grey areas in the aforesaid LCB Framework in the form of the present set of FAQs.

 Applicability

1. What is the date of applicability of the LCB Framework?

The LCB Framework became applicable from Financial Year 19-20 i.e. for entities following April-March, the effective date is April, 01 2019 and for entities following January-December, the effective date is  January 01, 2020.

2. How to construe the term financial year as mentioned in the LCB Framework?

As per the explanation to point 1.1 of the LCB Framework, the term ‘Financial Year’ would imply April- March or January – December, as may be followed by an entity. Accordingly, FY 2020 shall mean April 01, 2019 – March 31, 2020 or January 01, 2020- December 31, 2020 as the case may be.

3. Which entities will be covered under the LCB Framework?

The entities which fulfill all the three conditions given below (based on the financials of the previous year, are classified as an LCB:

• Entities which have issued listed securities (specified securities, debt securities, non- convertible redeemable preference shares);
• Having long term (original maturity of more than 1 year) outstanding borrowings excluding ECBs and borrowings between parent and subsidiary of Rs. 100 cr and above; and
• Carries a credit rating of AA and above of unsupported bank borrowings or plain vanilla bonds (highest rating to be considered in case of multiple ratings).

4. Whether an LCB is required to check the applicability of the LCB Framework every year?

LCBs are required to check the applicability of the LCB Framework every financial year, and report the same to the stock exchanges within 30 days from the beginning of the FY in which it is identified as such. The format of initial disclosure is given under Annex-XII A of Ch. XII of the Operational Circular.

5. Whether the requirements of the LCB Framework are relevant for all the LCs?

While the ambit of Ch. XII of the Operational Circular is broad enough to cover both Non-Banking Financial Companies (‘NBFCs’) and Non-Banking Non-Financial Companies (‘NBNFCs’), the circular is more relevant for NBNFCs.

NBFCs are financial institutions and are engaged in lending and investing activities in their day to day operations and therefore, the major chunk of the working capital and long term funding requirements anyways come from issuance of debt securities considering the leverage issues.

Therefore, one may construe that the LCB Framework is more relevant for NBNFCs since they are not mandated to borrow from the issue of debt securities as the funding requirements of these entities can also be fulfilled by banks. Further, the circular should have laid down a specified threshold on the increased borrowing which if met should be required to constitute debt securities also to the tune of 25%.

Meaning of entities having listed securities

6. Which securities are to be considered in order to satisfy the condition of para 1.2(a) of the LCB Framework?

The LCB Framework shall be applicable to all entities which have listed either of the following securities on a recognized stock exchange(s), in terms of the SEBI LODR Regulations 2015:

• specified securities; or
• debt securities or
• non-convertible redeemable preference shares.

7. What is the meaning of a listed entity?

The LCB Framework is applicable to any entity which has listed its securities (as mentioned in FAQ no. 5) on one or more stock exchanges. Listed entity has been defined in clause (p) of Reg 2(1) of the LODR Regulations as – “an entity which has listed, on a recognised stock exchange(s), the designated securities issued by it or designated securities issued under schemes managed by it, in accordance with the listing agreement entered into between the entity and the recognised stock exchange(s).”

Therefore, entities other than companies which include a bank and have listed the aforesaid securities will be required to check the applicability under the LCB Framework.

8. What is the meaning of “specified securities”?

The term “specified securities” has been defined under clause (zl) of Regulation 2(1) of the LODR Regulations, to mean ‘equity shares’ and ‘convertible securities’ as also defined under clause (eee) of Reg 2(1) of the SEBI ICDR Regulations.

9. Whether a company which has only listed its Commercial Paper is also required to comply with the LCB Framework if other conditions are met?

Clause (a) of point 1.2. of the LCB Framework clearly mentions the type of listed securities that are to be considered for the purpose of applicability of the Framework. Commercial Papers are money market instruments. These are neither “securities” in terms of the Securities Contract (Regulation) Act, nor are they covered within the list of securities specified in clause (a) of point 1.2. of the LCB Framework.

10. Whether an entity which has listed its securities in the nature of derivatives, or units of collective investment scheme etc are also covered under the LCB Framework?

The meaning of “securities” is provided under clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. The definition of securities is wide enough to cover shares, debentures, derivatives, units of collective investment schemes or mutual fund schemes etc. However, please note that all forms of “securities” are not covered under clause (a) of point 1.2. Of the LCB Framework for the examination of the applicability of the Framework on the entity. Securities such as derivatives and units of collective investment schemes are also not covered under the aforesaid Framework.

11. Which type of preference shares are covered under clause (a) of point 1.2. of the LCB Framework for the purpose of determining applicability of the Framework?

The entities which have listed any of the following types of preference shares are covered –

1. Non-convertible redeemable preference shares
2. Convertible preference shares (convertible into equity shares)

Therefore, if an entity issues preference shares structured in a manner other than as mentioned above, the same will not be covered under clause (a) of point 1.2. of the LCB Framework.

12. What is the meaning of debt securities for the purpose of checking the applicability under para 1.2 (a) of the LCB Framework as well as for complying with the Framework once the cumulative conditions are fulfilled and the listed entity is identified as an LCB?

The meaning of “debt securities” is required to be taken from clause (k) of Regulation 2(1) of the NCS Regulations.

“debt securities” means non-convertible debt securities with a fixed maturity period which create or acknowledge indebtedness and includes debentures, bonds or any other security whether constituting a charge on the assets/ properties or not, but excludes security receipts, securitized debt instruments, money market instruments regulated by the Reserve Bank of India, and bonds issued by the Government or such other bodies as may be specified by the Board;

Therefore, in order to qualify as a “debt security” under the NCS Regulations, the following needs to be ensured –

• The securities shall have to be non-convertible.

• • Optionally convertible or compulsorily convertible debt securities will not satisfy the meaning of “debt securities” under the NCS Regulations.

• The securities shall have a fixed maturity period.

• • Therefore, in case of debt securities having a perpetual maturity period, or such other similar securities which are explicitly excluded from the purview of “debt securities” under the NCS Regulations, the same will not be covered.

• The debt securities may be termed as debentures, bonds, or any other security acknowledging indebtedness.
• The securities may be secured or unsecured.
• The definition expressly excludes the following type of instruments such as security receipts, securitised debt instruments, money market instruments, bonds issued by the Government or other bodies as may be specified by SEBI.

Outstanding Long Term Borrowing

 13. What qualifies to be an Outstanding Long Term Borrowing?

Outstanding Long Term borrowing shall mean any outstanding borrowing with original maturity of more than one year and shall exclude external commercial borrowings and inter-corporate borrowings between a parent and subsidiary(ies).

14. Let us examine whether a loan qualifies as “outstanding long term borrowing” for the purpose of clause (b) of point 1.2. Of the LCB Framework in the following cases.

Let us assume that a company obtains a loan from a bank for Rs. 50 crores on 15th April, 2021.

 Case I – Prepayment of loan having original maturity of more than one year

The loan has a maturity period of 15 months ending on 15th July, 2022, but the Company repays the same on 10th April, 2022, i.e., within a period of 11 months.

The language of the clause reads as “any outstanding borrowing with original maturity of more than one year”. Therefore, if a company avails long-term borrowings for an original term of more than a year, but the borrowings are subsequently prepaid within a year, the same should still qualify as an outstanding long-term borrowings for the purposes of clause (b) of point 1.2. of the LCB Framework.

Case II – Prepayment of loans before the end of financial year

In the aforesaid case, consider that the loan has been repaid in the month of February, 2022, i.e., before the end of the FY.

The determination of whether an entity is an LCB or not is based on the financials of the entity as on the last date of the FY. Further, the language of the clause reads as “any outstanding borrowing with original maturity of more than one year”. Therefore, where the borrowings are repaid before the end of FY itself, thus having no outstanding amount as at the end of the FY, the same is not required to be included for the purpose of clause (b) of point 1.2. of the LCB Framework.

Case III – Renewal of short-term borrowings for a total maturity period exceeding one year

Assume that the loan was obtained with an original maturity of eight months, i.e., till December, 2021 however, was renewed on the same terms and conditions thereafter, for another period of eight months, i.e., till August, 2022. 

Ideally one should go by the contractual terms to determine the maturity of loans. However, if considering the mechanics in which a loan is being rolled out, it seems that the loans were intended to be long-term borrowings, the same may be considered as long-term borrowings for the purpose of determining applicability.

Case IV – Long-term borrowings with original maturity of more than one year, but repayment due within a period of less than one year on the date of checking the applicability

Assuming that a loan obtained on 15th April, 2021 is due for repayment on 15th June, 2022. The loan is due for repayment within a period of less than one year (2.5 months) from the the last day of the financial year (31st March, 2022).

Please note that the original maturity of the loan shall be for a period of more than one year and not the time interval between the date of checking the applicability of LCB Framework and the date of repayment of loan. Therefore, the loans will still qualify to be an outstanding long-term borrowing as on 31st March, 2022.

Credit Rating

15. Ratings of which instruments of an entity has to be considered for the purposes of determining applicability of the LCB Framework?

As per the condition 1.2(c) of the LCB Framework, the credit rating of the unsupported bank borrowing or plain vanilla bonds of the entity with no structuring/support built in is to be considered for the purpose of identifying an entity as LCB.

16. If a company does not have any rated instrument, will the LCB Framework apply to such a company?

For the purpose of falling under the applicability of the LCB Framework, all the three cumulative conditions provided under para 1.2 of the Circular/ Operational Circular are required to be fulfilled. Accordingly, an entity not having any rated bonds or bank borrowings will not be covered under the LCB Framework.

17. Whether credit rating on securitised debt instrument / structured debt instrument is to be covered?

The credit rating on securitised/ structured debt instruments are not covered for the purpose of determining applicability of LCB Framework.

18. What are structured instruments? Will credit rating of such structured instruments also be considered for determining applicability of LCB Framework?

Structured instruments are instruments other than plain vanilla bonds or debentures, with certain features or conditions which results in distributing the risk-reward amongst the parties involved. For example, market-linked bonds, index-based instruments, put or call options in a bond, etc. are covered within the meaning of structured instruments. Credit rating of such instruments will not be considered for determining applicability of the LCB Framework.

19. What constitutes unsupported bank borrowing?

The Circular talks about the credit rating of unsupported borrowings or plain vanilla bonds. A supported borrowing may be referred to as a borrowing backed by some sort of a guarantee for ensuring its repayment. Therefore, an unsupported borrowing would be a borrowing that is not supported by any guarantee from a third party so as to uplift or back its credibility. The same does not mean to include unsecured borrowings, i.e. not backed by a collateral. The supported borrowings, or borrowings backed by guarantee may result into enhancement of credit rating of such borrowing.  The reason behind maintaining the requirement of credit rating of AA and above for unsupported borrowing is to mandate entities (falling under the definition of an LCB) to borrow through mandatory debt issuance, on the basis of its own credentials and creditworthiness without being impacted by the credentials of the guarantor. Further, only such highly rated entities shall encourage an investor to invest.

20. What if the issuer has multiple credit ratings?

In case, where an issuer has multiple ratings from multiple rating agencies or for multiple instruments, the highest of such ratings shall be considered for the purposes of applicability of the LCB Framework.

21. What if the listed entity has not received any rating for its unsupported borrowing?

If the listed entity has not received any rating for its unsupported borrowing, the LCB Framework will not be applicable on such an entity.

22. What if the listed entity does not have any unsupported borrowing or plain vanilla bonds as on the date of examining the applicability of the LCB Framework?

If the listed entity does not have any unsupported borrowing or plain vanilla bonds as on the date of examining applicability, and therefore, no credit rating, the entity will not satisfy the requirement under clause (c) of point 1.2. of the LCB Framework, resulting in non-applicability of the same.

23. In case the company has a rating of AA-, will that fall under the applicability condition?       

Clearly, the LCB Framework mandating certain companies to divert at least a part of their incremental borrowings to the capital market is applicable to entities having a rating of “AA or above”. Hence, the question is, whether an entity having a rating of AA- can be said to be falling within this requirement. Stated differently, the question pertains to whether AA- rating is also a case of AA rating?

Strictly from the definitional viewpoint, + and – symbols after a rating are simply notches. AA rating has three notches – AA+, AA, and AA-. One may refer to the definition of AA rating in S&P’s global rating definitions. It goes to say: “S&P may add a “+” or a “-” to these letter grades as well to “show relative standing within the rating categories”. Therefore, the related standing of a AA- entity is one notch below an entity having a AA rating; however, both are cases of AA rating. Therefore, a view may be taken that AA- may be included within the meaning of rating of “AA”.

However, from the perspective of the SEBI’s  prescription for LCBs, it will be contextually wrong to say that an entity with AA- rating has a rating of AA or above. Clearly, the prescription to source funds from the bond markets is based on the acceptability of the bonds by the capital market. One cannot contend that a company with AA- rating will have the same acceptability for a capital market investor as one with AA rating. As AA- is certainly a standing or notch below AA, the reference to “AA or higher rating”, in my view, does not include AA-.

Compliances required under LCB Framework

24. What compliances trigger for entities identified as LCB with respect to incremental borrowings?

There are two basic requirements of borrowings under the LCB Framework with respect to LCB:

a. Initial requirement:

For the first two years in which the framework became applicable (i.e. FY 2020 and 2021), the LCB was required to raise a minimum of 25% of the incremental borrowings on an annual basis in each of the FY subsequent to the FY in which the entity is identified as an LCB, by way of issuance of debt securities under NCS Regulations.

b. Continual requirement:

With effect from FY 2022 onwards, the LCB is required to raise a minimum of 25% of its incremental borrowings for the FY subsequent to the FY in which the entity becomes identified as an LCB, over a period of 2 FYs.

For example, if on the last day of FY (T-1), an entity gets identified as an LCB, then at least 25% of the incremental borrowings for the FY (T) will be required to be raised by way of issuance of debt securities within a period of two FYs, i.e., FY (T) and FY (T+1).

25. Can unlisted debt securities be issued for the purpose of complying with the LCB Framework?

The LCB Framework requires LCs to raise at least 25% of its incremental borrowings during a financial year by way of  issuance  of  debt securities, as defined under the SEBI NCS Regulations, 2021 (refer FAQ no. 12 for the meaning of debt securities).

There may be a doubt on whether the reference of “debt securities” for the purpose of meeting incremental borrowing requirements, shall be restricted to “listed” debt securities, or can cover “unlisted” debt securities too. In our view, the same should be taken to mean “listed” debt securities for the following reasons –

• The underlying objective of the LCB Framework was to develop and deepen a ‘liquid and vibrant corporate bond market’ by nudging corporates, who have borrowing needs, to access the bond market. Needless to say that SEBI can regulate only listed bonds and therefore, reference of “debt securities” in this context should be “listed” debt securities only.
• Further, the LCB Framework refers to the meaning of debt securities to be taken from the NCS Regulations. NCS Regulations are applicable to only listed debt securities, and therefore, any reference to “debt securities” under the LCB Framework should be interpreted as listed debt securities only.

Having said that, please note that the existing Framework does not explicitly use the term “listed” debt securities, and therefore, the issuer may, until any clarity is provided by the regulator, interpret it to include unlisted debt securities as well, for the purpose of compliance with the requirement of incremental borrowings as per LCB Framework.

We have been given to understand that the concerned department is reviewing the language of the existing LCB Framework, and amendments may be made to the language to remove the existing ambiguity.

26. Apart from NCDs, what all debt securities can be issued by the LCB for complying with the incremental borrowings requirement under the LCB Framework?

Generally, for the purpose of raising plain vanilla debt security, NCDs or bonds are the most common options. Any debt security with a convertible option loses its applicability under the NCS Regulations. Therefore, plain vanilla listed bonds or listed debentures without convertibility option will form part of the incremental borrowing under the LCB Framework.

27. What are the consequences if the LCB is unable to comply with the requirement of incremental borrowing within the given time period?

For the first two FYs, i.e., FY2020 and FY2021, the LCB Framework has been launched on a “comply or explain” basis, i.e., if the entity is unable to comply with the requirement of incremental borrowings, the same was required to be reported to the stock exchanges (for detailed discussion, refer FAQ no. 37).

FY 2022 is the first FY in which there is a monetary punishment in the event of non-compliance with the incremental borrowing requirements. In case of any shortfall in the incremental borrowing requirements over a block of two FYs, a monetary penalty/fine of 0.2% of the shortfall in the incremental borrowings shall be levied and the same shall be paid to the stock exchange(s).

28. Whether relaxation is for any first two years of implementation or the year mentioned in the LCB Framework?

The LCB Framework was led by a consultation paper issued by SEBI^[2]on July 20, 2018 which clearly stated that “A “comply or explain” approach would be applicable for the initial two years of implementation.  Thus, in case of non-fulfilment of the requirement of market borrowing by way of a debt security, reasons for the same shall be disclosed as part of the “annual disclosure requirements” in the format as prescribed under Annex XII-B of the Operational Circular.

However, the Operational Circular is clear on the initiation point of the LCB Framework i.e. April, 2019, accordingly, one may take a view that only FY 2020 and 2021 will be the first two years in which the relaxation of “comply or explain” can be taken. Any entity which gets covered under the LCB Framework at a later date shall have to mandatorily comply with the borrowing requirements and be liable to penalty in case of non-compliance over the block of two FYs.

29. Let us assume that the LCB Framework became applicable on a company for the first time at the end of FY 2022 (T-1), i.e., the company is required to comply with the incremental borrowings over a block of 2 years being FY 2023 (T) and FY 2024 (T+1), should it be really concerned about it this year?

In such a case, even if the company fails to comply with the requirements of incremental borrowings by the end of FY 2023, the amount can be carried forward to FY 2024. Therefore, the company will have additional time to comply with the LCB Framework.

Incremental borrowings

30. What constitutes incremental borrowing?

The LCB Framework clarifies that the  expression “incremental borrowings” shall mean any borrowing done during a particular financial year, of original maturity of more than one year, irrespective of whether such borrowing is for refinancing/repayment of existing debt or otherwise and shall exclude   external   commercial   borrowings   and   inter-corporate  borrowings between a parent and subsidiary(ies).

Therefore, incremental borrowing would mean –

1. Long-term borrowings with an original maturity of more than one year.
2. The purpose of such borrowing is not relevant for the purpose of identification of the same as “incremental borrowing”.
3. ECBs and inter-corporate borrowings between holding-subsidiary(ies) are exempt from being considered as “incremental borrowings”.

31. Whether incremental borrowing will be considered from the date of actual disbursement or from the date of executing the facility arrangement? 

Since the borrowing is captured in the balance sheet from the date of disbursement therefore it can be implied that the incremental borrowing as mentioned in the LCB Framework shall be considered from the date of actual disbursement and not from the date of execution of facility arrangement. For example, an agreement executed in March, 2021 but funds disbursed in April, 2022 should be considered as incremental borrowings for FY2023.

31A. Whether the amount raised by way of debt securities issuance be included for determining-

a. Total incremental borrowing?

For computing total incremental borrowing, the amount raised by way of debt securities issuance should not be included. Let us try to understand the reason for advocating this view. Say a company has raised term loan of Rs. 1000 and Debentures of Rs. 300 during FY 22-23. Here, if we consider Rs. 1000 as incremental borrowing. Then 25% of the same comes to Rs. 250. In which the company will be considered to be compliant as it raised Rs. 300 by NCD issuance. However, if we consider Rs. 1300 as incremental borrowing, 25% will come to Rs. 325. Thereby increasing the debt security issuance obligation on an LCB. Hence, including debt security component is likely to give a compounding effect, which does not seems to be the intent of SEBI.

b. Applicability of the LCB framework?

We are of the view that the amount raised through both loan as well as debt securities will be included for the purpose of computing the amount of o/s borrowing for determining the applicability of the LCB framework. This is because the law makers would want to keep a track of those entities which have debt security issuance for the purpose of applying the said framework.

32. What is the manner of adjusting the shortfall in any FY?

As we go through the illustration given in Annexure C of the circular, it becomes clear that for the first year of implementation there is no concept of carrying forward the shortfall to the second year, since the LCB is required to explain the reason for not being able to comply with the borrowing requirements.

Further, as regards the shortfall for the second year and onwards is required to be carried forward to the next year. Now let us try and understand the manner of adjustment from the below mentioned illustration:

X Ltd is an LCB as on the last day of the previous year being 31^st March, 2019.

[Rs. in cr]	2020	2021	2022	2023	2024	2025 [Not an LC]
Increased Borrowing [IB]	200	500	700	600	650	100
Mandatory borrowing from debt securities of 25% of the IB[MB]	50	125	175	150	162.5	NIL
Actual Borrowing from debt securities [AB]	40	100	75	200	100	70
Adjustment of the shortfall of the previous year	NIL	NIL	25	125	75	137.5
Shortfall to carry forward	10	25	125	75	137.5	67.5
Penalty	NIL	NIL	NIL	NIL	NIL	30* 0.2% = 0.6

Basically, the LCB shall first adjust the AB towards the shortfall of the previous year of the current block and then check whether it has complied with the MB requirements. Further, the penalty shall be levied if there is a shortfall of the previous year in the current block that could not be adjusted with the AB of the second year of the current block.

33. A company, which has its equity shares listed on the stock exchange, has unsupported bank loans having a credit rating of AA. The details of outstanding and incremental borrowings of the company are given below.

FY	Incremental borrowings (in crores)	Outstanding borrowings (in crores)	Amount raised through listed debt securities
2019		120
2020	100	200	20
2021	50	150	40
2022	0	80	0
2023	50	100	20

What compliances trigger on the company in respect of each of the FYs?

FY	Incremental borrowings during the FY (in crores)	Outstanding borrowings as on the last day of FY (in crores)	Whether LCB for the relevant FY?	Amount required to be raised through debt markets	Amount actually raised through debt markets	Shortfall	Penalty for shortfall
2019		120	–	–	–	–
2020	100	200	Yes	25	20	5	Reason to be recorded
2021	0	80	Yes	0	0	Nil	NA
2022	40	120	No	0	20	NA	NA
2023	50	150	Yes	12.5	10	2.5	NA (see note 1)
2024	120	200	Yes	32.5 (see note 2)	1.5	31	Rs. 20,000 (see note 3)

Notes –

1. The incremental borrowings through debt securities can be achieved within the 2-years’ block, i.e., FY 2023 and FY 2024. Therefore, the shortfall will be carried over to FY 2024 and fine will not be levied for FY 2023.
2. For FY 2024, 25% of the incremental borrowings for that financial year including the shortfall of previous financial year of the same block will be required to be raised through debt markets.
3. Fine will be levied @0.2% of the shortfall amount for FY 2023. The shortfall of FY 2024 can be carried over to the next 2-years’ block and can be met within FY 2025.

34. Will vehicle loans qualify as incremental borrowing?

Considering the intent of the LCB Framework is to strengthen the bond market in India, it can be stated that vehicle loan, which in essence is an asset backed borrowing, i.e. loan taken to buy a vehicle, cannot qualify as incremental borrowing as one cannot access bond market to get funding for purchasing a vehicle.

35. Will non-fund based borrowings also be included as incremental borrowings?

In case of non-fund based facilities, there is no inflow of money, and therefore, the same cannot be included for the purpose of computation of incremental borrowings.

36. Whether the term incremental borrowings shall also cover Pass Through Certificates (‘PTCs’)?

Under the LCB Framework, the term “incremental borrowings” has been defined to include borrowings during a particular financial year with an original maturity of more than 1 year, excluding ECBs and ICDs between a parent and its subsidiaries.

Further, IND AS 109 treats PTCs as collateralized borrowings only. Here it is pertinent to note that the question of showing the investor’s share in PTC as financial liability arises only because the securitised pool of assets fails the de-recognition test.

The originator has no obligation towards the investors of the PTC. The investors are exposed to the securitised pool of assets and not to the originator. Therefore, merely because the investor’s share appears on the balance sheet of the originator as financial liability, as per Ind AS 109, does not mean they are debt obligations of the originator.

Accordingly, incremental borrowings shall not include PTCs.

Disclosure requirements

37. What are the disclosure requirements under the LCB Framework?

The LCB Framework requires the following disclosure requirements from the LCB to the stock exchanges –

• Initial disclosure – The fact that the entity has fulfilled the criteria of being an LCB based on the financials of the previous year has to be disclosed to SE within 30 days of the beginning of the FY.
• Annual disclosure – The details of incremental borrowings done during the FY is required to be disclosed to SE within 45 days of the end of the FY.

38. Who is required to certify the disclosures required to be made in terms of Para 3.1. of the LCB Framework?

The disclosures are required to be certified by both the CS and the CFO of the LCB.

39. Where is the disclosure required to be made?

The disclosures are required to be filed with the stock exchanges in which the securities of the LCB are listed. Further, the same is also required to be included in the audited annual financial results of the LCB.

40. What are the contents of the initial disclosure required to be made by the LCB?

The initial disclosure required to be made by the LCB contains the following details –

1. Name of the company
2. CIN
3. Outstanding borrowing of the company as on the last date of the FY (in Rs. crores)
4. Highest credit rating during the previous FY along with name of the CRA
5. Name of  stock  exchange in  which  the  fine  shall  be  paid,  in  case  of shortfall in the required borrowing under the framework

In our view, the disclosure being that of the applicability of LCB Framework on an entity, the details of the outstanding borrowing of the company and the highest credit rating should capture only those borrowings and ratings which are covered under clauses (b) and (c) of point 1.2. of the LCB Framework.

41. If the entity identified as an LCB has no incremental borrowings during the year, does the requirement of annual disclosure still attract?

Yes, even if the LCB has no incremental borrowings during the year, the annual disclosure is required to be filed by such LCB.

42. Which details are required to be disclosed in the annual disclosure to be filed with effect from FY 2022 onwards?

The format for the annual disclosure with effect from FY 2022 onwards is given as Annex XII-B2 of Ch XII of the Operational Circular. In case of any shortfall in incremental borrowings through debt securities in the first year of a 2-years’ block, the shortfall can be carried forward to the next year in the 2-years’ block. In case of any such carried forward amount, details of the same are also required to be given in the annual disclosure.

In the first year of the 2-years’ block, no fine is required to be paid to the stock exchanges for such shortfall. However, if the shortfall persists at the end of the second year in the 2-years’ block, fine is levied on the LC, and details of the same are required to be provided in point (e) of the annual disclosure.

43. Whether initial disclosures are required to be made even if an entity ceases to be an LCB?

While the Operational Circular required only the LCBs to provide confirmation of the fact that the same is an LCB for the relevant financial year. However, the stock exchanges have issued a clarification in this regard, requiring all listed entities to file a confirmation of the LCB status at the beginning of every financial year, even if the same is not identified as an LCB.

44. How will the stock exchange be apprised that an entity is no more an LCB?

An entity that ceases to be identified as an LCB is required to provide an intimation to the exchange stating the same, though the same is not a mandatory requirement under the LCB Framework. In any event, the stock exchanges have access to the annual financial results of the listed entities, and therefore, the status of an entity as an LCB can be verified from the same.

Penal provisions

45. What are the penal consequences for non- compliance?

Refer our reply to FAQ no. 27.

46. Whether the fine shall be paid to all stock exchanges where the securities of the LCB are listed?

At the time of filing the initial disclosures with the stock exchange, the LCB is required to provide the name of the stock exchange to which it would pay the fine in case of shortfall in the mandatory borrowing through debt markets. Therefore, in the event of a shortfall, a fine will be paid only to the identified stock exchange.

47. How will the stock exchange levy fine in case of shortfall in incremental borrowings?

The stock exchange shall collate information about the LCB and submit the same to SEBI within 14 days of the last date of submission of annual financial results. On the basis of the information, in the event of any shortfall, the stock exchange shall collect the fine from the LCB.

48. How will the collected fine be used?

The collected fine will be remitted by the  stock  exchanges  to  SEBI Investor  Protection  and Education Fund within 10 days from the end of the month in which the fine was collected.

^[1]https://www.crisil.com/en/home/our-analysis/reports/2021/02/crisil-yearbook-on-the-indian-debt-market-2021.html

^[2]https://www.sebi.gov.in/reports/reports/jul-2018/consultation-paper-for-designing-a-framework-for-enhanced-market-borrowings-by-large-corporates_39641.html