SEBI revisits mode of bidding in public issue of debt securities

Permits submission through UPI mechanism and online interface

-CS Henil Shah & CS Burhanuddin Dohadwala


In order to streamline the process in case of public issue of debt securities and to add an addition to the current Application Supported by Blocked Amount (‘ASBA’) facility. Securities and Exchange Board of India (‘SEBI’) vide its circular dated November 23, 2020[1] (‘November 23 Circular’) has introduction Unified Payments Interface (‘UPI’) mechanism for the process of public issues of securities under:

  • SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (‘ILDS Regulations’);
  • SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (‘NCRPS Regulations’);
  • SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (‘SDI Regulations’) and
  • SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (‘ILDM Regulations’).

The said circular shall be effective to a public issue of securities for the aforesaid captioned regulations which opens on or after January 01, 2021 (‘effective date’).  Earlier, SEBI Circular dated July 27, 2012[2] (‘Erstwhile Circular’) provided the system for making application to public issue of debt securities.  The Erstwhile Circular will stand repealed from the effective date. However, SEBI Circular dated October 29, 2013[3] w.r.t allotment of debt securities shall continue to remain in force.

Earlier in November, 2018[4] SEBI had introduced use of UPI as a payment mechanism with ASBA, to streamline the process of public issue of equity shares and convertibles and implemented the same in 3 phases.

The article below covers the role required to be done by the issuer in case of public issue of debt securities.


UPI[5] is an instant payment system developed by the National Payments Corporation of India (‘NPCI’), an RBI regulated entity. UPI is built over the IMPS (‘Immediate Payment Service’) infrastructure and allows you to instantly transfer money between any two parties’ bank accounts.

The facility to block funds through UPI mechanism whether applying through intermediaries (viz syndicate members, registered stock brokers, register and transfer agent and depository participants) or directly via Stock Exchange (‘SE’) app/ interface is set for upto and amount of Rs. 2 lakhs, which is the maximum limit approved by NPCI for capital markets vide its circular dated March 03, 2020[6].

Appointment of Sponsor Bank

Sponsor Bank as a term was introduced under the SEBI circular dated November 01, 2018 meaning a self-certified syndicate bank appointed by issuer to conduit/act as a channel with SE and NCPI to facilitate mandate collect requests and/or payment instructions of retail investors.

Comparison of mode of application under November 23 Circular and Erstwhile Circular

November 23 Circular Erstwhile Circular Remarks
Direct application through SE app/web-interface along with amount blocked via UPI mechanism. Direct application over the SE interface with online payment facility; Online payment facility stands replaced with UPI mechanism. However, it is not clear as to how the application to be submitted where amount to be invested is above 2 lac rupees.
Application through intermediaries along with details of his/her bank accounts for blocking funds Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE using ASBA facility No change
Application through SCSBs with ASBA. Applications through banks using ASBA facility; No change
Application through SCSBs/intermediaries along with his/her bank account linked UPI ID for the purpose of blocking of funds, if the application value is Rs.2 lac or less.

New insertion.

Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE without use of ASBA facility This was discontinued for all public issue of debt securities made on or after October 01, 2018 vide SEBI Circular dated August 16, 2018[7].

Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE for applicants who intended to hold debt securities in physical form. No reference made in the present circular

Modes of submitting application as per November 23 Circular

Process of the applying utilizing UPI mechanism is produced in a diagrammatic form as below:

* Application made on SE App/web interface shall automatically get updated on SE biding platform

# Upon bid being entered under the bidding platform SE shall undertake validation process of PAN and Demat account along with Depository.

## In case of any discrepancies the same are reported by depositories to SE which in turn relays the same to intermediaries for corrections.

Roles of issuer in case of public issue of debt securities

Apart from appointing a sponsor bank by the issuer the roles of issuer remain same as those already required under the SEBI circular dated July 27, 2012 i.e.:

  • Use of SE platform;
  • Entering to agreement with SE with respect to use of same;
  • Dispute resolution mechanism between the issuer and SE and maintenance of escrow account remain the same.

Only the aforesaid roles are aligned with newly introduced with UPI Mechanism.

Allotment of securities within 6 days

SEBI vide its circular dated November 10, 2015 had, in order to stream line the process of public issue of equity shares and convertibles issued a circular to reduce the timeline for issue from 12 working days to 6 working days and same was introduced for public issue of debt securities, NCRPS and SDI vide circular dated August 16, 2018[8]. The same has been re-iterated/repeated under the November 23 Circular. Indicative timelines for various activities are re-produced under Annexure-A.

Additional data details required to be mentioned under the Application and biding form relating to UPI

  1. Under Main Application form
  • Payment details –UPI ID with maximum length of 45 characters
  • Acknowledgement slip for SCSB/broker/RTA/DP
    • Payment details to include UPI
  • Acknowledgement slip for bidder
    • Payment details to include UPI ID
  1. Overleaf of Main Application form
  • UPI Mechanism for Blocking Fund would be available for Application value upto Rs. 2 Lakhs;
  • Bidder’s Undertaking and confirmation to include blocking of funds through UPI mode;
  • Instructions with respect to payment / payment instrument to include instructions for blocking of funds through UPI mode.


Public issue application using UPI is a step towards digitizing the offline processes involved in the application process by moving the same online. UPI mechanism in public issue process shall essentially bring in comfort, ease of use and reduce the listing time for public issues.

Annexure A:

Indicative timelines for various activities

Sr. No. Particulars Due Date (working day)
1. Issue Closes T (Issue closing date)
  • SE(s) shall allow modification of selected fields (till 01:00 PM) in the bid details already uploaded.
  • Registrar to get the electronic bid details from the SE by end of the day.
  • SCSBs to continue / begin blocking of funds.
  • Designated    branches    of    SCSBs    may   not    accept    schedule    and applications after T+1 day.
  • Registrar to give bid file received from SE containing the application number and amount to all the SCSBs who may use this file for validation/ reconciliation at their end.
  • Issuer, merchant banker and registrar to submit relevant documents to  the  SE(s)  except  listing  application,  allotment  details and   demat   credit   and   refund   details   for   the   purpose   of   listing permission.
  • SCSBs to send confirmation of funds blocked (Final Certificate) to the registrar by end of the day.
  • Registrar shall reconcile the compiled data received from the SE(s) and all SCSBs (hereinafter referred to as the “reconciled data”).
  • Registrar to undertake “Technical Rejection” test based on electronic bid details and prepare list of technical rejection cases.
  • Finalization of technical rejection and minutes of the meeting between issuer, lead manager, registrar.
  • Registrar  shall  finalise  the  basis  of  allotment  and  submit  it  to  the designated SE for approval.
  • Designated SE to approve the basis of allotment.
  • Registrar to prepare funds transfer schedule based on approved basis of allotment.
  • Registrar and merchant banker to issue funds transfer instructions to SCSBs.
  • SCSBs  to  credit  the  funds  in  public  issue  account  of  the  issuer  and confirm the same.
  • Issuer shall make the allotment.
  • Registrar/Issuer   to   initiate   corporate   action   for credit   of   debt securities, NCRPS, SDI to successful allottees.
  • Issuer  and  registrar  to  file  allotment  details  with  designated  stock exchange(s)  and  confirm  all  formalities  are  complete  except  demat credit.
  • Registrar  to  send  bank-wise  data  of  allottees, amount  due  on  debt securities,  NCRPS,  SDI allotted,  if  any,  and  balance  amount  to  be unblocked to SCSBs.
  • Registrar to receive confirmation of demat credit from depositories.
  • Issuer and registrar to file confirmation of demat credit and issuance of instructions to unblock  ASBA  funds,  as  applicable,  with  SE(s).
  • The   lead   manager(s)   shall   ensure   that   the   allotment,   credit   of dematerialised debt securities, NCRPS, SDI and refund or unblocking of application monies, as may be applicable, are done electronically.
  • Issuer  to  make  a  listing  application  to  SE(s)  and  SE(s) to give listing and trading permission.
  • SE(s) to issue commencement of trading notice.
7. Trading commences; T+6










2020 – Year of changes for AIFs

Timothy Lopes – Senior Executive                                                                             CS Harshil Matalia – Assistant Manager

The year 2020 – ‘Year of pandemic’, rather we can say the year of astonishing events for everyone over the globe. Without any doubt, this year has also been a roller coaster ride for Alternative Investment Funds (‘AIFs’) with several changes in the regulatory framework governing AIFs in India.

Recent Regulatory Changes for AIFs

In continuation to the stream of changes, Securities Exchange Board of India (‘SEBI’), in its board meeting dated September 29, 2020, has approved certain amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’). The said amendments have been notified by the SEBI vide notification dated October 19, 2020. The following article throws some light on SEBI (AIFs) Amendment Regulations, 2020 (‘Amendment Regulations’) and tries to analyse its impact on AIFs.

Clarification on Eligibility Criteria

Regulation 4 of AIF Regulations prescribes eligibility criteria for obtaining registration as AIF with SEBI. Prior to the amendment,  Regulation 4(g), provided as follows:

“4 (g) the key investment team of the Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification;”

The amended provision to 4 (g) extends the meaning of relevant professional qualification, the effect of which seems to add more qualitative criteria to the management team of the AIF, to be evaluated  at the time of grant of certification. The newly amended section 4(g) of the AIF Regulations reads as follow:

“(g) The key investment team of the Manager of Alternative Investment Fund has –

  • adequate experience, with at least one key personnel having not less than five years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets; and
  • at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by the Board:

Provided that the requirements of experience and professional qualification as specified in regulation 4(g)(i) and 4(g)(ii) may also be fulfilled by the same key personnel.”

It is apparent from the prima facie comparison of language that the key investment team of the Manager may have one key person with five years of experience (quantitative) as well as a personnel holding professional qualification (qualitative) from institutions recognised under the regulation. Further, clarity has been appended in form of proviso to the section that quantitative and qualitative requirements could be met by either one person, or it could be achieved collectively by more than one person in the fund.

With this elaboration, SEBI has harmonized the qualification requirements as that with the requirement specified for other intermediaries such as Investment Advisers, Research Analysts etc. in their respective regulations. Detailed prescription on degrees and qualifications for AIF registration by SEBI is a conferring move and is expected to aid as a clear pre-requisite on expectations of SEBI from prospective applications for registration of the fund.

Formation of Investment Committee

Regulation 20 of AIF Regulations specifies general obligations of AIFs. Erstwhile, the responsibility of making investment decisions was upon the manager of AIFs. It has been noticed by the SEBI from the disclosures made in draft Private Placement Memorandums (‘PPMs’) filed by AIFs for launch of new schemes, that generally Managers prefer to constitute an Investment Committee to be involved in the process of taking investment decisions for the AIF. However, there was no corresponding obligation in the AIF Regulations explicitly recognizing the ‘Investment Committee’ to take investment decisions for AIFs. Such Investment Committees may comprise of internal or external members such as employees/directors/partners of the Manager, nominees of the Sponsor, employees of Group Companies of the Sponsor/ Manager, domain experts, investors or their nominees etc.

These  amendments are based on the recommendations to SEBI to recognize the practice followed by AIFs to delegate decision making to the Investment Committee.[1] The rationale behind amendments to AIF Regulations is based on the following merits as proposed in the recommendations::

  1. Presence of investors or Sponsors or their nominees in an Investment Committee which may serve to improve the due diligence carried out by the Manager, as they are stakeholders in the AIF’s investments.
  2. Presence of functional resources from affiliate/group companies of the Manager (legal advisor, compliance advisor, financial advisor etc.) in the Investment Committee may be useful to ensure compliance with all applicable laws.
  3. Presence of domain experts in the committee may provide comfort to the investors regarding suitability of the investment decisions, as the investment team of the Manager may not have domain expertise in all industries/ sectors where the fund proposes to invest.

Thus, the insertion was made, giving the option to the Manager to constitute an investment committee subject to the following conditions laid down in the newly inserted sub-regulation, i.e. Regulation 20(6) of the AIF Regulations given below –

  1. The members of the Investment Committee shall be equally responsible as the Manager for investment decisions of the AIF.
  2. The Manager and members of the Investment Committee shall jointly and severally ensure that the investments of the AIF comply with the provisions of AIF Regulations, the terms of the placement memorandum, agreement made with the investor, any other fund documents and any other applicable law.
  3. External members whose names are not disclosed in the placement memorandum or agreement made with the investor or any other fund documents at the time of on-boarding investors shall be appointed to the Investment Committee only with the consent of at least seventy five percent of the investors by value of their investment in the Alternative Investment Fund or scheme.
  4. Any other conditions as specified by the SEBI from time to time.

The constitution of investment committee is a global standard practice followed by the Funds. However, funds structure in India might be altered with the new defining role of investment committee under the AIF Regulations. The investment committee generally comprises of nominees of large investors in the fund and at times other external independent professional bodies that act as a consenting body towards prospective deals of the fund. The amendment will alter the role of investors holding positions at investment committee as the new defining role might deter them from taking underlying obligations. From the funds perspective seeking external independent professionals might get costly as there is an obligation introduced by way of this amendment regulation. Further, it casts an onus on the investment committee to be involved in day to day functioning of the fund, which used to be otherwise (where members were usually involved in mere finalising the deals).  Lateral entry of the members to investment committee post placement of memorandum with the consent of investors is aimed at greater transparency in funds functioning.

Test for indirect foreign investment by an AIF

As per Clause 4 of Schedule VIII of FEMA (Non-Debt Instrument) Rules, 2019 (‘NDI Rules’) any investment made by an Investment Vehicle into an Indian entity shall be reckoned as indirect foreign investment for the investee Indian entity if the Sponsor or the Manager or the Investment Manager –

(i) is not owned and not controlled by resident Indian citizens or;

(ii) is owned or controlled by persons resident outside India.

Therefore, in order to determine whether the investment made by AIFs in Indian entity is indirect foreign investment, it is essential to identify the nature of the Manager/Sponsor/investment manager, whether he is owned or controlled by a resident Indian citizen or person resident outside India.

RBI in its reply to SEBI’s query on downstream investment had clarified that since investment decisions of an AIF are taken by its Manager or Sponsor, the downstream investment guidelines for AIFs were focused on ownership and control of Manager or Sponsor. Thus, if the Manager or Sponsor is owned or controlled by a non-resident Indian citizen or by person resident outside India then investment made by such AIF shall be considered as indirect foreign investment.

Whether an investment decision made by the Investment Committee of AIF consisting of external members who are not Indian resident citizens would amount to indirect foreign investment?

In light of the above provisions of the NDI Rules and with the introduction of the concept of an “Investment Committee”, SEBI has sought clarification from the Government and RBI vide its letter dated September 07, 2020[2].


With the enhancement in eligibility criteria, SEBI has ensured that the investment management team of the AIF would have relevant expertise and required skill sets.

Further, giving recognition to the concept of an investment committee will cast an obligation on investment committee fiduciary like obligations towards all the investors in the fund. . However, there exists certain ambiguity under the NDI Rules, for applications wherein external members of investment committee who are not ‘resident Indian citizens’,   which is currently on hold and pending receipt of clarification.



Summary of the cartload of amendments introduced towards DTs and corporate bonds

SEBI implements measures proposed in the Consultation Paper on Corporate Bonds and Debenture Trustees

-Aanchal Kaur Nagpal, Executive & Burhanuddin Dohadwala, Manager


Owing to a wide array of defaults by various companies owning debt obligations SEBI, in order to secure the interest of the debenture holders, introduced various measures, particularly in respect of Debenture Trustees (‘DTs’), as they are the ultimate saviors of the debenture holders.

An effective mechanism in place for DTs would ultimately lead to better protection of the interests of the debenture holders increasing investor confidence.

SEBI had issued a consultation paper dated February 25, 2020 (‘Consultation Paper’)[1] to seek comments/ views on the measures that were expected to strengthen the regulatory framework for corporate bonds, secure the interest of the debenture holders, enhance the role of the DTs and empower them to effectively discharge their responsibilities towards the debenture holders of listed debt issues/ proposed to be listed debt issues.

The increased events of default by a few financial institutions and the lapses/ complications on the part of DTs in the expeditious enforcement of the security brought to the fore, the need for a review of the present regulatory framework for DT.

With the given challenges/hurdles observed in:

  • Charge creation;
  • Enforcement of security of the secured debentures;
  • Delay in enforcing the security in the event of default;
  • Inter Creditor Agreement (‘ICA’);
  • Creation of floating charges and
  • Other related issues in the recent cases of default,

SEBI intended to review the regulatory framework for DTs and put in place various provisions that would further secure the interests of the debenture holders of listed debt issues, enable the DTs to perform their duties in the interest of the investors more effectively and promptly in case of default.

Implementation of the proposed changes in the Consultation Paper:

SEBI implemented the amendments/changes as discussed in the consultation paper by way of the following:

  1. SEBI (Debenture Trustees) (Amendment) Regulations, 2020[2] dated 8th October, 2020 (‘DT Amendment Regulations’);
  2. SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2020[3] dated 8th October, 2020 (‘ILDS Amendment Regulations’);
  3. SEBI (LODR) (Third Amendment) Regulations, 2020[4] dated 8th October, 2020 (‘LODR Regulations’);
  4. Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities dated 13th October, 2020[5]; (‘SOP for DTs’)
  5. Contribution by Issuers of listed or proposed to be listed debt securities towards creation of Recovery Expense Fund dated 22nd October, 2020[6] , effective from January 01, 2021; (‘Circular on recovery fund’)
  6. Creation of Security in issuance of listed debt securities and ‘due diligence’ by debenture trustee; (Dated November 03, 2020[7]), effective for new issues proposed to be listed on or after January 01, 2021, (‘Circular on creation of security’).

Thus, all the above provisions are to be read together with the Consultation Paper.  We have tried to provide a holistic view of the proposals in the Consultation Paper as well the implementation of the same through the table below:

Sr. No. Point of consideration Recommendation by the Consultation Paper Implementation Status Our remarks/comments
Creation of Identified Charge
1) NBFCs create a floating charge on their entire receivables for all its lenders on a pari passu basis. Lack of identification of the charged assets leads to difficulty in enforcement of security. Also, possibility that the good assets are enforced by banks while debenture holders are left with sub-par assets. Creation of charge on identified assets viz. Identified receivables, investments, cash to be created by NBFCs instead of a floating charge on entire books. Debentures to be treated as secured only on creation of identified charge. Implemented.

1) Circular on creation of security

– Documents/Consent   required   at   the   time   of entering   into DTA;

– Due diligence by DT for creation of security;

– Disclosures  in  the offer document or private placement memorandum/ IM and filing of OD or PPM/IM by the Issuer;

-Creation and registration of charge of security by Issuer prior to listing.

Due diligence:

–   No clarity as to who will bear DD expenses, in case issuer, then increased cost

–   Exemption to be provided for issuers having common DT for several issuances as DTs cannot obtain their own comments or objections as required under Para 6.1 (b) (ii) of the Circular.

–   Since issue opens and closes on the same day in case of private placement, issuers to start with the stated process much before opening of the offer.

Creation of charge-

Registration of charge within 30 days of creation, failure to be considered as breach of covenants/terms of issue. [unlike time limit of 120 days provided under Companies Act, 2013]

 To read our detailed analysis on the Circular, kindly refer to our article – ‘This New Year brings more complexity to bond issuance as SEBI makes it cumbersome’[1]

Due diligence of identified assets and Asset cover certificate
2a) ·       Pursuant to regulation 15(1)(t) of the DT Regulations, asset cover certificates are submitted to the DT on a quarterly basis by the independent auditor and on a yearly basis by a statutory auditor.

·       These aid in monitoring the adequacy of assets charged against the debt issued.

·       Format of these certificates varies for every DT and mostly indicate only a statement confirming that 100% asset cover us maintained rather than a detailed list of assets.

·    Asset cover certificates by the statutory auditor to be submitted on a half yearly basis.

·    Asset cover certificate to be made more granular to enhance monitoring of quality of assets by including the entire list of identified assets as security.

·    If quality of any asset deteriorates/ asset if pre-paid, then issuer to replace such assets and maintain asset cover as per DTD.

·    Certificate to also certify compliance with all covenants in the IM/ DTD.


1)   DT Amendment Regulations

As per amended Rule 15(1)(t) of DT Regulations, in case of listed debt securities secured by book debts/ receivables, the DT is required to obtain a certificate from the statutory auditor, giving the value of receivables/ book debts including compliance with covenants of the IM/ offer document in the manner as specified by the Board.

2)   DT Amendment Regulations

Listed entities are required to forward a half-yearly certificate regarding maintenance of 100% asset cover in respect of listed NCDs.

Not applicable to:

–        Bonds secured by a Government guarantee.

·    While it is imperative for DTs to follow a pro-active approach in monitoring of the asset cover, if the requirement to specify the entire list of identified assets (as required under the Consultation Paper) would have been implemented, the same would have made the certificate too bulky considering the amount of identified assets in the list.

·    Thus, SEBI has specified that the value of the assets would be mentioned.


·    Further, issuers may develop a shared database of receivables for the DT to monitor variations in the assets on a  real time basis which could also be subject to detailed/sample checking by the statutory auditor.

2b) Quality to be maintained as per following parameters:

·    Establishing a delinquency rate (‘DR’) benchmark (to be used as a factor for monitoring asset quality) by the DT at the time of signing of DTD.

·  If DR breaches threshold, issuer to replace such assets with standard assets.

·  Covenant for maintaining of quality of assets, conditions for replacing delinquent assets to be included in IM and DTD for transparency.

Yet to be implemented. Guidance for determination of DR benchmark should be prescribed.
Calling of Event of Default (EoD)
3) ·  Determination of EoD is inconsistent among DTs.

·  Some call DTs at DTD level and some at ISIN level.

·  The above is owing to varied practices for issuing debentures- multiple ISINs are issued under one umbrella IM/DTD or single ISIN is split across multiple tranches with different IMs.

·  Event of default (‘EoD’) to include breach of any covenant mentioned in IM/ DTD.

·  EoD to be called at ISIN level. This is because if a single investor is invested in a debenture under an ISIN, he has full right to enforce security under that ISIN.

Implemented by

1)    DT Amendment Regulations

Amended regulation 15(2)(b), event to include breach of covenants of offer document/IM and DTD.

2)    SOP for DTs

EoD shall be reckoned at ISIN level as all terms and conditions are same throughout a single ISIN. (para A.3)

Inter-Creditor Agreement (ICA)
4a) Since, security interest of debenture holders is pari passu to other lenders, DTs are approached by banks to join the Inter-Creditor Agreement (‘ICA’) for resolution plan of a borrower. However, a DT would face multiple challenges in respect of interests of the debenture holders while joining an ICA. (same has been discussed below) DTs to join ICA subject to the approval of the debenture holders.

Also, the same is subject to various conditions along with an opportunity to the DTs to exit the ICA at various stages and in various circumstances as if it never signed the same. In such cases, the resolution plan would not be binding on the DTs. (same has been discussed below)


1)      DT Regulations

As per the inserted regulation 15(7), the DT may enter into ICAs on behalf of the debenture holders subject to the approval of the debenture holders and conditions as specified by SEBI.

Inclusion of manner of voting/conditions of joining ICAs in schedule I.

2)      SOP for DTs

All the conditions as stipulated in the Consultation Paper have been adopted in the SOP. (para C.7).

Discussed below
4b) A debenture holder representative committee consisting of debenture holders having majority investment may be formed after default by the issuer in order to fast track the ICA process. 1)      SOP for DTs

DTs may form a representative committee of the investors to participate in the

ICA or to enforce the security or as may be decided in the meeting.

Clarity should be given by SEBI as to composition of the committee-whether the same will consist of debenture holders having majority across series/ISIN or series-wise/ISIN-wise should be laid in the regulations.
Voting mechanism
5a) Procedural delay viz. a long notice period of 21 days to receive consent for future course of action, would further delay enforcement of security by the DT, especially in case of joining an ICA where the review period under RBI norms is 1 month for signing the ICA. ·  Notice period for receiving consent of debenture holders to be reduced to 15 days from 21 days.

·  Negative consent for enforcement of security and positive consent for joining ICA to be taken simultaneously in the same letter.

·  Proof of dispatch and delivery to be maintained by the DT.

1)      ILDS Amendment Regulations

The amended regulation 18(2) specifies 15 days’ notice period.

2)      SOP for DTs

Process for seeking consent will be as follows:

– DTs to send 3 days’ notice to the debenture holders from the EoD.

– Positive and negative consent to be taken together as specified in the Consultation Paper

– Consent to be given 15 days.

– Meeting to be convened of all holders within 30 days from EoD.(shall not be applicable in case of public issue)

– Necessary action to be taken by DT based on consent received.

– Consent of majority of investors shall mean ‘75% of investors by value of outstanding debt and 60% of investors by number at ISIN level’.

Since the implications of entering/exiting ICA or going for enforcement actions might be huge; as such, an ordinary resolution might not suffice and a stricture approval should be specified.

Keeping that mind, SEBI has adopted an even stricture approach from a special resolution, by specifying dual condition in value and number.

SEBI has adopted the requisite consent for debenture holders from RBI norms on ICA.

5b) Contact details received from RTAs are not updated leading to difficulty in communication with the debenture holders.

Email-ids also not available as providing the same is not mandatory for debenture holders leading to hindrance in conducting e-voting.

Email-ids to be provided mandatorily for debenture holders in case of private placement. Yet to be implemented.
Creation of a recovery fund
6) In case of a default, DTs are required to fulfill their obligations to act in the interest of the debenture holders as well as enforcement of security even if they are able to recover their fees from the issuer.

The expenses towards the above the same are currently borne by the debenture holders in most cases.

Due to lags in receiving the money on time, there is a delay in the enforcement of the security.

·  A recovery fund to be created towards at the time of issue of debentures that will be used by DTs for recovery

·  Proceeding expenses.


·  Value of fund= 0.01% of issue subject to maximum of 25 lakhs per issuer.


·  The same will not be applicable on ‘AAA rated’ bonds. However, in case of downgrading of rating, issuer will be obligated to create such fund.

·  Amount to be returned to the issuer at the time of maturity in case of no default.


1)      ILDS Amendment Regulation

The inserted regulation 26(7) of ILDS Regulations specifies that a recovery expense fund will be created in the manner specified by SEBI and also inform the DT about the same.

Amendment in schedule I to insert details of creation of recovery expense fund and the details and purpose thereof.

2)      DT Amendment Regulations

Duties of DTs to include ensuring the implementation of the conditions relating recovery expense fund under regulation 15(1)(h).

3)      Circular on Recovery fund

Details relating to creation, operation, maintenance and refund of the recovery fund has been specified.

The statutory auditor should certify, besides the asset cover, that the recovery fund is being adequately maintained, and well demarcated from other general funds of the company.



Disclosures on the website by DTs
7) While the DT Regulations mandate various duties on DTs, investors are generally not aware of the monitoring by the DTs as well as the compliance status of issuers regarding covenants of the IM. DTs to be mandatorily required to provide minimum disclosures on their website viz. Quarterly compliance report, defaults by the issuer, compliance status of asset cover, maintenance of various funds by the issuer, status of proceedings of cases under default etc.

This would enhance transparency and hold the DTs responsible.

Yet to be implemented The intention behind such disclosures is to promote transparency in the performance of DTs. Keeping the same in mind, SEBI should instruct issuers to provide the link of such website in the IM as well as annual report of the issuer, in addition to the disclosure of details of the DT  [as required under regulation 53(e) of LODR regulations] for the information of the investors.
Disclosures regarding Performance of DTs
8) There exists no performance indicators to enable investors to ascertain the performance of a DT. Disclosure to be made by DTs w.r.t. the following parameters to reflect their performance:

– timeliness of action taken

Monitoring of covenants

Effectiveness in enforcing securities or taking remedial actions in case of default, etc.

Yet to be implemented ·       DTs should also report at prescribed intervals that they have monitored the asset cover in the prescribed duration, and have obtained auditor’s certificate, and in their independent assessment, there is no deterioration in the asset cover, both in terms of value and quality. In case, they have observed any deterioration, the same should be disclosed, and reported along with steps taken to rectify the same.
Public Disclosure of all covenants by the issuer in IM
9) ·       There are instances where issuers enter into separate agreements with debenture holders containing additional/ specific covenants that do not form part of the principal IM.

·       These agreements, known as ‘side letters’ contain an accelerated payment clause” which states that if the borrower violates the terms of the covenants, including default or

·       downgrade of debt, such lender is entitled to

·       demand immediate repayment.

·       Such clauses hamper the interests of the issuer as well as other lenders.

·     All covenants including the ‘accelerated payment clause’

·     Shall be incorporated in the IM.

·     Issuer to inform DT of such covenants for monitoring the same.

·     Also, para 3.11 states that the IM should disclose that it has no side letter with any debenture holder except as disclosed in the

·     IM and on the stock exchange website where the debt is listed.

Implemented by the ILDS Amendment Regulations amended schedule I of the ILDS Regulations to include details of all covenants of the issue (including side letters, accelerated payment clause, etc. Instead of allowing side letter to be a part of the IM, the concept of side letter should be discouraged totally. All covenants should be there in the IM only.

The issuer should also be made to undertake in the IM that it has not signed any side letter and that all covenants as included in the IM are the only covenants agreed to by the issuer.

Standardization of Debenture Trust Deed (DTD)
10) A DTD consists of standard covenants as specified under DT Regulations and as per form SH-12 under Companies Act, 2013 as well as customized clauses specific to an issuer.

DTDs are lengthy and thus should be standardized to make them comprehensible and easy to read and understand.

DTD to be bifurcated into two parts:

– Part A: generic and standard clauses common to all DTs.

– Part B: specific and customized clauses relevant to the particular issue for which the DTD is executed.

(same as per offer document of mutual funds)


1)      ILDS Amendment Regulations

Regulation 15(2) has been amended to provide that the trust deed shall consist of 2 parts:

a) Part A containing statutory/standard information pertaining

to the debt issue

b) Part B containing details specific to the particular debt issue

2)      DT Amendment Regulations

Regulation 14 amended to include that trust deed shall consist of 2 parts:

(same as ILDS Amendment Regulations)

SEBI should provide clarity as to what clauses would fall under part B.
Enhanced Disclosures
11) Details about the terms of the debentures, duties of DTs and redressal mechanisms in case of default, are not known to the investors.

The investors thus are not fully aware of the risks undertaken while investing.


In order to enhance transparency, the issuer is required to provide additional disclosures in the IM such as:

– A risk factor to state that while the debenture is secured against a charge to the tune of 100% of the principal and interest amount in favour of DT, the possibility of recovery of 100% of the amount will depend on the market scenario at the time of enforcement of security.

– That the issuer has no side letter

– Pari passu charge of the investors, etc.

Partly Implemented

1) ILDS Amendment Regulations

Schedule I of the ILDS Regulations has been amended to include a note as to the risk factor.

SEBI to also make necessary amendments in order enable inclusion of other disclosures as well.
Framework and Standard Operating Procedure(SOP) for imposing fines
12) There have been a lot of instances of non-co-operation of the issuers as well as violations of the LODR Regulations by the issuer. Actions and adjudication proceedings initiated in this regard by the DT, usually take up a lot of time and the, non-compliance may continue during such proceedings as well. An SOP to be prepared that would list out penalties for specific violations by the issuer.

This would enable better compliance and co-operation on the part of the issuer.

Yet to be implemented

Points for consideration:

There are certain issues in the Consultation Paper that if not thought through would pose various complications in their implementation.

1) Creation of charge on identified assets

The Consultation Paper aims to discourage floating charge on the entire balance sheet and requires that debentures are to be secured by way of a charge on identified assets which would include identified receivables, investment and cash. Further, the debentures would be considered secured only if the charge is created on identified assets of the NBFC.

The rationale for the above is that, unlike other Companies where there are fixed charges created, NBFCs usually create a floating charge in favour of lenders. The problem arises when all such lenders are secured by way of pari passu charge on the entire receivables of the NBFC. The same leads to lack of identified/ specific security interest for each lender leading to difficulty in the enforcement of the same. Further, there is a change that the higher quality assets are handed over to banks and other major lenders, leaving only the sub-par assets in favour of the debenture holders.

Our comments:

Receivables are floating assets and are dynamic in nature. The intention of SEBI is to mandate NBFCs to create a pool of assets as identified asset towards secured debentures. Thus, creating a demarcated pool of receivables as security interest in debentures would not be possible as the pool would still keep fluctuating due to various transactions such as repayment, prepayments and default.

Thus, even if there is an identified pool created, the same would still be a floating charge due to various fluctuations.

In our view, the approach adopted by the Consultation Paper is akin to covered bonds where there is a pool of assets (identified assets) monitored by a pool monitor (DT). Hence it is suggested that SEBI gives recognition to covered bonds.

Amendment under IBC:

Currently, IBC does not make any express distinction on the basis of floating or fixed charge, and both such charges are treated as secured debentures in the waterfall under IBC. However, flaoting charges are subservient to fixed charges. Thus, an amendment would be required under IBC regarding the same.

The above recommendation is still required to be implemented

2) Joining the ICA by the DTs on behalf of the debenture holders

Firstly, the ICA applies to institutional investors alone. Hence debenture holders that would fall under the above category would only be allowed to be a part of such ICA.

Secondly, the rights of debenture holders also depend on the nature of the charge- when the same is exclusive or pari passu. It is only when the rights are par passu that the debenture holders will be required to be a part of the ICA.

The recommendations under the Consultation paper have been implemented by the SOP for DTs wholly.

The provisions relating to the same allow a way-out to the DTs in various circumstances and exit the ICA altogether, for instance, if the resolution plan is not in accordance with SEBI regulations, if terms of ICA are contravened by any party, if the resolution plan is not finalized within 180 days from the review period (with an extension upto 365 days). Under these circumstances, if the DT exits the CIA it will treated as if it never entered the ICA and the same will not be binding.

Now the above leads to various problems:

  • If the DT will be treated as exiting the ICA altogether, would that mean that DT could now take independent action? Since the language used is ‘ it will be treated as if the DT never entered the ICA’. [Lenders as party to the ICA, along with dissenting lenders, are prohibited from initiating any other legal action/ proceeding against the borrower, including proceedings under IBC]
  • If the DT initiates insolvency proceedings under IBC, how will the lenders be a part of the committee of creditors since they are barred from taking any other action?
  • How would the DT enforce security that is equally in favour of the other lenders as well?
  • In case of joint financing of a secured asset, consent of a minimum of 60% (in value) of creditors is required under SARFAESI to initiate enforcement action. Therefore, the debenture holders may not be having a practical solution by exiting the ICA.
  • Lastly, resolution of an entity is a collective process, and the process might require collective compromises as well. If creditors are provided exceptions, it is difficult to find success of either of the proceedings. Individual actions against the company can erode the asset base to the prejudice of the Company.

3) Certification of covenants under the asset cover certificate

As per regulation 56(1)(d) of the amended SEBI LODR Regulations,

The listed entity shall forward the following to the debenture trustee promptly

(d) a half-yearly certificate regarding maintenance of hundred percent asset cover or asset cover as per the terms of offer document/Information Memorandum and/or Debenture Trust Deed, including compliance with all the covenants, in respect of listed non-convertible debt securities, by the statutory auditor, along with the half-yearly financial results:

Thus the question arises as to what does ‘including compliance with all the covenants’ mean and what kind of covenants are required to be certified.

As per the rationale provided under the Consultation Paper and Discussion (Agenda) in the SEBI Board Meeting dated 29th September, 2020

  1. Consultation paper:

(i) Requirement for the asset cover certificate falls under the head ‘Due diligence and monitoring of asset cover by DT’ in the consultation paper;

(ii) As per para 3.2.2 of the consultation paper,

Point c- Issuer shall disclose the covenants of maintaining the quality of assets, conditions of replacing the bad/ delinquent assets in IM and DTD to create transparency and reduce the information gap regarding the covenants of the charge creation and the process thereafter.

Point d-The asset cover shall also certify the compliance with all the covenants mentioned in the IM or DTD, as applicable.

Thus, both the above points should be read in conjunction.

  1. SEBI Board Meeting dated 29th September, 2020

(i) Also reference should be made to paras 9.2.2, 9.2.3, 9.2.6, 9.2.7, 9.2.8 of the Agenda of the Board Meeting.

(ii) As per para 9.2.6, However, certain types of undertakings in support of creation of charge such as personal guarantee, negative lien are not registered with any independent agencies and hence there exists the issue of verification of such undertakings. Therefore, disclosures with respect of these undertaking need to be made in the offer document/ Information Memorandum.

Amended regulation 56(1)(d)- a half-yearly certificate regarding maintenance of hundred percent asset cover or as per the terms of offer document/ Information Memorandum including compliance with all the covenants, in respect of listed non-convertible debt securities, by the statutory auditor, along with the half-yearly financial results.

Our view:

Thus, on a holistic reading, it is observed that SEBI intends to monitor the quality of the charged asset. For the same, SEBI has instructed issuers to include undertakings i.e. covenants, in support of creation of charge such as personal guarantee, negative lien in the offer document/ IM/ DTD and compliance with such covenants needs to be ensured. Thus, ‘including compliance with all covenants’ under the amended regulation 56(1)(d) should be read in reference to maintenance of asset cover.

Therefore, statutory auditors will be required to only certify those covenants that revolve around the asset cover of debt securities.


SEBI has focused in strengthening the role of DT in case of default by issuers of listed debt securities. Thus, the measures as stated above are truly in the right direction and would help in easing the strained enforcement of rights of debenture holders. While most of the measures are a welcome moves, there are some moves that may be too ambitious and would definitely require thorough consideration.

Our write-up/video can be accessed below:

1. SEBI responds to payment defaults by empowering Debenture Trustees:

2. This New Year brings more complexity to bond issuance as SEBI makes it cumbersome

3. Youtube Channel:

4. Other write-ups:









Schemes of Arrangement under the Scanner

Listed Companies made subject to stricter scrutiny and multilevel approvals

-Megha Mittal


With the objective of empowering the stock exchanges and streamlining the processing of draft schemes filed with the stock exchanges, the Securities and Exchange Board of India has issues a Circular dated 3rd November, 2011[1] (“Amendment Circular”) thereby amending the Circular dated March 10, 2017[2] (“March, 2017 Circular”) which lays down the framework for Schemes of Arrangement by listed entities and relaxation under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957.

The Amendment Circular shall be effective for scheme submitted to the Stock Exchange after 17th November, 2020 and for those companies which are either listed, seeking to be listed or awaiting trading approval after 3rd November, 2020.

Schemes of Arrangement is unarguably a material event for the listed company, and as such, optimum transparency, disclosure by the company, coupled with stringent checks by the Committees, viz Audit Committee and Committee of Independent Directors, becomes a very crucial factor for decision making by the shareholders.

The Amendment Circular primarily aims at ensuring that the recognized stock exchanges refer draft  schemes  to  SEBI  only  upon  being fully convinced that the listed entity is in compliance with SEBI Act, Rules, Regulations and circulars issued thereunder. While the amendments introduced, bring to light the tenet of the regulatory bodies to ensure higher levels of transparency and disclosures with respect to the proposed schemes, there also seems to be an underlying tone of stress and responsibility that has been imposed on the Audit Committee and Independent Directors to assess the viability of the proposed Schemes.

In this article, the author has given a detailed comparison of the provisions, before and after the Amendment Circular, along with comments on the same.

Read more

SEBI subtly mandates debt listed companies to prepare quarterly financial results

Stock exchange circular stipulates submission of financials not older than 6 months

Aanchal Kaur Nagpal | Senior Executive, Vinod Kothari & Company


NSE, vide clarification dated 14th July, 2020[1], has clarified that audited financials or unaudited financials with limited review, submitted by issuers for listing of their privately placed debentures, including for the stub period, shall not be older than 6 months from the date of the private placement disclosure document.

Schedule I to SEBI (ILDS) Regulations, 2008 mandates furnishing financial parameters upto latest half year in the offer document in addition to providing abridged version of audited consolidated (wherever available) and standalone financial information ( like profit & loss statement, balance sheet and cash flow statement) for at least last three years and auditor qualifications , if any and abridged version of latest audited / limited review half yearly consolidated (wherever available) and standalone financial information (like profit & loss statement, and balance sheet) and auditors qualifications, if any.

There was no express requirement that the half yearly financial results being submitted cannot be older than 6 months. In case of Commercial Paper (‘CPs), SEBI had expressly specified that the audited financial statements to be submitted by an issuer intending to list its CPs, shall not be older than 6 months from the date of the application of listing. [Para 5.2 of Annexure I of SEBI Circular on Framework for Listing CPs dated 22nd October, 2019[2]]

Carve out from the above requirement was provided, as amended vide SEBI Circular dated December 24, 2019[3], to listed issuers who were in compliance with SEBI (LODR) Regulations, 2015. Such listed entities could file unaudited financials with limited review for the stub period in the current financial year, subject to making necessary disclosures in this regard including risk factors.


While a clarification in the above context was much needed, however the requirement for financials to be not older than 6 months would pose difficulties on debt-listed companies.

Debt listed entities are required to prepare financials (unaudited or audited) on a half yearly basis within 45 days (except in case of advance intimation) from the end of each half year [Regulation 52(1) of LODR Regulations] while equity listed entities are required to prepare the financials on a quarterly basis within 45 days from the end of each quarter and within 60 days from the financial end of the year for annual financials.

The aforementioned clarification will not impact the following companies:

  1. Equity-listed entities intending to list their privately placed debentures as they would be preparing quarterly financials;
  2. Debt-listed entities that are subsidiaries of equity-listed entities as they would be required to prepare quarterly financials for the purpose of consolidation with their holding equity-listed entity.

However, debt listed entities that are neither subsidiaries of equity listed entities nor having their specified securities listed, won’t be able to raise funds pursuant to issuance of NCDs if the financials are older than 6 months.

Debt-listed entities are required to prepare their financials within the following due dates:

Period of Financials Due Date Period during which financials would be more than 6 months old
Half year ended 31st March 15th May 1st April to 14th May
Half year ended 30th September 15th November 1st October to 14th November

For e.g. a debt listed entity won’t be able to list debt securities on Oct 1 based on financial results of March 31. Such companies will have to either prepare quarterly financials till June 30 or get the half yearly results for September 30 finalized on priority.

Clarity or Complication?

The said NSE clarification serves as a complication rather than a clarity. The said circular strains the ability to raise funds by debt-listed entities. NBFCs too would take a huge hit due to the said restriction on raising funds during periods where latest financials are not available. Where the world is already in a crisis due to the COVID-19 pandemic, liquidity of the debt market becomes all the more crucial.

On one hand, SEBI has mandated Large Corporates to raise minimum 25% of their incremental borrowings, by way of issuance of debt securities (as defined under SEBI ILDS Regulations), and on the other restriction by way of the said clarification has been imposed wherein the debt listed entities will have to prepare financials on a quarterly basis to be able to issue and list privately placed debt securities as and when there is requirement of funds.




SEBI completely restricts Retail Investors from AT1 instruments

Qasim Saif | Executive

Perpetual Non-Cumulative Preference Shares (PNCPS’) and Innovative Perpetual Debt Instruments (IPDIs) / Perpetual Debt Instruments (PDIs) (commonly referred to as AT1 instruments) are a kind of perpetual bonds without any redemption date that banks issue to meet their long term capital as well as their Additional Tier-I capital requirements. These instruments are treated as quasi-equity instruments, providing a unique blend of characteristics, that is, coupling the perpetual availability of funds with fixed periodic payments.

Despite having unique characteristics, the AT1 bonds are seen with distrust by investors because such instruments are more likely to default and in some circumstances carry more risk of non-repayment than equity. The return on such bonds is higher than tier 2 bonds however is significantly lower than the return on equity.

Recently, the AT1 bonds were all over the news when the Reserve Bank of India wrote down the liability towards the AT1 bonds issued by Yes Bank, without affecting the equity shareholders, resulting in a large number of people, including senior citizens, losing their savings who were lured to invest in AT1 bonds instead of fixed deposits, with a promise to pay higher returns. Our detailed write-up on this topic can be viewed here.

This write-up, however, deals with the recent changes brought in by SEBI for the listing of AT1 bonds.

Amendments proposed by SEBI

Though the AT1 Bonds are regulated by RBI guidelines issued in consonance with Basel III norms, however public issues and listing of these bonds are regulated by SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013.

SEBI on October 6, 2020,[1] issued a circular containing additional guidelines in regards to the issuance, listing and trading of AT1 Instruments. The additional guidelines are based on recommendations of the Corporate Bonds and Securitization Advisory Committee set up by SEBI. The Circular shall come into force with effect from October 12, 2020.

The additional guidelines prescribed and its analysis is as follows-

  1. Mandatory issuance through electronic book building platform

SEBI vide circular dated January 05, 2020,[2] mandated issuance of debt securities exceeding rupees two hundred crores to be undertaken through the electronic book building platform (“EBPF”). Now, SEBI has mandated that the issuance of AT1 instruments shall be compulsorily done through EBPF irrespective of the issue size.

Further, the January 2020 Circular did not include AT1 bonds, however, the October Circular has specifically included AT1 bonds within its ambit.

EBPF is deployed in large size issue because of the novelty of the system and higher cost as compared to other alternatives. However, the latest amendment on the use of EBPF irrespective of the issue size will increase smaller issuances costly, therefore, making them unviable.

  1. Only QIBs shall be allowed to participate in an issue

The most important change is that now only QIBs shall be allowed to participate in the issuance of AT1 bond; retail and other non-QIB investors have been excluded from the list of eligible investors to AT1 bonds.  The amendement is made with an intent to safeguard the retail investors from the risk possed by such instruments, as these complex instruments carry certain risk that are not generally not understood by the common people

The QIBs are better equipped for analyzing potential risk and whether or not such issuance is worth investing compared to other classes of the investor, this would hence form the first line of defense to protect the other investors, who would be benefited with skills and resources of QIBs.

This change however directly conflicts with the RBI Guidelines on this issue, which allows banks to issue AT1 bonds to retail investors with permission of its board via amendments to implementation of Basel III Capital Regulations in Indian on date September 1, 2014[3]

In any event, if the AT1 bonds are taken for listing, the conditions under SEBI Circular will have to be fulfilled and therefore, the issuances shall have to be restricted to QIBs only.

It shall be noted that the restriction is only on the issuance of securities and non-QIB investors can still purchase the securities from the open market.

However, there might be still concerns that such QIBs might engage in selling securities by misleading investors as it was alleged in the case of Yes Bank.

  1. Allotment and trading lot fixed

SEBI has further specified the minimum allotment of AT1 instruments shall not be less than rupees one crore and further the minimum trading lot is also fixed at rupees one crore.

As mentioned above that though retail investors may not be able to participate in issuances, they might purchase the bonds from stock markets, to further deter retail investment in such instruments the trading lot has also been fixed at rupee one crore.

The fixing of minimum allotment size may not be of major importance as the issuance would only be to QIBs who, usually invest larger sums of money, however, minimum allotment size is generally kept in parity with trading lot size to create a uniform lot of securities and avoid forming of odd lots, hence fixing of minimum allotment size is mainly to bring it with parity with trading lot size.

  1. Increased disclosure requirements

Issuers of AT1 bonds are required to make disclosures as prescribed under Schedule I of SEBI (NCPRS) Regulations, in addition to that the issuer shall now have to make disclosures that are prescribed under Annex I and provisions of circulars mentioned in Annex II of the October Circular.

Along with that specific disclosures about the following shall have to be made in the offer document:

  1. Details of all the conditions upon which the call option will be exercised by them for AT1 instruments
  2. Risk factors, to include all the inherent features of these AT1 instruments such as discretion of issuer in terms  of  writing down the principal  / interest, to skip interest payments, to make an early recall etc. without commensurate right for investors to legal recourse,even if suchactions of the issuer mightresult in potential loss to investors.
  3. Point of Non-Viability clause: The absolute right, given to the RBI, to direct a bank to write down the entire value of the outstanding  AT1 instruments/bonds,  if it thinks the bank has passed the Point of Non-Viability or requires a public sector capital infusion to remain a going concern.

These additional disclosures will give the investors a better understanding of the instrument and what they are signing up for.

Impact on currently listed AT1 Bonds

The majority of additional guidelines are in respect of securities that would be now be issued hence would have no impact on bonds already issued/listed on securities market. However, the conditions with respect the trading lot could impact the holders of AT1 bonds as they might have investments, not in multiple of one crore, which might result in the creation of odd lots.

Generally, special windows are provided by stock exchanges where investors can sell their odd lots to the market maker, intermediaries, or other concerns hence a special window, in this case, might be provided to deal with odd lots that might be created due to additional guidelines.


Given the tone of the changes made by the SEBI, it is very clear that the changes are highly inspired by the events that led to retail investors burning their hands in the case of Yes Bank. Most of the changes seem to carry the intent of deterring the retail investors from investing in these securities. The following paragraph from the circular makes the situation clear:

“Given the nature and contingency impact of these AT1 instruments and the fact that full import of the discretion is available to an issuer, may not be understood in the truest form by retail individual investors.”

Additional guidelines would without doubt restrict retail investment in AT1 bonds however, the added conditions in likelihood would jeopardize whatever little interest investors had on this product. Though the protection of investors is a goal of SEBI, so is the promotion of capital markets in India; hence, the regulation might be welcomed on the investor protection front but there are serious doubts on how good it will do for the development of the AT1 bonds market in India.

Links to related articles –




Snapshot of SEBI Board Meeting dated 29th September, 2020


SEBI in its Board Meeting held on 29th September, 2020 has approved amendments in various Regulations which shall come into effect by way of amendment in the respective Regulations. The brief highlights of the same are as below:

Strengthening role of Debenture Trustees

SEBI, in the recent past, has brought in certain amendments in order to strengthen the role of DTs so as to protect interest of debenture holders. The latest amendment in the existing DT Regulations was made by SEBI (Debenture Trustees) (Amendment) Regulations, 2017 which aimed to streamline provisions of DT Regulations with the CA, 2013 and other SEBI Regulation and also to enable DTs to secure the interest of investors.

The Board Meeting approved that DTs shall convene meeting of debenture holders for enforcement of security, joining of inter-creditor agreement (ICA) etc. The requirement of forming a ICA comes from the RBI Prudential Framework for Resolution of Stressed Assets and the Resolution Framework for COVID-19 related stress. By virtue of these notifications, there is a mandatory requirement of Inter-Creditor Agreements (ICA) by the lending institution governed by the RBI, for the purpose of invocation of a resolution plan of any defaulting borrower. The aforesaid frameworks recognize that even other lenders to the borrower which are other than the lending institutions, such as debenture trustee, may sign the ICA, if they so desire. In line with the same, SEBI is proposing the DTs to convene meeting for joining ICA to safeguard the interests of the debenture holders.

Keeping the same intent, DTs are also bestowed with the responsibility of monitoring the asset cover for debentures and obtain half yearly certificate from statutory auditor. The Board approved following additions to the responsibility of DTs:

  • DTs to exercise independent due diligence of the assets of the company on which charge is being created
  • DTs shall convene meeting of debenture holders for taking required action for enforcement of security, joining the inter-creditor agreement etc.
  • Carry out continuous monitoring of asset cover including obtaining mandatory certificate from statutory auditor on half yearly basis
  • Creation of recovery expense fund at the time issuance of debt securities for utilisation in the event of default or to take legal action to enforce the security.

Pursuant to the text of the Board Meeting, it seems that SEBI is going to introduce a new concept of ‘recovery expense fund’ for creating fund for expenses that might be required to recover debts due to debenture holders in case of default.

Apart from the aforesaid, the existing provisions of the Companies Act, 2013 does have a requirement of transferring funds by specified class of companies to Debenture Redemption Reserve (‘DRR’) and also transfer certain amount of funds for debentures maturing during the next year to specified account/securities (‘hereinafter referred to as DRF’). However, these funds/reserves are for recovery of debts, whereas, recovery expense fund is a pool of fund for incurring expenses for recovering debts by DTs. Nevertheless, introduction of a separate fund requirement for any event of default seems to be a new compliance burden on companies. Further, whether such fund has to be created as an internal book entry transfer within the company like in case of DRR or transfer it outside the company in trust of the DT, is something we have to look for. Definitely, companies like NBFCs and HFCs which are frequently involved in raising funds through debentures shall have a new compliance to be ensured, if such amendment is made effective.

Amendments in SEBI (Delisting of Equity Shares) Regulations, 2009

SEBI (Delisting of Equity Shares) Regulations 2009 provides for voluntary delisting of equity shares from stock exchanges which provide the overall framework for voluntary delisting by a promoter or acquirer through a process referred to as Reverse Book Building. The Board Meeting has approved of exempting listed subsidiary from complying with the book building process if following conditions are met:

  1. The listed subsidiary is a wholly owned subsidiary of the company by virtue of scheme of arrangement
  2. The listed subsidiary is a subsidiary of the company for a minimum of 3 years
  3. The listed subsidiary and the holding company should be in the same line of business
  4. The shares of listed subsidiary and the holding company should be listed on recognised stock exchange for a minimum of 3 years
  5. Votes casted by public shareholders of listed subsidiary for delisting of securities should be 2 times in favour of the number of votes cast against it.
  6. The company should be compliance of provisions relating to scheme of arrangement under SEBI (LODR) Regulations, 2015

The process of Reverse Book Building is a price discovery mechanism in order to provide a price on which the public shareholders can exit from the company. Accordingly, the intent of exempting a wholly-owned listed subsidiary from undergoing the said mechanism seems logical by virtue of the fact that such a company will have a sole shareholder.

Disclosure by Informants under PIT Regulations

SEBI vide SEBI (PIT) (Third Amendment) Regulations, 2019 had introduced Chapter III under the existing PIT Regulations providing for a mechanism to submit by a person, a voluntary information with SEBI about alleged violation of insider trading laws. The procedural requirements to be followed by an informant while submitting the information with SEBI have been provided in the said chapter along with the format of the disclosure prescribed under Schedule D of the Regulations.

The aforesaid provisions however do not provide for any limitation period for submitting such an information with SEBI. Accordingly, SEBI has decided to provide for a time period of 3 years. The manner of calculating the said period shall come clear only once the amended text is released.  Further, the Meeting approved to make changes in Schedule D of the Regulations so as to require informants to specifically disclose details such as:

  1. Details of securities;
  2. Trades by suspect;
  3. UPSI based on which insider trading is alleged;

Disclosure of forensic audit by listed entities

SEBI has in the past ordered forensic audit for various companies, however, there was no requirement of disclosing the same by the company to the investors at large, except if considered material by the company under Part B of Schedule III of SEBI (LODR) Regulations, 2015. Accordingly, SEBI at its Board Meeting has decided to direct companies to disclose initiation and submit report of forensic audit along with comments of management to the stock exchange without applying any test of materiality.

Though it is not clear as of now, however, it seems that SEBI will introduce this disclosure requirement as an amendment to Schedule III Part A Para A of SEBI (LODR) Regulations, 2015 as it is to be disclosed by the company without applying any test of materiality i.e. deemed to be material.

SEBI intends to bring transparency for investors especially public investor holding larger interest in listed entities to have information about lapses in the company, which otherwise was not being disclosed by the company. SEBI requires every listed entity to disclose following w.r.t. forensic audit:

  1. Initiation of forensic audit along with name of entity initiating forensic audit along with reasons, if any
  2. Final forensic audit report on receipt by the listed entity along with comments of the management.

Eligibility and disclosures under rights issue rationalized

– Qasim Saif, Executive


SEBI has on 23rd September 2020 released a press release[1] intimating about amendments to be made in SEBI ICDR Regulations, 2018 (“ICDR Regulations”/ “Regulations”) 2018. Further, on 28th September 2020, SEBI issued a notification bringing the SEBI (ICDR) (Fourth Amendment) Regulations, 2020[2] (“Amendment”) which was notified in official gazette on 1st October 2020. The Amendment is specifically focused for matters in relation to rights issue by listed entities. Several changes have been made which includes increasing the threshold for applicability, truncated disclosures in the letter of offer, removing the requirement for appointing a compliance officer, etc. At various places, the amendment is for the purpose of clarification or straightening of language of the Regulations.

In this article we have discussed the major amendments along with the probable impact.

Areas for amendments

1.     Increase in issue size for checking applicability

Erstwhile, ICDR Regulations were applicable in case of a rights issue for a size exceeding INR 10 crores. Further, the draft letter of offer (“draft LOF”) in such cases is required to be filled with SEBI for its observations. In other cases, i.e. where the issue size is less than INR10 crores the letter of offer (“LOF”) is to be filled with SEBI for information and dissemination on the SEBI’s website in accordance with Regulation 3. As a matter of temporary relaxation, SEBI vide its Circular dated 21st April, 2020 (April Circular) increased the aforesaid threshold to INR 25 crore for issues opening on or before March, 2020.

By virtue of the Amendment, the limit of INR 10 crores under Regulation 3 has been increased to INR 50 crores.  This would mean that while the general conditions and compliance will now be applicable to issue size of INR 50 crore or more, listed companies with a lower issue size will be required to file the LOF with SEBI for informative purpose.

As a result of the Amendment, while the applicability threshold has been increased, however, the companies with a lower issue size are still required to prepare the LOF in terms of the requirements of the ICDR Regulations and file the same with SEBI. Accordingly, while the change will surely be of relief to the entities which are now outside the applicability these Regulations, however, preparation of the LOF in terms of these Regulations will still be required.

Further to this, it should also be noted that practically filling of draft LOF for the purpose of obtaining observations from SEBI and then making prescribed changes generally takes several months. Accordingly, now since many entities will not be required to take the observations from SEBI, the same should help entities raise funds faster.

2.     Relaxation in eligibility to make right issue, for members of promoter group and promoter or director of company who are director in entities, which were earlier debarred by SEBI

Regulation 61 of ICDR Regulations state that an issuer shall not be eligible to make a rights issue of specified securities:

a) if the issuer, any of its promoters, promoter group or directors of the issuer are debarred from accessing the capital market by the Board;

b)if  any  of  the  promoters  or  directors  of  the  issuer  is  a  promoter  or  director  of  any  other company which is debarred from accessing the capital market  by the Board.

c) if any of its promoters or directors is a fugitive economic offender.

Further, explanation to the said Regulations state that “the  restrictions  under  (a)  and  (b)  above  will  not  apply  to  the  promoters  or directors  of  the  issuer  who  were  debarred  in  the  past  by  the  Board  and  the period  of debarment is already over as on the date of filing of the draft letter of offer.”

However, the language of the said explanation did not cover promoter group or other entities where the promoter or director of the issuer holds similar and which is debarred by SEBI. This lacuna in the language of the existing text gives an impression to result in a permanent restriction on right issue if the members of the promoter group were debarred or unless the concerned person vacated the post in the other entity which was debarred by SEBI from accessing the capital market.

The explanation shall now read as follows “the  restrictions  under  (a)  and  (b)  above  will  not  apply  to  the  persons  or  entities  mentioned therein  who  were  debarred  in  the  past  by  the  Board  and  the period  of debarment is already over as on the date of filing of the draft letter of offer.” After the amendment, all the mentioned persons or entities are now covered under the explanation and hence on completion of period of debarment, the issuer shall be eligible to undertake the right issue.

The above amendment is much needed clarification in the language rather than a relaxation

3.     Firm arrangement towards 75% of finance of capital expenditures only

Regulation 62 (1) (c) of ICDR Regulations require that issuer shall make  firm  arrangements  of  finance  through  verifiable  means  towards  seventy  five per cent of the stated means of finance for the specific project proposed to be funded from right issue,  excluding  the  amount  to  be  raised  through  the  proposed  rights  issue  or through existing identifiable internal accruals.

The Amendment introduces an explanation to the said clause stating “For the purpose of this regulation ‘finance for the specific project’ shall mean finance of capital expenditures only.”

The addition of explanation provides a clarity on calculation of amount that the company has to make firm arrangement for. The explanation also provides a simplification in compliance, as in most projects the capital expenditure are highly predictable unlike revenue expenditure that vary significantly and may not be estimated accurately.

4.     Removing the requirement to appoint a Compliance officer.

The Regulation 69 (8) of the ICDR Regulations require appointment of Compliance Officer by the issuer who  shall  be  responsible  for  monitoring  the compliance of the securities laws and for redressal of investors’ grievances. The said regulation has been omitted by the amendments.

Further the name of Part IV of Chapter III of ICDR Regulations has been suitably changed from “Appointment of Lead Managers, Other Intermediaries and Compliance Officer” to “Appointment of Lead Managers and Other Intermediaries”

Removing the requirement to appoint a compliance officer is a much needed amendment since the lead manager/ designated lead manager to the issue is any way required to ensure compliance with several applicable laws. Accordingly, it was a redundant practice to designate a compliance officer separately for a rights issue.

5.     Changes in Disclosure requirements

Regulation 70 of ICDR Regulations require that certain disclosure be made under LOF and Draft LOF. The SEBI has proposed that specified entities shall be required to make disclosures in format provided under Part A or Part-B of Schedule VI.

Disclosure requirements under Part B of Schedule VI have been rationalized to avoid duplication of information in LOF, especially the information which is already available in public domain and is disclosed by the companies in compliance with the disclosure requirements under SEBI listing regulations.

However, the Issuer not fulfilling the conditions above will be required to make disclosures in the format given in Part B-1 of Schedule VI, the disclosures in Part B-1 would be more detailed than that in Part B, however it shall be truncated as compared to Part A, that is applicable for IPO or FPO.

The Part-B of Schedule VI states that following entities shall be eligible to make disclosers under the given format –

1) Issuer has been filing periodic reports, statements and information in compliance with listing regulations for the last one year (instead of the last three years as required earlier) immediately preceding the date of filing Draft LOF or LOF as the case may be.

2) Statement above shall be available on website of Stock Exchanges.

3) the  issuer  has  investor  grievance-handling  mechanism  which  includes meeting of the Stakeholders’ Relationship Committee at frequent intervals, appropriate delegation of power by the board of directors of the issuer as regards  share  transfer  and  clearly  laid  down  systems  and  procedures  for timely and satisfactory redressed of investor grievances

The mentioned rationalization of disclosures would not only save the listed entities from duplication of task of providing same information that is already disclosed repeatedly but will also ease the accessing of reports by the stakeholders. The decluttering of the disclosures would be beneficial for all, Issuer, investor as well as regulators.

6.      Relaxation in Minimum 90% subscription criteria

Regulation 86(1) of ICDR Regulations require that the minimum subscription to be received in the right issue shall be at least ninety per cent of the offer through the offer document, the said limit was temporally relaxed to 75% by the April Circular.

The amendment proposes to remove mandatory requirement of minimum 90% subscription in case the issue is for the purpose of financing other than capital expenditure for a project, provided that the promoters undertake to subscribe fully to their portion of rights entitlement.

The said relaxation should help the issuers looking for financing their business by right issue, specifically for general financing needs of business. The condition that the promoters would be needed to subscribe their entitlements completely would help safeguard the interest of other subscribers.

7.     Application in plain paper to contain all the disclosures under the ICDR Regulations

Regulation 78 of ICDR Regulation allow shareholders to make application on plain paper in case he/she has not received application from for the right issue. SEBI has included a proviso to the regulation stating that “SCSBs shall accept such application forms only if all details required for making the application as per these regulations are specified in the plain paper application”.

On a general basis an application form contains following details to be entered by the shareholder-

– Name of Issuer

– Name and address of the Equity Shareholder including joint holders;

– Registered Folio Number/DP and Client ID no.;

– Number of Equity Shares held as on Record Date;

– Number of Rights Equity Shares entitled to;

– Number of Rights Equity Shares applied for;

– Number of additional Rights Equity Shares applied for, if any;

– Total number of Rights Equity Shares applied for;

– Total amount paid

– Particulars of cheque/demand draft;

– Savings/Current Account Number and name and address of the bank where the Equity Shareholder will be etc.

8.     FTRI in case of pending Show Cause Notice

Regulation 99 of the ICDR Regulations provide for eligibility criteria for Fast Track Rights Issue (FTRI). FTRI is a faster method of raising funds through right issue whereby the issuer is not required to file draft LOF to SEBI for observations, this makes the process of right issue comparatively faster, enabling issuer to get funds faster.

Clause (h) of the aforesaid regulation restricts the rights issue in case show cause notice have been issued or prosecution proceedings have been initiated by the  Board  and  pending  against  the  issuer  or  its  promoters  or  whole-time  directors.

The amendment provides that the above clause shall now exclude the cases where notice is issued in regards to proceedings for imposition of penalty. However it shall be necessary that disclosures along with potential adverse impact on the issuer are made in the letter of offer.

The said amendment would help compliant companies against whom SCN is issued for violations that are not of serious nature and require only imposition of penalty. As discussed FTRI facilitates faster and cheaper raising of finance by the company, the relaxation would promote the companies to undertake right issue for fund raising activities.


Rights issue has been constantly gaining popularity in India with corporate giants such as Reliance Industries, Shriram Transport Finance and Bajaj electrical have chosen the same as a way to raise funds during the pandemic. In order to promote the right issue as a way of raising funds and ease the funding for listed companies the SEBI has made the amendment.

The Amendments are in the directions to make the offer by way of rights issue easier and do away with disclosures or compliance requirements which were duplicated or redundant. Further, the relaxation in minimum subscription and eligibility criteria for FTRI should come to the rescue of the listed entities to raise funds in the times when most businesses are facing liquidity issues.



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