SEBI revisits EBP mechanism for issuance of debt securities

By Vinita Nair and Chahat Jain (corplaw@vinodkothari.com)

SEBI vide circular SEBI/HO/DDHS/CIR/P/2018/05 dated January 05, 2018 issued Electronic book mechanism for issuance of debt securities on private placement basis, 2018 (‘Circular, 2018’)[1] has repealed circular No. CIR/IMD/DF1/48/2016 dated April 21, 2016 (‘Circular, 2016’)[2] which mandated usage of electronic book mechanism for issuance of debt securities on private placement basis.

Circular, 2018 shall come into force from April 01, 2018. Circular, 2018 makes suitable revisions in existing framework to streamline the procedures, allowing private placement of other classes of securities, enhancing transparency in the issuance for better discovery of price & stiff norms for issuer, arranger as well for bidders in line with the consultation paper for review of circular on Electronic book mechanism for issuance of debt securities on private placement basis issued in May, 2017[3].

This article analyses significant amendments made in the EBP mechanism.

Parameter: Applicability

Circular, 2018: Applicable to all private placement of debt securities and Non-Convertible Redeemable Preference Share (NCRPS) as per the provisions of ILDS and NCRPS Regulations.

Circular, 2016: Applicable to all private placement of debt securities as per provisions of ILDS.

VK & CO comments: Both the circular shall apply to private placement of securities that are intended to be listed on stock exchanges. Listed entity issuing debt securities or NCRPS under provisions of Companies Act, 2013 without listing the same on stock exchange need not comply with the said circulars.

Parameter: Nature of securities covered under the Circulars

Circular, 2018: Debt securities issued under ILDS. NCRPS issued under NCRPS Regulations

Circular, 2016: Debt securities issued under ILDS.

VK & CO comments: Based on the feedbacks received from the market and keeping in view of the benefits of  existing  electronic  book  mechanism, it was suggested in the consultation paper that EBP mechanism may also be extended for private placement of Structured Products/ Market  Linked  Debentures Municipal  Bonds  and Non-convertible  Preference shares(‘NCRPS’).

NCRPS has been defined under NCRPS Regulations to mean a preference share which is redeemable in accordance with the provisions of the Companies Act, 1956 and does not include a preference share which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder.

ILDS Regulations deal with listing of debt securities only. However, NCRPS Regulations is applicable to:

  1. public issue of NCRPS;
  2. listing of NCRPS which are issued by a public company through public issue or on private placement basis; and
  3. issue and listing of Perpetual Non-Cumulative Preference Shares (PNCPS) and Perpetual Debt Instrument (PDIs), issued by banks on private placement basis in compliance with Guidelines issued by Reserve Bank of India.

Since, Circular, 2018 refers to NCRPS only and not PNCPS or PDIs. Therefore, in view of each of the terms being specifically defined in the Regulations, it may be interpreted that issuances of NCRPS and PNCPS made by Banks under Basel Guidelines need not comply with the requirements of Circular, 2018 even if it exceeds the limits prescribed therein.

Parameter: Limit prescribed in relation to applicability

Circular, 2018: Following has been prescribed:

  • a single issue, inclusive of green shoe option, if any, of Rs 200 crore or more;
  • a shelf issue, consisting of multiple tranches, which cumulatively amounts to Rs 200 crore or more, in a financial year;
  • a subsequent issue, where aggregate of all previous issues by an issuer in a financial year equals or exceeds Rs 200 crore.

Circular, 2016: all private placements of debt securities in primary market with an issue size of Rs.500 crores and above, inclusive of green shoe option, if any.

FAQs on EBP issued by SEBI further clarified as under:

  • The requirement of using electronic book mechanism shall also be applicable for those tranche issue(s) which individually may be less than Rs 500 crore, however is/ are part of a shelf offer, which including green shoe option, is more than Rs 500 crore in a financial year.
  • Further, in case, the issuer comes with multiple issues in a financial year which are individually less than Rs. 500 crore however, the aggregate issue size in the same year crosses Rs.500 crore, in such scenario, issuer shall use EBP mechanism for any incremental private placement which takes aggregate issue size in the year equal to Rs.500 crore or above.

VK & CO comments: The consultation paper proposed reducing the limit from Rs. 500 crore to Rs 50 crores as in case of almost 71.7% of the issuances made till March, 2017 issuance were made for raising amounts ranging from Rs. 50 crores to less than Rs. 500 crores. However, Circular 2018 has finalized a limit of Rs. 200 crores, either by way of single issuance or cumulatively issued under ILDS or NCRPS in a financial year.

There is no clarity on whether the limit of Rs. 200 crores will individually apply to debt securities and NCRPS intended to be listed on stock exchange. In absence of express provision, the limit shall apply in aggregate to all issuances of debt securities and NCRPS made on private placement basis that are intended to be listed on stock exchanges.

Parameter: Optional compliance with requirements of the Circular

Circular, 2018: Issuer may choose to access the EBP platform in case of following:

  • Issuances of debt securities and NCRPS made on private placement basis and intended to be listed, within the prescribed limit of Rs. 200 crores in a financial year.
  • Debt securities as per provisions of ILDM Regulations;
  • Commercial Paper; and
  • Certificate of Deposits.

Circular, 2016: Issuer may choose to access the EBP platform in case of following:

  • issues with a single investor and where coupon rate are fixed. However arrangers acting as underwriters shall not be considered as single investors.
  • issues wherein the issue size is less than Rs. 500 crores, inclusive of green shoe option, if any.

VK & CO comments: The EBP mechanism was optional for fixed coupon rate issues with a single investor. As discussed in the consultation paper, a concern was raised by market participants that there can be situations, wherein, just to bypass the EBP mechanism, the entire book can be first sold to a single investor, and, the said single investor can then in turn sell the securities to various investors. Accordingly, it was proposed to provide for a lock in of 60 days period from the date of allotment.

However, Circular 2018 is silent on exemption in relation to issues made to single investor as well as lock in requirement. As a result, such issuance will also have to be made on EBP platform if the limit is exceeded.

Parameter: Details of Private Placement Memorandum (PPM)

Circular, 2018: Issuer shall provide the private placement Memorandum (PPM)/ Information memorandum (IM) and term sheet to the EBP at least two working days prior to the start of issue opening date.

The PPIM/ IM  and the term sheet shall disclose following:

  • Details of size of issue including green shoe option, if any.
  • Bid opening and closing date.
  • Minimum Bid Lot

The issuer may choose to disclose estimated cut off yield to the EBP, however the same has to be disclosed at least one hour prior to opening of the bidding for the issue.

Circular, 2016:

  • Disclosures as has been prescribed in acts, rules, regulations, etc. Issuer shall specify minimum issue size which shall be inclusive of green shoe option, if any.
  • Details with respect to green shoe option shall be disclosed along with the reasons for the retention of excess amount, if any.
  • The PPM may not contain the coupon details, however, the PPM may contain upper ceiling limit.

VK & CO comments: Procedural requirement prescribed in relation to specific disclosure to be made in the PPM/ IM.

Parameter: Eligibility to participate in bids

Circular, 2018:

  • Eligible participants bidding on proprietary basis, for an amount equal to or more than Rs.15 crore or 5% of the base issue size, whichever is lower, shall bid directly i.e. shall enter the bids directly on EBP platform. Foreign Portfolio Investors may bid through their custodians.
  • For bids made by an arranger for any particular issue, an arranger shall disclose following to the EBP at the time of bidding:
  • Specify that whether the bid is proprietary bid or is being entered on behalf of an eligible participant or is a consolidated bid i.e. an aggregate bid consisting of proprietary bid and bid(s) on behalf of eligible participants.
  • For consolidated bid, arranger shall disclose breakup between proprietary bid and bid(s) made on behalf of eligible participants

Circular, 2016:

  • Arranger shall be categorised as a Category 1 Participant who may enter bids on EBP either on proprietary basis or for other participants such as High Net worth Individuals (HNIs), Institutional investors etc.
  • Sub- arranger shall be categorised as a Category 1 Participant who may enter bids on EBP either on proprietary basis or for other participants such as High Net worth Individuals (HNIs), Institutional investors etc.
  • All the investors apart from the Institutional Investors, shall enter bids only through Category 1 Participants.
  • Institutional investors shall be categorised as Category 2 Participants who may enter bids on proprietary basis or may participate through an arranger/sub-arranger. . Institutional investors shall enter proprietary bids provided that minimum application or bid value is more than the minimum bid size as specified by the issuer.

VK & CO comments: The consultation paper highlighted the fact that non-institutional investors were not able to bid directly and had to mandatorily required to bid through an arranger. It was suggested that the objective of transparent price discovery through the bidding process could be achieved only if all investors were able to bid on their own on the platform.

Initially, the access was restricted in order to first acquaint the eligible bidders with the platform in order to ensure smooth transition. Since market is already acquainted with functioning of EBP mechanism, it was suggested to extend direct participation to non-institutional bidders.

Further, the paper proposed to allow direct participation by non-QIB investors only if such investors were bidding Rs. 25 crores and above. The limit for QIB investors was proposed of Rs. 10 crores. In case of bid amounts lower than aforesaid amounts, bids may be routed through arranger/ sub-arranger.

Circular, 2018 prescribed an amount of Rs. 15 crores or 5% of the base issue size, whichever is lower instead of Rs. 10 crores and Rs. 25 crores without making any bifurcation in the amount for QIB and non-QIB bidders.

Parameter: Consolidated Bids

Circular, 2018: an arranger shall disclose following to the EBP at the time of bidding:

  • Specify that whether the bid is proprietary bid or is being entered on behalf of an eligible participant or is a  consolidated  bid i.e.  an  aggregate  bid consisting of proprietary bid and bid(s)on behalf of eligible participants.
  • For consolidated bid, arranger shall disclose breakup between proprietary bid and bid(s) made on  behalf  of  eligible  Further, for bids entered on behalf of eligible participants, following shall be disclosed:
  1. Names of such eligible participants;
  2. category (i.e. QIB or non-QIB); and
  3. quantum of bid of each eligible participant.

Circular, 2016:

  • Arranger shall be categorised as a Category 1 Participant who may enter bids on EBP either on proprietary basis or for other participants such as High Net worth Individuals (HNIs), Institutional investors etc.
  • Sub- arranger shall be categorised as a Category 1 Participant who may enter bids on EBP either on proprietary basis or for other participants such as High Net worth Individuals (HNIs), Institutional investors etc.

VK & CO comments: As discussed in the consultation paper, in absence of specific requirement to disclose the names of parties for which the arranger submitted bids, the objective of transparency was getting affected. Section 42 of Act, 2013 mandates offering to such persons whose names are recorded by the company prior to the invitation to subscribe. It was observed that the arranger/ sub-arranger sometimes submitted bid on behalf of investors that were not pre-identified by the issuer.

Further, the consultation paper proposed a lock in of 60 days from the date of allotment for securities allotted against proprietary bid of the arranger.

However, Circular 2018 only provides for disclosure requirement and no lock in period.

Parameter: Open Bidding and allotment on yield priority basis

Circular, 2018: Estimated cut-off is required to be disclosed at least one hour prior to opening of the bidding for the issue.

All the bids made on a particular issue, should be disclosed on the EBP platform on a real time basis specifying the yield, demand at that particular yield and cumulative demand.

Allotment to the bidders shall be done on yield priority basis in the following manner:-

  • All the bids shall be arranged in the ascending order of the yields, and a cut-off yield shall be determined.
  • All the bids below the cut-off yield shall be accepted and full allotment should be made to such bidders.
  • For all the bids received at cut-off yield, allotment shall be made on pro-rata basis.

Circular, 2016: No such mandatory requirement to disclose on real time basis. Further, issuer had the option to accept or reject bids received, if the issuer agrees to the yield so discovered.

VK & CO comments:  The consultation paper provided for mandating submitting information on EBP platform on real time basis, while keeping the details of bids anonymous. The arranger/ sub-arranger were required to provide category of investors in case of submitting consolidated bids. Further, allotment on yield priority basis was also suggested to encourage the investors to participate directly on the platform.

Parameter: Submission of multiple Bids and modification of Bids.

Circular, 2018: Multiple bids by a bidder is not permitted. Modification or cancellation of the bids shall be allowed i.e. bidder can cancel or modify the bids made in an issue, subject to following:

  1. such cancellation/modification in the bids can be made only during the bidding period;
  2. no cancellation of bids shall be permitted in the last 10 minutes of the bidding period;
  3. in the last 10 minutes of the bidding period, only revision allowed would for improvement of coupon/yield and upward revision in terms of the bid size.

Circular, 2016: Participants were allowed to enter multiple bids i.e. single participant could enter more than one bid.

Conclusion

All the recommendations made in the consultation paper were not implemented as it is. Certain proposals have not been incorporated in the revised mechanism. There is a need to clarify on issuance made to single investor at fixed coupon rate and applicability of the circular to AT-1 capital instruments issued by banks.


[1] https://www.sebi.gov.in/legal/circulars/jan-2018/electronic-book-mechanism-for-issuance-of-securities-on-private-placement-basis_37295.html

[2] https://www.sebi.gov.in/sebi_data/attachdocs/1461236399007.pdf

[3] https://www.sebi.gov.in/reports/reports/may-2017/consultation-paper-for-review-of-circular-on-electronic-book-mechanism-for-issuance-of-debt-securities-on-private-placement-basis_34940.html

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