While SEBI took numerous measures to deepen the bond market and increase transparency and participation viz., Electronic Book Building Platform (‘EBP) for issue above Rs. 50 cr., Request for Quote (‘RFQ’) platform, reduction in face value of privately placed bonds, online bond platform (‘OBP’), corporate bond repo system etc, illiquidity in bond market continued to remain one of the major concerns for SEBI. To address the issue of liquidity mainly for retail investors, SEBI vide its consultation paper dated August 16, 2024, had proposed the introduction of Liquidity Window facility, a unique concept in bond market. SEBI notified this facility vide circular dated October 16, 2024effective from November 01, 2024.
What is the proposed Liquidity Window Facility (‘LWF’):
LWF, at the issuer’s discretion, allows eligible investors to exercise a put option on NCDs on predetermined dates. This enables investors to sell their securities back to the issuer, removing the need to find prospective buyers in the market. In this setup, the issuer assumes the role of market maker, a concept that has not yet been fully implemented in the bond market.
Key Features of LWF:
Issuer’s discretion: It is optional for the issuer to provide LWF.
Nature of issuance: Issuers can provide this facility for prospective bond issuances through public issues as well as on a private placement (proposed to be listed) at the ISIN level.
Quantum of LWF: Minimum 10%[1] of final issue size. Aggregate limits and sub-limits (in no. of securities) for put option that can be exercised in each window to be disclosed in the offer document.
Timing: LWF to commence after the expiry of 1 year from date of issuance. Facility may be operated on a monthly or quarterly basis at issuer’s discretion, as indicated in the offer document upfront.
Eligible Investors: The issuer will determine which investors are eligible, with a particular focus on retail investors. Investors need to hold securities in demat form to avail this benefit. If put options exercised during the period exceed sub-limits, acceptance will be on a proportionate basis.
Pricing of bonds under LWF:
Date of valuation: ‘T-1’day where T is the first day of the LWF[2].
Issuers can provide a maximum discount of 1% on the valuation arrived. Price plus accrued interest payable.
Display valuation on the website of the issuer and SE during the liquidity window period.
Option with the issuer for bonds purchased under LWF: Within 45 days of closure of LWF or before the end of quarter, whichever is earlier:
sell on debt segment of SE; or
sell on RFQ platform, if eligible to access; or
sell through an online bond platform provider; or
extinguish the NCDs.
In case of sale, amount realized will be added back to the aggregate limit and will replenish any past usage of the limit.
Restriction on re-issuance[3]: Re-issuance is not allowed under ISINs in which LWF is offered
Exemption in ISIN capping[4]: ISI.Ns in which LWF is offered are exempted from computation of ISIN limits as per Chapter VIII of NCS Master Circular.
Operational Guidelines: Stock exchange, in consultation with clearing corporations and depositories, will issue detailed guidelines on how to use the LWF, including the process for exercising the put option.
Other Conditions:
Authorisation and Implementation
Prior approval of BOD.
Monitoring of implementation & outcome SRC or BOD (in case there is no SRC).
Transparent, non-discretionary and non-discriminatory within the class of investors.
Does not compromise market integrity or risk management.
Liquidity Window Period:
Duration: Open for 3 working days.
Intimation of proposed schedule: To be provided 5 working days before the start of the financial year in which facility it is to be given via SMS/WhatsApp.
Mode and manner of availing:
Put options can be exercised by blocking the securities in demat a/c during trading hours and using the specified mechanism to intimate issuer w.r.t. the exercise of put option.
Investors may modify or withdraw bids during the window period[5].
Submissions received during window period (during trading hours) will only be considered valid
Submit report to SE – within 3 WD from closure of window; and
Inform the depositories and DT regarding NCDs to be extinguished – within 3 WD from end of 45 days from the closure of window (timeline to sell/ extinguish purchased securities)[7]
Website disclosure:
By: SE, depositories, DT, and Issuers
When: Disclose on website upon issuance of each ISIN in which facility is provided. Details to be maintained and updated at all times.
Details: List of ISINs for option is available, o/s amount, credit rating, coupon rate, maturity date, valuation details and other relevant information (as per para 6.11 of circular)
Issuer to submit above details to SE, depositories and DT to disclose on their website
In case of change: Issuer to intimate SE, depositories and DT within 24 hrs of change. SE, DT and depositories to update their website within 1WD of such intimation.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2024-08-18 09:22:292024-10-22 15:54:19Bond issuers set to become Market Maker to enhance liquidity
With an intent to promote the Corporate Bond market, SEBI had introduced the framework for borrowing by Large Corporates (‘LCs’) framework with effect from April 1, 2019 by way of circular issued on November 26, 2018. Under the said framework, certain listed entities[1] who satisfied the prescribed criteria with respect to their long term borrowings, were mandated to raise 25% of their incremental borrowings by way of issuance of debt securities. Incremental borrowings were defined to include borrowings of original maturity of more than 1 year excluding external commercial borrowings and inter-corporate borrowings between a parent and subsidiary(ies). This portion of incremental borrowings was required to be raised by way of debt securities on an annual basis For FY2020 and FY2021 and over a block of 2 years which was then extended to 3 years from FY 2022 onwards. Failure to meet the same would attract a penalty of 0.2% of the shortfall amount.
Around 1/3rd of the eligible LCs were unable to raise the required amount through debt securities in FY 21-22 on account of:
raising of debt becoming costlier due to tightening liquidity and hike in the benchmark rate;
non-availability of interest subsidy benefits from Central and State Governments in case of certain issuers and the resultant impact on viability of the projects undertaken;
cost of debt resulting in higher tariff rates to the ultimate consumers in case of power sector entities, etc.
On the other hand, the investors like insurers, pension, and provident funds are required to invest a particular percentage of their incremental receipts in corporate bonds and therefore, continuous issuance of debt securities was necessary.
Recently, SEBI amended the SEBI (Issue and Listing of Non-Convertible Debt Securities) Regulations, 2021 (‘NCS Regulations’) introducing Chapter V B effective from July 06, 2023 that provides the requirement for LCs under Reg. 50B to comply with requirements stipulated by SEBI.
While it has been more than 4 years since the introduction of the concept of LCs, issuers are still struggling to comply with the mandatory requirements. Therefore, SEBI decided to review the LCs framework and issued a Consultation Paper dated August 10, 2023, for public comments. Thereafter, basis the comments received from the public and suggestions of the Corporate Bond and Securitisation Advisory Committee (‘CoBoSAC’), SEBI approved the revised framework, as detailed herein in its Board meeting held on September 21, 2023 (‘SEBI BM’).
Revised framework as per the Present Circular
The revised framework has been notified by SEBI vide Circular dated October 19, 2023 (‘Present Circular’) and is applicable w.e.f. April 1, 2024 for LCs (criteria for identification discussed in the latter part) following April-March as their financial year and from January 1, 2024 for entities following January-December as their financial year. Thus, the revised framework is applicable for entities which would be identified as LCs as on March 31, 2024 or December 31, 2023, as the case may be.
Key features of the revised framework are as follows:
This article discusses the amendments made in the LCs framework by way of the Present Circular including the rationale provided in the CP, relevant points discussed in the SEBI Board meeting in this regard and transition related requirement for ongoing block of 3 years for existing LCs.
Increase in the threshold of outstanding long-term borrowings
Existing Provisions
Proposed Changes in CP
SEBI’s rationale for proposed change
Outstanding long-term borrowings[3] of Rs. 100 crore or above
Outstanding long-term borrowing of Rs. 500 crore or above.
To align the criteria for LCs with the ‘High Value Debt Listed Entity’ or ‘HVDLEs’ as provided under the Listing Regulations.
Brief of public comments received and SEBI’s response:
While a major portion of public comments were in favour of the increase in the limit to Rs. 500 crore, a common remark raised by the public suggested applying the LC framework based on outstanding listed debt instead of outstanding long-term borrowings. SEBI disagreed as it will increase the burden for entities that have already tapped the debt market and will not help in reducing the burden on the banking system. There were few comments seeking exemption from the applicability in case of loss making companies and NBFCs, which was also dismissed by SEBI indicating that it has no nexus with profit or loss made by an entity and that NBFCs being the largest borrowers cannot be excluded.
SEBI BM decision
Increase the limit from existing Rs. 100 crores to Rs. 1000 crores, basis which, around 170 entities would qualify as LCs (as opposed to 482 entities in case of limit of Rs. 500 crore proposed).
Provisions under the Present Circular
The threshold limit of outstanding long term borrowings has been increased to Rs. 1000 crores.
Our Remarks
Classification as an HVDLE is on account of outstanding listed debt securities. On the contrary, an entity may not have any of its debt securities listed but may still be classified as an LC if it has its equity listed and borrowing from banks/ financial institutions exceeding the prescribed threshold. Increase of limit to Rs. 1000 crore is a welcome change.
Scope of outstanding long-term borrowings and incremental borrowings
Existing Provisions
Proposed Changes in CP
SEBI’s rationale for proposed change
Includes: any outstanding borrowing with an original maturity of more than 1 year Excludes: (i) External Commercial Borrowings (ii) Inter-corporate borrowings between a holding and subsidiary
Term ‘incremental borrowings’ to be replaced with ‘qualified borrowings’. Includes: any outstanding borrowing with an original maturity of more than 1 year Excludes: (i) External Commercial Borrowings (ii) Inter-Corporate Borrowings between its holding and/or subsidiary and /or associate companies;(iii) Grants, deposits, or any other funds received as per the guidelines or directions of the Government of India (‘GOI’);(iv) Borrowings arising on account of interest capitalization
To cover associate companies, on which the holding company has significant influenceThe end use of grants received from the Government is restricted to the purposes specified by Government and cannot be deviated fromInterest capitalized on the loan amount cannot be considered as borrowings.
Brief of public comments received and SEBI’s response:
All the public comments were in favor of the proposal. Few comments were received to additionally exclude borrowings for the purpose of refinancing which was not accepted by SEBI as it would defeat the intent of the framework. The suggestion to exclude borrowings made for mergers, acquisitions and takeovers was accepted by SEBI given those are not routine occurrences in the life-cycle of an entity.
SEBI BM decision
Incremental borrowings to be termed as qualified borrowings. Borrowings for mergers, acquisitions and takeovers to be further excluded from the scope of qualified borrowings.
Provisions under the Present Circular
The nomenclature ‘incremental borrowings’ has been revised to ‘qualified borrowings’ and the exclusions proposed in the CP i.e. inter-corporate borrowings involving associate companies, any funding received from the GOI, borrowings on account of interest capitalisation have been given effect to. Additionally, as per the public comments received, borrowings for the purpose of scheme of arrangement as stated above have also been excluded.
Retention of credit rating requirement as a criterion for LC identification
Existing Provisions
Proposed Changes in CP
SEBI’s rationale for proposed change
Have a credit rating of “AA and above”
Remove the requirement.
Entities with long-term outstanding borrowings of Rs. 500 Cr or above would generally fall under the bracket of credit rating of ‘AA and above’
Brief of public comments received and SEBI’s response:
Most of the public comments were against the proposal as entities with low rated debt may not find investors at all, which was accepted by SEBI.
SEBI BM decision
The criteria of a minimum credit rating to be retained as per existing norm.
Provisions under the Present Circular
SEBI has retained the existing requirement prescribing a minimum credit rating of “AA”/“AA+”/AAA under the revised framework.
Our Remarks
The proposal in the CP to drop the requirement altogether was inappropriate. An outstanding borrowing of Rs. 500 crore may not be necessarily indicative of the credit quality of the borrower. While regulations may force or incentivize the issuers to come up with debt issuance pursuant to this framework, however, it cannot force the investors to invest. An investor in debt security will rely on the credit quality which is fairly indicated through the credit rating of the debt security. The requirement of having a credit rating is one of the prerequisites for listing a debt security under NCS Regulations (Reg. 10). Even for determining the list of eligible issuers of debt securities for the purpose of contribution to Core Settlement Guarantee Fund (‘Core SGF’), the issuer should have long term debt rating of the eligible securities of AAA, AA+, AA and AA- (excluding AA- with negative outlook). Decision to retain the erstwhile requirement is a welcome move.
Retention of block period of three years
Existing Provisions
Proposed Changes in CP
SEBI’s rationale for proposed change
FY 2020 & FY 2021 – On an annual basis FY 2022 onwards – On a block of 3 years
On an annual basis
To simplify the process of raising debt securities and to eliminate the complex process of tracking all the issuances during the block years.
Brief of public comments received and SEBI’s response:
Most of the public comments were against the proposal, which was accepted by SEBI.
SEBI BM decision
SEBI to retain the requirement of the continuous block of 3 years in the framework.
Provisions under the Present Circular
It has been prescribed that atleast 25% of the qualified borrowings will be required to be raised by way of issuance of debt securities over a continuous block of 3 years.
Since, the framework is applicable w.e.f. FY 2025, entities identified as LCs as on the last day of ‘T-1’ [i.e. March 31, 2024 / December 31, 2023, as the case may be], will be required to raise the requisite quantum of qualified borrowings of FY ‘T’ [FY 2025] through issuance of debt over a block of 3 years i.e. over ‘T’ [FY 2025], ‘T+1’ [FY 2026] and ‘T+2’ [FY 2027].
Our Remarks
The proposal in the CP to make it an annual requirement was inappropriate. For the purpose of this framework, the interest of such issuers who do not issue debt securities frequently is also to be kept in mind. While frequent issuers of debt securities may not find it difficult to borrow funds by issuance of further debt securities, it may not be feasible for non-frequent issuers to raise the entire quantum of prescribed incremental borrowings within a period of 1 year. Issuers are to be given certain flexibility and the timelines need not be made more stringent. Decision to retain the erstwhile requirement is a welcome move.
Incentive for exceeding the mandatory limit
Existing Provisions
Proposed Changes
SEBI’s rationale for proposed change
–
In case of a surplus, a certain quantum of the annual listing fees to be reduced; Reduction in the contribution to be made to the core SGF.
To promote ease of doing business and to encourage LCs to raise funds by incentivizing them.
Brief of public comments received and SEBI’s response:
All public comments were in favour of the proposal. One of the recommendations was to provide incentive in the form of reduction in the contribution to be made to the Recovery Expense Fund[4], which was not approved by SEBI given it is a refundable deposit and meant to meet recovery expenses in case of any default.
SEBI BM decision
SEBI decided to introduce the incentive structure. With respect to the proposal for reduced contribution to Core SGF, SEBI approved to permit carry forward of incentive till utilisation or set off within 6 years of obtaining the incentive.
Provisions under the Present Circular
The incentive scheme proposed has been notified. A benefit of reduction in the annual listing fees pertaining to listed debt securities or non-convertible redeemable preference shares ranging between 2% to 10% computed in the following manner would be available in case of surplus borrowings raised through issuance of debt:
Sr. No.
% of surplus borrowing as on last day of FY “T+2” for the block starting FY “T”
% of reduction in annual listing fees payable to the Stock Exchanges by the LCs for FY “T+2”
1
0-15%
2% of annual listing fees
2
15.01% – 30%
4% of annual listing fees
3
30.01% – 50%
6% of annual listing fees
4
50.01% – 75%
8% of annual listing fees
5
Above 75%
10% of annual listing fees
Further, a credit in the form of reduction in the contribution to be made to the Core SGF of LPCC would also be available in the following manner:
Sr. No.
% of surplus borrowing for the block starting FY “T” as on last day of FY “T+2”
Quantum of Credit
1
0-15%
0.01%
2
15.01% – 30%
0.02%
3
30.01% – 50%
0.03%
4
50.01% – 75%
0.04%
5
Above 75%
0.05%
The Present Circular further mentions that in case of entities classified as ‘eligible issuers’ by the LPCC, the incentive would be permissible to be carried forward for a period of 6 years of obtaining the same as approved in the SEBI BM. Further, in case of an entity which is not an eligible issuer, the incentive may be carried forward until it is classified as an eligible issuer. Thereafter, the incentive would be available for the purpose of utilisation for a period of 6 years from year of such classification.
Manner of computation
Let us consider the following example to understand the computation of credit:
Company ‘X’ is identified as an eligible issuer requiring to contribute Rs. 2 crores to the Core SGF. It has complied with the requirements of raising the requisite qualified borrowings in the following manner:
Sr. No.
Particulars
Amount (in Rs. Cr)
1
Borrowings that should have been made from the debt market by the LC for FY “T” (A)
200
2
Actual borrowings in “Block of three years” (B)
250
3
Surplus borrowings (B-A) (C)
50
4
% of surplus borrowing (C/A*100)
25%
5
Quantum of credit (% of quantum of credit as per the table above*C)
0.01 (i.e. 50*0.02%)
6
Actual contribution required to be made to the SGF [Actual contribution required to be made – Quantum of credit]
1.99 (i.e. 2-0.01)
Our Remarks
Contribution to Core SGF:
The benefit of reduced listing fee can be availed by the listed entity for listed debt securities or non-convertible redeemable preference shares. However, the relaxation in the form of reduced contribution to Core SGF will be an incentive only to an ‘eligible issuer’ as per the list rolled out annually by AMC Repo Clearing Limited (‘ARCL’), recognised as Limited Purpose Clearing Corporation (‘LPCC’) by SEBI, on the basis of prescribed parameters. In case of an LC which has not been identified as an ‘eligible issuer’, the credit in contribution to the Core SGF would not serve as an incentive and may get lapsed. It may even be the case for an issuer identified as ‘eligible issuer’ in year 1 however, not identified in the subsequent year. ARCL vide Circular dated September 29, 2023 rolled out a list of 125 eligible issuers who will be required to contribute to Core SGF for the eligible issuance as per the eligible list issued on or after 01st October 2023 till 30th September, 2024. In the light of this, SEBI’s decision to allow carrying it forward till 6 years is a welcome change.
Mandatory Listing:
In case an LC which is a debt listed entity and raises further debt pursuant to the LC framework post January 1, 2024, it will be mandatorily required to list every such issuance pursuant to Reg. 62A of the SEBI Listing Regulations, inserted vide the SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2023. On the other hand, in case an LC is not a debt listed entity, however, lists any particular issuance of debt securities issued pursuant to the LCB framework any time post January 1, 2024, as per the afore-mentioned provision, it will be mandatorily required to list all issuances done post January 1, 2024 within a period of 3 months from the date of listing.
As a result of such mandatory listing, the LCs may cross the threshold of having outstanding listed debt securities amounting to Rs. 500 crores, thereby classifying the entities as a ‘High Value Debt Listed Entity’ or an ‘HVDLE’. Consequently, the entity will be required to comply with the corporate governance provisions stipulated under Reg. 16 to Reg. 27 of the SEBI Listing Regulations. We have further analysed the same in our article which can be accessed here.
Disincentive for not meeting the mandatory limit
Existing Provisions
Nature of amendment proposed
Proposed Changes
SEBI’s rationale for the proposed change
Monetary penalty/ fine of 0.2% of the shortfall in the borrowed amount is levied in case of shortfall
Doing away with the penalty and introducing an incentive/ disincentive structure
In case of a shortfall, an amount equivalent to 0.5 basis points of such shortfall shall be made by the LC to the core Settlement Guarantee Fund (‘SGF’) as set up by the Limited Purpose Clearing Corporation (LPCC).
To promote ease of doing business and to encourage LCs to raise funds by incentivizing them.
Brief of public comments received and SEBI’s response:
While majority of the comments were in favour of the proposal, it was recommended that:
(a) the disincentive should be applicable if there is a non-compliance for a continuous block of 2/3 years;
(b) further reduction in the quantum; and
(c) applicability only to entities required to contribute to Core SGF.
SEBI BM decision
SEBI confirmed (a) and disagreed for (b). In case of (c). SEBI clarified that Core SGF requirement will be made applicable to all issuers to ensure uniformity.
Provisions under the Present Circular
SEBI has done away with the penalty provision and notified the disincentive structure. The said structure will apply in case of shortfall in raising the requisite quantum at the end of the block of 3 years, i.e. as on the last day of ‘T+2’. The disincentive scheme is in the form of additional contribution to be made to the Core SGF in the following manner:
Sr. No.
% of surplus borrowing for the block starting FY “T” as on last day of FY “T+2”
Quantum of additional contribution
1
0-15%
0.015%
2
15.01% – 30%
0.025%
3
30.01% – 50%
0.035%
4
50.01% – 75%
0.045%
5
Above 75%
0.055%
Manner of computation
Let us consider the following example to understand the computation of disincentive:
Company ‘X’ is identified as an eligible issuer requiring to contribute Rs. 2 crores to the Core SGF. It has complied with the requirements of raising the requisite qualified borrowings in the following manner:
Sr. No.
Particulars
Amount (in Rs. Cr)
1
Borrowings that should have been made from the debt market by the LC for FY “T” (A)
200
2
Actual borrowings in “Block of three years” (B)
150
3
Shortfall in borrowings (X-Y) (C)
50
4
% of shortfall in borrowing (C/A*100)
25%
5
Quantum of additional borrowing (% of quantum of additional borrowing as per the table above*C)
0.0125 (i.e. 50*0.025%)
6
Actual contribution required to be made to the SGF [Actual contribution required to be made + Quantum of additional borrowing]
2.0125 (i.e. 2+0.0125)
Dispensation for LCs identified basis erstwhile criteria
The entities which have been identified as LCs under the erstwhile LC framework are required to comply with the requirement over a block of 3 years in the following manner:
FY in which the entity was identified as LC i.e. ‘T-1’
Block of 3 years over which the LC was required to raise the requisite quantum of long term borrowings i.e.‘T’, ‘T+1’, ‘T+2’
Remaining period of the block as on March 31, 2023 prior to Present Circular
Remaining period as per the Present Circular
FY 2021
FY 2022, FY 2023, FY 2024
1 year i.e. FY 2024
1 year i.e. FY 2024
FY 2022
FY 2023, FY 2024, FY 2025
2 years i.e. FY 2024 & FY 2025
1 year i.e. FY 2024
FY 2023
FY 2024, FY 2025, FY 2026
3 years from FY 2024 to FY 2026
1 year i.e. FY 2024
The erstwhile LCs are required to endeavour to comply with the requirement of raising 25% of their incremental borrowings done during FY 2022, FY 2023 and FY 2024 respectively by way of issuance of debt securities till March 31, 2024, failing which, such LCs are required to provide a one-time explanation in their Annual Report for FY 2024.
The Present Circular additionally amends the Chapter XII of NCS Master Circular to the following effect:
Deletion of penalty related provision in Clause 2.2(d) of Chapter XII; and
Deletion of format of annual disclosure to be submitted within 45 days from end of the financial year by an identified LC providing details of incremental borrowing and mandatory borrowing, as provided in Clause 3.1 (b) of Chapter XII.
Conclusion
The changes in the framework vide the Present Circular attempt to tackle the hindrances which are being faced by entities classified as LCs, including removal of the penal provisions on shortfall, etc. Thus, these changes seem positive and would help LCs in complying with the LCs framework. However, while the framework aims to deepen the bond market by mandating debt issuance, one cannot disregard the other recent amendments in the legal framework governing debt securities, which seem to be a deterrent for companies from approaching the capital markets, for instance, provisions relating to mandatory listing of debt securities, requirement to obtain approval of all holders in case of voluntary delisting, etc. While the framework would be relevant for entities who have already tested the equity markets and wish to enter the debt market, the recent amendments relating to mandatory listing, no selective delisting etc. would impact issuers who intend to list their debt securities.
[1] Criteria under the erstwhile framework was as follows and was applicable to all listed entities except Scheduled Commercial Banks:
having listed specified securities or debt or non-convertible redeemable preference shares on a recognised stock exchange; and
having outstanding long term borrowing of Rs. 100 crore or above; and
having a credit rating of ‘AA and above’.
[2] About Core SGF: In terms of SEBI Circular SEBI/HO/DDHS/DDHS-RACPOD1/CIR/P/2023/56 dated April 13, 2023, eligible issuers are required to contribute 0.5 basis points (0.005%) of the issuance value of debt securities per annum based on the maturity of debt securities. The issuers need to make full contribution upfront prior to the listing of debt securities.The Core SGF contribution is applicable for all public issue or private placement of debt securities under the SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021 of eligible issuer except for a) Tier I & Tier II bonds issued by Banks, NBFCs & other institutions; b) Perpetual Debt; c) Floating rate bonds; d) Market linked bonds; e) Convertible bonds (Optional or Compulsorily); f) Securities other than long term debt rating of the eligible securities shall be AAA, AA+, AA and AA- (excluding AA- with negative outlook).
[3] Outstanding long term borrowings indicate borrowings which have original maturity of more than 1 year with certain exclusions as detailed further herein.
[4] Recovery Expense Fund is a refundable fund to be deposited with the stock exchanges at the time of listing. The purpose of the fund is recovery in case of default.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2023-08-11 19:40:392023-10-26 16:20:19SEBI rationalizes the framework for Large Corporates
ICRA has published a report on 23.04.2020[1], listing out some 328 entities[2] who have availed or sought a payment relief from the lending institutions or investors. The list also includes names of such entities that have received an in-principle approval from investors in their market instruments (like non-convertible debentures)- prior to the original due date- for shifting the original due date ahead, but where a formal approval from the investors was received either after the original due date or is still pending to be received.
Earlier, Securities and Exchange Board of India (SEBI) had, vide circular no. SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2020/53 dated 30.03.2020[3], addressed to the credit rating agencies (CRAs), granted certain relaxation from compliance with certain provisions of the circulars issued under SEBI (Credit Rating Agencies) Regulations, 1999 due to the COVID-19 pandemic. The circular stipulated that appropriate disclosures in this regard shall be made in the press release, seemingly, the report published by ICRA is a part of the disclosure requirement specified by SEBI.
In view of the COVID crisis, companies in large numbers are approaching investors or will be approaching investors for restructuring of the debentures, therefore, it becomes pertinent to discuss- how the restructuring is carried on? whether a meeting of debenture holders will be required to be convened? what will be the consequences if the restructuring is not done? and other related questions. Below we discuss the same.
Force Majeure– An Excuse to Default?
In financial terms, “default” means failure to pay debts, whether principal or interest. Under ISDA Master Agreement[4], failure by the party to make, when due, any payment is listed as an event of default and one of the termination events. However, the ISDA Master Agreement provides that in case of a force majeure event, payments can be deferred. Most of the standard agreements, contain specific clauses pertaining to force majeure, where the party required to perform any contractual obligation is required to intimate the other party as soon as it becomes aware of happening of any force majeure event. While in some cases, due to impossibility of performance, the agreement itself is frustrated; in some other cases, the obligations are merely deferred till the event persists.
Consequences of default- Rights available to debenture holders:
A debenture holder has several options available in case of default: (a) insolvency proceedings; (b) enforcement of security interest; (c) proceedings for recovery of debt due. Below we discuss the same:
– Right to call for meeting of debenture holders: Rule 18 (4) of the Companies (Share Capital and Debentures) Rules, 2014 stipulates that the meeting of all the debenture holders shall be convened by the debenture trustee on:
requisition in writing signed by debenture holders holding at least 1/10th in value of the debentures for the time being outstanding; or
the happening of any event, which constitutes a breach, default or which in the opinion of the debenture trustees affects the interest of the debenture holders.
– Right to make an application before NCLT: Section 71(10) of the Companies Act, 2013 provides that on failure of the company to redeem the debentures on the date of their maturity or failure to pay interest on the debentures when it is due, an application may be filed by any or all of the debenture holders or debenture trustee, seeking redemption of the debentures forthwith on payment of principal and interest due thereon.
–Application under IBC: Section 5(7) of IBC defines a “financial creditor” to mean any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to, and Section 5(8) of IBC defines “financial debt” as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument. Thus, debenture holders are treated as financial creditors for the purpose of IBC and may exercise all the rights as available to a financial creditor.
As per Section 6 of IBC-“Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter”. Accordingly, the debenture holders (whether secured or not) may apply for initiation of corporate insolvency resolution process against the company under Section 7 of IBC. In fact the Central Government has, vide notification no. S.O. 1091(E) dated 27th February, 2019, notified that such right may also be exercised by the debenture holder, through a debenture trustee.
–Right to enforce security interest: The right of foreclosure is a counter-part of right of redemption. Just like a company has a right of redeeming the security after payment of debt amount, a secured debenture holder has a right of foreclosure or sale in case of default in redemption. In the case of Baroda Rayon Corporation Limited vs. ICICI Limited[5]and in Canara Bank vs. Apple Finance Limited[6], Bombay High Court upheld the right of the debenture trustee to sell off the properties of the company for the benefit of the debenture holders.
Here, it is pertinent to understand how the debenture holders shall exercise the right of foreclosure. The law distinguishes between security interests based on the nature of the collateral. For instance, in case of security interests on immovable properties, Chapter IV of Transfer of Property Act, 1882 applies. Further, the security interest, in case of secured debentures, can be enforced in the following manner: (a) In case the debenture holder is a bank/ financial institution, as per the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002; and (b) In case the debenture holder is not a bank/ financial institution, as per the common law procedures.
– Other remedies: Any default in the terms of the debentures is a breach of contract, and the debenture holder may sue the company for breach of contract as per the provisions of Contract Act, 1872, and further seek for compensation as per the terms of the debenture, or in absence of specific term in the agreement, compensation may be claimed as per the provisions of Section 73 of the Contract Act, 1872.
Issues cropping up due to COVID- 19 and the resolution thereof:
In view of the COVID pandemic one of the issue that was arising was that the issuers of debt instruments who were not able to fulfil the obligations as per the terms of the debentures or redeem the same on the maturity date were running to courts for seeking interlocutory reliefs, seeking to restrain the debenture holders from exercising any rights against the defaulting issuer. In the case of Indiabulls Housing Finance Ltd. vs. SEBI[7], the petitioner prayed for an ad interim direction to restrain any coercive action against it, with respect to the repayment to be made by it to its non-convertible debenture holders. In the said case, granting the prayer, the Hon’ble Delhi High Court directed maintenance of status quo with respect to the repayments to be made by the petitioner to the NCD holders.
Further, there was a lack of clarity on how rating and valuation of a security would be revised in view of the default or the restructuring? Therefore, SEBI has issued the following circulars:
SEBI, vide a circular no. SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2020/53 dated March 30, 2020[8], granted certain relaxation from compliance with certain provisions of the circulars issued under SEBI (Credit Rating Agencies) Regulations, 1999 due to the COVID-19 pandemic.
With respect to recognition of default, the circular stipulates that CRAs recognize default based on the guidance issued vide SEBI circular dated May 3, 2010[9] and November 1, 2016[10], however, based on its assessment, if the CRA is of the view that the delay in payment of interest/principle has arisen solely due to the lockdown conditions creating temporary operational challenges in servicing debt, including due to procedural delays in approval of moratorium on loans by the lending institutions, CRAs may not consider the same as a default event and/or recognize default.
Further, SEBI has, vide its circular no. SEBI/HO/IMD/DF3/CIR/P/2020/70 dated 23.04.2020[11], reviewed certain provisions of the circular dated 09.2019[12] issued under SEBI (Mutual Funds) Regulations, 1996. In the circular, SEBI has stipulated that based on assessment, if the valuation agencies appointed by Association of Mutual Funds in India are of the view that the delay in payment of interest/principal or extension of maturity of a security by the issuer has arisen solely due to COVID-19 pandemic lockdown creating temporary operational challenges in servicing debt, then valuation agencies may not consider the same as a default for the purpose of valuation of money market or debt securities held by mutual funds.
Restructuring Process and the Formalities associated thereto:
In the context of COVID, the restructuring of debentures shall mean nothing but deferral of the date of redemption. The terms of the debentures, including the maturity date, etc is specified in the terms of issuance. The terms of issuance also provides how the variation in terms can be effectuated. Therefore, it is pertinent that to make any changes in terms of debentures, the relevant clauses in the issuance terms are considered.
In terms of Reg. 59 (2) of the SEBI LODR Regulations, 2015, any material modification to the structure of debentures in terms of coupon redemption etc. are required to approved by the Board of Directors and the debenture trustee (DT). Further, in terms of Reg. 59(1), prior approval of the stock exchange(s) shall also be required for such material modification which shall be given by the stock exchange(s) only after obtaining the approval of the Board and the DT.
In addition to the approval as aforesaid, in terms of Regulation 15(2)(b) of SEBI DT Regulations, DT is required to call a meeting of the debenture holders on happening of any event which in the opinion of the DT affects the interest of the holders. Similar provision is there in the Companies (Share Capital and Debenture) Rules, 2014 also [sub- rule (4) of Rule 18].
Unlike the requirements of obtaining shareholders’ consent by way of special/ ordinary resolution for various matters including variation of rights thereof, there is no explicit provision for obtaining of a consent of the debenture holders for restructuring of the debentures under the Companies Act, 2013 (‘CA 13’). However, the provisions of SS 2 being, mutatis mutandis, applicable to a meeting of debenture holders also, all the provisions w.r.t convening/ conducting of general meeting such as, sending of notice, explanatory statement etc. as applicable to general meetings shall apply to the meeting of debenture holders.
However, looking at the current crisis situation, where calling of a physical meeting is not possible, and issuers will be required to hold the meeting of the debenture holders, in case consent by e-mail is not possible due to the large number of debenture holders, through video conferencing mode. The modalities for participation (like voting, two-way communication, recording, etc.) and other compliances related of sending of notices etc. may be in the manner clarified by the MCA Circular dated 13.04.2020[13].
In a nutshell, the procedural requirements to be followed for restructuring of debentures shall be as provided hereunder.
S. No
Relevant Provisions
Actionable/ Compliance
Remarks
1.
Regulation 50 (3) of LODR Regulations
Prior intimation to the stock exchange (SE) for the meeting board of directors, at which the restructuring is proposed to be considered.
2 working days in before the board meeting.
(excl. date of intimation and date of meeting)
2.
Sec. 173 of CA 13
BM to be convened by the Company for proposed restructuring including the revised terms subject to approval of the stock exchanges and the debenture holders.
After taking the consent of the board of directors and DT.
5.
Regulation 15(2) of DT Regulations, 1993
Separate meeting of debenture holders to be called for deferment in repayment due to liquidity crunch in the hour of crisis.
The meeting may be called by the company itself or through the DT.
Since the scope of SS 2 issued by ICSI includes meetings of debenture holders also, the company will have to observe the requirements of SS 2 in convening the meeting of debenture holders. However, considering the current crisis situation, such meeting may be convened through VC facility as clarified by MCA Circular dated 13th April, 2020. Our FAQs in this regard may be found at http://vinodkothari.com/2020/04/general-meetings-by-video-conferencing-recognising-the-inevitable/
6.
Regulation 51 (2) of the Listing Regulations
Intimation to the stock exchanges being an action that shall affect payment of interest or redemption of NCDs
ASAP but not later than 24 hours of Board decision.
Documentation Requirements:
In usual circumstances, if any variation is carried out in the debenture terms, the parties enter into an addendum, amending the clauses contained in the debenture subscription agreement (and also, in the trust deed/ security documents, if required), however, given the current scenario and the lock down, it is not possible for parties to sign and execute the agreements. Since the restructuring already has the approval of the majority debenture holders, it is deemed that the resolution “overrides the terms of issuance”. Thus, in our view, the resolution passed by the debenture holders approving the restructuring should suffice, and modification in the agreements may not be required.
[2] The rating agency has stated that the list is not a comprehensive one, as information about some rated entities are not readily available as of now, and separate disclosures will be made w.r.t. such entities.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinita Nair Dedhiahttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinita Nair Dedhia2013-03-06 06:57:002024-03-26 07:00:46New Debenture Redemption Reserve Provisions: Will they promote or demote the Bond Market?
Reload document
Open in new tab