SEBI’s Attempt at Strengthening Bonds by Easing Business
On October 19, 2023, the Securities Exchange Board of India (“SEBI”), after considering prevailing market conditions and representations from market participants, issued a circular for the revision in the framework for fund raising by issuance of debt securities by Large Corporations (“LCs”).
The primary reason for the introduction of the framework for borrowing by Large Corporates in the April of 2019, was to promote and strengthen the Corporate Bond Market and to enable this objective, certain listed entities which fit the prescribed criteria with respect to long term borrowings were mandated to raise 25% of their incremental borrowings by way of issuance of debt securities, the failure of which would lead to a penalty of 0.2% of the shortfall amount.
While the intent of the framework was for the benefit of the corporate debt ecosystem, the implementation of the framework in the Financial Year 2021 to 2022 showed that 1/3rd of the eligible LCs struggled to raise the required amount through debt securities. The reasons that contributed to this failure inter alia, were expensive debts caused by tightened liquidity and hiked benchmark rates, non – availability of interest subsidy benefits from the Government and higher tariff rates to the ultimate consumers.
Recognizing the difficulties faced by the entities for compliance with the requirements as mandated by the framework of 2019 and based on the representation made by the various Stakeholders in the same regard, SEBI floated a consultation paper in August 2023, proposing a revision in the framework applicable to LCs for fundraising through the issuance of debt securities.
Key features of the revised framework which shall be applicable from January 2024 or April 2024 depending on the Financial Year followed by the LCs, include an increase in the threshold of outstanding long-term borrowings from Rs. 100 crore to Rs. 1000 crore with the rationale that the same will allow align the criteria for LCs with the ‘High Value Debt Listed Entity’ or ‘HVDLEs’ as provided under the Listing Regulations. The term "incremental borrowings" has been replaced with "qualified borrowings," to cover associate companies, on which the holding company has significant influence and the end use of grants received from the Government is restricted to the purposes specified by Government and cannot be deviated from, furthermore interest capitalized on the loan amount cannot be considered as borrowings.
The credit rating requirement for LC identification has been retained as "AA" or above, additionally, SEBI decided to maintain the block period of three years for raising debt securities, despite earlier proposals to shift to an annual basis in order to simplify the process and to avoid complexities.
Furthermore, SEBI introduced a dispensation for LCs identified under the previous criteria, allowing the erstwhile LCs 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.
Lastly, in a bid to encourage ease of doing business and to encourage LCs to raise funds by incentivizing them, SEBI introduced an incentive structure wherein the LCs exceeding the mandatory limit will be incentivized through reductions in the annual listing fees and in contributions to the Core Settlement Guarantee Fund (SGF), additionaly the penalty for not meeting the mandatory limit has been replaced with a disincentive structure requiring an additional contribution to the core SGF.
In conclusion, the revised regulatory framework introduced by SEBI marks a significant step towards fostering a robust corporate bond market in India. The amendments, demonstrate SEBI's responsiveness to the challenges faced by Large Corporates (LCs) in complying with the earlier framework. By addressing issues related to borrowing thresholds, credit ratings, and incentivizing compliance through reduced listing fees and contributions to the Core Settlement Guarantee Fund, SEBI aims to strike a balance between regulatory requirements and the ease of doing business.
As the revised framework comes into effect, market participants, including LCs, investors, and regulatory bodies, will play pivotal roles in shaping the success of these regulatory measures. SEBI's continuous engagement with stakeholders and its receptiveness to feedback demonstrate a commitment to refining regulations in line with market dynamics, ultimately contributing to the development of a vibrant and resilient corporate bond market in India.
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