Introduction

The Securities and Exchange Board of India (SEBI) has taken a significant step towards improving transparency, disclosure, and investor protection in the Indian debt market. To achieve these objectives, SEBI has introduced amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). Entities with non-convertible debt securities listed and outstanding as of January 1, 2024, and those intending to issue additional non-convertible debt securities are now required by SEBI to conduct such issuances exclusively through the listed platform, with specific exceptions and conditions applicable. The primary motivation behind these changes is to prevent information asymmetry, enhance transparency, and mitigate the possibility of mis-selling in the debt securities market.

Background and Data Analysis

Before delving into the details of the amendments, it’s important to understand the context and the existing law. Regulation 28 of the LODR Regulations, which applies to issuers of specified securities, mandates that every listed entity obtain in-principle approval for listing from a recognized stock exchange(s) before issuing any security. This regulation prevents any entity with listed specified securities from issuing further specified securities without listing them. However, no such provisions existed for issuers of NCDs, leading to situations where entities had both outstanding unlisted and listed NCDs.

As of January 31, 2023, data obtained from depositories revealed that 839 issuers had outstanding listed NCDs. Of these, 583 issuers had only listed NCDs outstanding, while the remaining 256 issuers had both unlisted and listed NCDs. Notably, 177 issuers among the 256 had issued unlisted NCDs while having outstanding listed NCDs, which raised several concerns about transparency, price discovery, and investor protection.

Key Amendments

After considering the feedback and potential impacts, SEBI introduced the following key amendments by inserting Regulation 62A in the LODR Regulations:

• Listing Requirement: Listed entities must list non-convertible debt securities issued after January 1, 2024, if outstanding NCDs exist by December 31, 2023. Those with unlisted NCDs issued by December 31, 2023, can also list them. If the listing is planned after January 1, 2024, all unlisted NCDs issued after that date must be listed within three months of the new listing.

• Exemptions:

(i) Bonds under Income Tax Act section 54EC

(ii) Non-convertible debt securities between holding companies and subsidiaries, with interest rates not lower than similar government securities.

(iii) Securities issued under agreements with multilateral institutions and issued under court or regulatory orders by financial sector regulators

Public Consultation

To gather stakeholder input, SEBI issued a consultation paper proposing a framework that required issuers with outstanding listed NCDs to list all subsequent issuances. Several concerns and suggestions were raised, leading to refinements in the proposal. Key points from the consultation and SEBI’s responses include:

• Issuer Flexibility: Some wanted flexibility in issuing NCDs, but SEBI clarified that outstanding listed NCDs require subsequent issuances to be listed for fairness.
• Exemptions for Specific Investors: Suggestions for exemptions for multilateral institutions and FPIs were agreed upon with specific conditions for bilateral deals.
• Companies Act Alignment: SEBI aligned with the Companies Act to prevent circumvention regarding loans below government securities rates.
• Issuance Exemptions: While sovereign gold bonds received exemptions, subsidiary companies remain subject to listing requirements.

Impact Assessment

The SEBI amendments are expected to have several positive impacts on the Indian debt market:

• Improved Transparency: Listing all subsequent NCD issuances ensures that investors have access to the same information, promoting transparency and fair price discovery.
• Investor Protection: Investors will benefit from the listing’s protective mechanisms, such as SCORES and dispute resolution systems.
• Reduced Information Asymmetry: The amendments will mitigate information asymmetry between listed and unlisted NCDs, reducing confusion for investors.
• Efficient Price Discovery: Enhancing the liquidity of listed NCDs promotes better price discovery, helping investors make more informed decisions.
• Risk Mitigation: Investors in unlisted NCDs will face reduced liquidity and counterparty risk when issuers list all subsequent NCDs.
• Even Playing Field: The amendments promote fair treatment for all investors in listed NCDs.
• Compliance with Global Practices: These changes bring Indian debt market regulations in line with global practices, enhancing its attractiveness to international investors.

Despite multiple positive impacts, SEBI’s recent mandate to list unlisted NCDs held by entities with low credit ratings could impact market volatility, liquidity, and investor risk. It’s crucial to note that such NCDs, often non-investment grade, may lead to price fluctuations, defaults, and increased investor risk, potentially affecting overall NCD market stability.

Consequences for non-compliance

According to Regulation 98 of LODR, in the event of a violation of the regulations, the listed entity or any other involved party shall be subject to the following actions by the respective stock exchange(s), as outlined in circulars or guidelines issued by the Board, in addition to any actions under securities laws: (a) imposition of fines; (b) suspension of trading; (c) freezing of promoter/promoter group holding of designated securities, as applicable, in coordination with depositories; and (d) any other actions specified by the Board as needed over time.

How Quant LegalTech’s Complius® helps you manage your NCD compliances

A LegalTech company can play a crucial role in helping issuers keep track of listing compliances, especially in the context of the requirements outlined by the Securities and Exchange Board of India (SEBI) for listing non-convertible debt securities (NCDs).

Here are several ways in which Quant LegalTech’s compliance management tool Complius® can assist issuers:

• Automated Compliance Monitoring: Complius® automates SEBI compliance tracking, keeping issuers updated.
• Custom Compliance Checklists: Create tailored checklists for NCD listing compliance.
• Document Management: Review and verify crucial compliance documents.
• Deadline Tracking: Ensure timely filings and submissions.
• Data Analytics: Analyze compliance performance for improvements.
• Task Management: Streamline compliance workflows and task assignments.
• Real-time Reporting: Stay informed with customizable reports and dashboards.
• Regulatory Alerts: Receive real-time SEBI regulation updates.
• Data Security: Ensure data privacy and security.
• Integration: Connect with regulatory databases for up-to-date information.
• Support and Training: Access customer support and training services.
• Scalable: Suitable for issuers of all sizes.
• Audit Trail: Maintain a transparent compliance history.

Complius® simplifies NCD listing compliance, reducing risks, and enhancing transparency. Complius® can be tailored to meet the unique needs of issuers in the Indian debt market, helping them navigate the complexities of listing compliance and stay in line with SEBI regulations. By leveraging Complius®, issuers can streamline their compliance processes, reduce the risk of regulatory violations, and ultimately enhance their transparency and investor protection.

In conclusion, SEBI’s amendments mark a significant leap towards a more transparent and investor-friendly Indian debt market. LegalTech solutions like Complius® are invaluable tools for issuers looking to navigate the changing regulatory landscape with ease, ensuring that compliance remains a manageable and transparent process.