(This article was published by LegalEra in their December 2023 edition).

SEBI has been implementing several measures since 2020 to strengthen and improve the bond markets in India, including increased disclosures, compliances and monitoring apart from tweaking several procedural aspects involved in the issuance of listed NCDs.

The Securities and Exchange Board of India (‘SEBI’) has, with effect from September 20, 2023, amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR’).

1. Amendments

All Non-Convertible Debt Securities (‘NCDs’) issued on or after January 1, 2024 by entities which have any listed NCDs outstanding as of December 31, 2023, will have to be mandatorily listed. Further, such listed entities can choose to list previously issued NCDs which are outstanding as of December 31, 2023, but such listing is not mandatory.

The exemptions to these amendments include (a) NCDs issued pursuant to an agreement between issuer and multilateral institutions provided these NCDs are locked-in, unencumbered and held till maturity and(b) capital gains tax-exempt bonds.

Further, SEBI,in the agenda of its board meeting (accessible here), has clarified that these amendments will not apply to issuances under Chapter V of the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021 i.e., non-equity regulatory capital instruments issued as per guidelines issued by the Reserve Bank of India (‘RBI’).

2. Objectives

SEBI’s primary objectives, amongst others, appear to be(a) to introduce transparency in price discovery for all NCD issuances (using the miserly threshold of INR 50 crore for the electronic book building process of privately placed NCDs (‘EBP’)), (b) resolving issues surrounding exits for investors of unlisted NCDs by providing transparency in pricing and a larger pool of potential buyers, (c) resolving information asymmetry between issuances of listed NCDs and of unlisted NCDs, (d) creating a level playing field for investors of listed NCDs and of unlisted NCDs, absent which investors of unlisted NCDs can potentially earn far higher returns when compared to investors of listed NCDs(given the EBP mechanism).

SEBI has also sought to resolve additional concerns that it perceives i.e., (a) providing an established grievance redressal mechanism which was otherwise, in its view, not available to investors of unlisted NCDs, (b) providing a settlement and clearing mechanism that is not prone to misuse or counterparty risks, (c) avoiding confusion at the ISIN level where an investor may not know if an ISIN pertains to listed NCDs or unlisted NCDs, and (d) avoiding possible mis-selling of unlisted bonds.

3. Analysis

SEBI has been implementing several measures since 2020 to strengthen and improve the bond markets in India, including increased disclosures, compliances and monitoring apart from tweaking several procedural aspects involved in the issuance of listed NCDs. These recent amendments are intended to further deepen the bond markets.

However, these amendments may not have the desired knock-on effect, and may, in fact, push investors and issuers to voluntarily delist existing listed NCDs or turn to other sources or avenues of fund raising, including traditional routes like banks and non-banking finance companies (‘NBFCs’), where possible.

Several key investors will be severely impacted. For example, Category II alternative investment funds (‘AIFs’), which are required by SEBI to invest largely in unlisted securities, will have a limited universe of issuers available which have no outstanding previously issued listed NCDs. AIFs will, therefore, have to tread with far more caution now, while balancing their investment portfolios. Similarly, the universe of issuers available to SEBI-regulated foreign portfolio investors (‘FPIs’) will also shrink considerably, at least for those end-uses where FPIs could invest in unlisted NCDs i.e., end-uses other than ‘real estate business’, ‘capital market’ and purchase of land. The flexibility given by the RBI and SEBI to FPIs in this regard may now prove to be insignificant.

It is worth noting that no exemption has been provided by SEBI for intra group exposures, for example, NCDs issued by subsidiaries or wholly owned subsidiaries to their holding company or parent respectively, which was included by SEBI in the agenda of its board meeting (accessible here), but was excluded from the final set of regulations published by SEBI.

Further, by requiring compulsorily listing of all subsequent issues of NCDs, several issuers will eventually fall under the ambit of ‘high value debt listed entities’ which comes with an additional set of compliances, at par with entities which have issued listed equity securities.

SEBI has already implemented several measures for issuers of private placed listed NCDs in relation to disclosures and compliances and is in the process of implementing several others, for e.g., the plan to bring disclosures in privately placed NCDs at par with public issuances of NCDs. Given these, the actual timelines for completing transactions originally envisaging unlisted NCDs by issuers having listed NCDs may be severely affected as a result of the timelines, disclosures and other compliances involved in issuance and listing of NCDs.

It may now also be practically impossible for issuers having outstanding listed NCDs to execute bilateral arrangements with investors and arrangers of unlisted NCDs, which are otherwise fairly common.

4. Conclusion

There are several intended and unintended consequences of these amendments. However, what is a major cause of concern is that SEBI’s approach – gauged from several recent amendments introduced by it – appears to be of treating listed equity securities and listed equity issuers at par (to a certain degree) with listed NCDs and listed NCD issuers. The reality, however, is that both operate very differently and with varying results.

SEBI, with these amendments, is seeking to regulate not just listed securities or entities which have issued such securities (in so far as such securities or investment therein is concerned) but also to regulate the domain of unlisted NCDs, which is outside its jurisdiction. It remains to be seen, therefore, if these amendments stand the test of time.

The recent amendments may not sound the death knell for the listed bond market just yet and there may yet be several takers for listed NCDs, but these amendments are a clear signal for investors and issuers alike, of what is to come.