SEBI's Amendments to the NCS Regulations: A Move Towards Increased Transparency?
[Ganesh is an Advocate practicing in Mumbai.]
The Securities and Exchange Board of India (SEBI), on 3 July 2023, introduced certain amendments (Amendments) to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations 2021 (NCS Regulations). This comes at a time where India has witnessed exponential growth in the issuance of listed non-convertible securities (NCS) by companies looking to raise debt. Financial year 2022 alone observed corporate bond issuances by Indian companies touch a record high of INR 8.2 trillion (USD 100 billion) (for further reference, see here and here).
At present, the issuance of NCSs is governed and regulated by the Companies Act 2013 (Act). NCS can either be unlisted or listed on a stock exchange recognised by SEBI. Entities proposing to issue NCS that are to be listed will have to additionally comply with the NCS Regulations and other regulations applicable for a listed issuance that are issued by SEBI from time to time. The rationale behind the Amendments introduced by SEBI was to simplify the process raising further debt, safeguard the interests of the prospective investors and to also increase transparency in the market which, according to SEBI, will encourage further issuances of NCSs and also further investor participation. In light of the same, the article seeks to analyze the efficacy of the Amendments introduced by SEBI.
The Amendments have inter alia introduced three primary modifications to the NCS Regulations - (a) the disclosure requirements by an issuer for the issuance of listed NCSs, will now be agnostic to the mode of issuance, i.e., public issuance or a private issuance; (b) filing of the general information document (GID) and the key information document (KID) instead of filing a shelf placement memorandum; and (c) insertion of the definitions of ‘key managerial personnel’ and ‘senior management.’
Prior to the Amendments, the extant NCS Regulations had separate disclosures for listed NCSs that were issued by way of private placement in comparison to listed NCSs that were issued by way of a public offer. The Amendments have now consolidated the same, requiring entities proposing to issue privately placed listed NCSs, to make the same disclosures that they would have, had it been a public issuance of listed NCSs. SEBI stated that the rationale behind the consolidation was to provide a unified framework for issuers proposing to issue NCSs. Furthermore, market participants were also of the view that there was a need for investors to have detailed information in the offer documents for an issuance of private placed NCSs that would be similar to a prospectus for a public issue of NCSs. This is a welcome amendment by SEBI as it not only ensures transparency but also encourages investor participation. This is pertinent especially at a time where there has been increased foreign participation in the Indian debt market by virtue of the SEBI and the Reserve Bank of India, easing investment routes by virtue of which foreign entities can invest in the Indian debt market.
SEBI has introduced the mandatory filing of a GID, which will act as a comprehensive prospectus for the issuance of NCSs. The GID shall incorporate the information and disclosures provided under Schedule I of the NCS Regulations. The GID will be submitted to the stock exchange for the preliminary issuance and will remain valid for one year from the date of filing such GID. Post the submission of the GID, issuers will only have to submit a KID for each subsequent tranche of issuance of NCSs. The KID shall inter alia contain the following particulars: (a) specifics of the NCSs for which the KID is being issued; (ii) updated financial information if the information in the GID is more than six months old; (iii) disclosure of any material changes or material developments in the information provided in the GID.
While, the requirement of filing a GID is issuer friendly (as issuers no longer have to prepare voluminous memoranda for each issuance of NCSs), it must be duly noted that a similar construct existed prior to the introduction of the Amendments. Issuers could previously file a shelf placement memorandum for the issuance of NCS and, thereafter, file a tranche placement memorandum under the overarching shelf placement memorandum for each subsequent issuance. However, the SEBI noted that most issuers did not utilise the existing framework of filing a shelf placement memorandum but would rather file a comprehensive memorandum for each issue of NCS which, according to SEBI, increased the time, cost and effort for all stakeholders involved. Ergo, mandating the submission of a GID and thereby a KID is less time consuming and efficient for stakeholders.
Be that as it may, there are certain ambiguities on the particulars to be included a KID, namely the disclosure of any 'material changes' or 'material developments' to the information provided in the GID. SEBI has been silent with respect to what constitutes 'material changes' or 'material developments', which makes the required disclosures uncertain. However, issuers can be guided by the test for materiality as provided under Regulation 30(4) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations). The LODR Regulations provide certain tests for determining the materiality of information which inter alia include (a) an event or information the omission of which is likely to result in discontinuity or alteration of event or information already available publicly will be deemed to be material; or (b) the omission of an event or information, whose value or the expected impact in terms of value, exceeds two percent of turnover of such issuer will be deemed to material.
In addition to the enhanced disclosure norms for privately placed debt securities, SEBI has also introduced definitions of ‘key managerial personnel’ (KMP) and ‘senior management’ (SMP). KMP has the same definition as provided to it in the Act, which inter alia includes the chief executive officer and the chief financial officer of a company. SMP inter alia includes those officers and personnel of a company who are members of its ‘core management team', excluding the board of directors, and shall also comprise all the members of the management one level below the chief executive officer or the managing director. The enhanced disclosures for SMPs is a positive introduction by the SEBI. Under the extant NCS Regulations, there are no definitions provided for KMPs or SMPs. The introduction of the same not only provides clarity in terms of the disclosures required but also streamlines the governance framework for companies. However, the broad manner by which an SMP has been defined may lead to possible misinterpretation in terms of the officers of a company that are to be included within the scope of a SMP. Furthermore, the definition of a SMP not only impacts the NCS Regulations, but also impacts other legislations enacted by SEBI given that an SMP has not been defined in such other legislations.
With India being at the epicenter for foreign debt investment and with its bond market rapidly growing, the need for further regulation to ensure transparency and to safeguard the interests of prospective investors is pertinent. Regulation by the SEBI, while imperative, must also be holistic and exhaustive to ensure that investors as well as prospective issuers are not caught in a web of entangled laws, further hampering the progression of the Indian bond market. The enforcement of Amendments is still at a nascent stage, and there have been no listed issuances post the introduction of Amendments. However, given that there is still a certain ambiguity with respect to certain provisions in the Amendments as aforementioned, SEBI has stated that the provisions are applicable on a "comply or explain" basis until 31 March 2024 and mandatorily thereafter. Hence, in the interim, there will be no harsh consequences for entities that are in non-compliance with the Amendments, until more clarifications are sought from SEBI and applicable exchanges.