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  • Palak Bhawsinka, Sagun Modi

SEBI’s Face Value Reduction: Navigating Implications and Challenges for Business Ease

[Palak and Sagun are students at National Law University Odisha.]


Over the years, the global corporate debt market has grown steadily, with the total amount of outstanding debt increasing from INR 9 trillion in 2011 to nearly INR 40 trillion presently. Even though there has been significant progress, these markets were mostly accessible to institutional investors, side-lining the participation of non-institutional investors. It was observed that India had witnessed a higher investment by institutional investors, whereas the non-institutional investors within the corporate debt market have consistently stayed below 2%, despite a slight recent uptick.

 

Against this backdrop, the Securities and Exchange Board of India (SEBI), in its consultation paper dated 9 December 2023, proposed that the face value of the non-convertible debentures (NCDs) or non-convertible redeemable preference shares (NCRPs) be reduced from INR 1,00,000 to INR 10,000. This paper was released to solicit public comments on the proposal concerning a reduction in the denomination of the face value of the NCDs or NCRPs. Previously, the higher face value served as a barrier for non-institutional investors, constraining their participation in the corporate bond market. As a result, the proposed reduction aims to address this concern by making these instruments more accessible to a wider range of investors and ultimately achieve the objective of promoting ease of doing business in India.

 

In this article, the authors have meticulously analyzed the proposed changes introduced by SEBI and underscore their impact within the investment landscape. Additionally, we will delve into potential challenges that may be posed and assess their implications for diverse stakeholders.

 

Rationale behind the Reduction


In the year 2022, SEBI undertook its first attempt to increase accessibility to the corporate debt market by revising the face value of debt securities and NCRPs. In a circular dated 28 October 2022, SEBI revised the minimum denomination by reducing the face value of privately placed debt securities and NCRPs to INR 1,00,000 marking a substantial reduction from the previous face value of INR 10,00,000 per debt security.


Following such an attempt, SEBI observed a significant change between July - September 2023. Non-institutional investors, those not affiliated with big financial institutions, subscribed to 4% of the total funds raised. This was a notable increase compared to the usual average of less than 1%. It was brought to SEBI’s attention that the boost in participation from non-institutional investors may have been because of the earlier reduction in face value from INR 10,00,000 to INR 1,00,000 in October 2022 and the increased use of online bond platforms. Accordingly, SEBI further proposed a reduction in the face value of privately placed NCDs and NCRPs, lowering it to INR 10,000 from INR 1,00,000. This aligned with the overarching goal of promoting the ease of doing business and at the same time ease, simplify, and reduce the compliance burden on the stakeholders involved.

 

The Proposed Changes


Along with this proposal of reduction, SEBI mandated that an issuer issuing NCDs or NCRPs with a face value of INR 10,000 shall appoint a merchant banker (MB) who shall carry out due diligence for the issuance of such privately placed NCDs or NCRPs and disclosures in the private placement memorandum. The appointment of such an MB was only mandatory in case of debt securities issued through public issue and no such requirement was present in the private placement mode. Furthermore, it is proposed that securitized debt instruments (SDIs) issued through private placement and listed, have the option of adopting a face value of either INR 1,00,000 or INR 10,000 and for all instances of SDI issuances, the issuing entity should engage an MB for the due diligence of the same. It is pertinent to note here that the SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations 2008 (SDI Regulations), neither specify a minimum face value nor mandate the appointment of a MB for private placements.

 

Navigating Implications and Challenges


SEBI’s proposed regulatory framework aims to reinforce transparency, accessibility, and investor confidence within the corporate bond market. The proposal aims to broaden and democratize the participation of non-institutional investors by reducing the entry barrier created by higher face values. This facilitates a wide-ranging spectrum of non-institutional investors, promoting a more inclusive environment in the corporate bond market and ensuring fair treatment for such investors. Moreover, the proposal is a crucial mechanism to address potential power imbalances between institutional and non-institutional investors, particularly concerning the higher ticket size entry requirements. By doing so, the framework aims to create a more resilient and investor-friendly market, instilling greater confidence and encouraging participation across all investor classes. Importantly, the proposal aligns with SEBI’s online bond platform initiative, thus promoting a level playing field in the digital marketplace.

 

Moreover, the engagement of a MB for due diligence in the issuance of privately placed NCDs or NCRPs and disclosures in the private placement memorandum not only reinforces transparency and integrity among stakeholders but also serves as a safeguard against potential malpractices in the issuance process. The due diligence process overseen by the MB ensures precise and transparent information disclosure, providing non-institutional investors with accurate and dependable data within a simplified and transparent regulatory framework. Furthermore, the MB's involvement introduces an additional layer of risk mitigation, enhancing the overall quality and reliability of the presented investment opportunities and safeguarding and protecting the interests of such non-institutional investors. This structured risk assessment and management mechanism benefits non-institutional investors, often constrained by limited resources, fostering increased reliability, trust, and confidence in the market.


While the proposal does aim to enhance transparency, accessibility, and investor confidence among non-institutional investors, it also brings forth significant challenges for the other stakeholders involved.


First, the engagement of the services of a MB for due diligence, imposes supplementary compliance efforts and financial obligations on the issuer. It encompasses fees for the MB's services, legal and documentation expenditures, as well as ancillary costs associated with the engagement. In navigating the dynamic landscape of the bond market, issuers are compelled to allocate substantial resources to ensure a seamless adherence to regulatory standards and effectively manage the ensuing financial implications. These additional financial costs may prove onerous and represent a potential impediment, particularly for smaller issuers, dissuading their participation in the corporate bond market. This has a direct impact on achieving the goal of promoting ease of doing business and reducing the compliance burden – one of the core objectives of the consultation paper.


Second, the proposal’s extension to SDIs with the option of dual face value denomination could present challenges on stock exchanges and trading platforms. They would need to adapt their systems and infrastructure to handle securities with dual face values. This involves modifications to trading systems, settlement processes, and reporting mechanisms. Implementing these changes can be resource-intensive, adding an additional layer of regulatory complexity, as different rules and requirements may apply to issuances with varying face values.


Conclusion


The proposal is a welcome step aiming to empower non-institutional investors by reducing entry barriers and fostering a robust, investor-friendly market. It represents a significant shift in India's financial sphere, aligning with global trends of enhanced efficiency, integrity and transparency. Nevertheless, the proposal's impact on issuers, entailing additional compliance costs, presents challenges, especially for smaller entities. Moreover, the extension of the proposal to SDIs with dual face value options adds another layer of complexity, requiring significant adaptations from stock exchanges and trading platforms.


Striking a harmonious balance between safeguarding investor interests and easing the burden on issuers remains a crucial consideration within the investment landscape. As India embraces this transformative step, careful navigation of legal nuances and industry implications will be essential for the successful implementation of SEBI’s proposal. This is necessary to align with the overarching objective of promoting ease of doing business in India and positioning the nation as a global investment hub.

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