SEBI, Bonds, and Debt Investing: How the regulator is bringing about changes for the betterment of all stakeholders

Market regulator SEBI has, over the last many months, taken steps to make bond investing more convenient. Recently, it came up with a consultation paper that proposes changes to Listing Obligations and Disclosure Requirements (LODR) regulations and Non-Convertible Securities (NCS) regulations, introduction of the concept of fast track public issuance and listing of debt securities. All these changes will ultimately make bond investing easier in the country. Here are takeaways for investors on key proposals.

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Lower ticket size

SEBI plans to permit issuers to come out with Non-Convertible Debentures (NCDs) or non-convertible redeemable preference shares (NCRPS) with the face value of ₹10,000 (90 per cent reduction). In such cases, the issuer will have to appoint a merchant banker who shall carry out due diligence for issuance of such privately placed NCDs or NCRPS and disclosures in the private placement memorandum. Further, such NCDs and NCRPS will be plain vanilla, interest/dividend bearing instruments with a simple structure (i.e. without any credit enhancements or structured obligations).

SEBI, in the agenda ‘Introduction of Regulatory framework for Online Bond Platforms’ placed before the Board in the meeting held on September 30, 2023, had approved the proposal to reduce the face value from ₹10 lakh to ₹1 lakh. Now, with reduction in the face value to ₹10,000 for NCDs and NCRPs, more non-institutional investors could participate at an even lower ticket size.

Typically, Securitised Debt Instruments (SDI) enable investors to invest in multiple assets. Now, SEBI has proposed requirement of appointment of merchant banker in case of issuance of SDIs at a face value of ₹10,000. This will ensure that some level of due diligence would be done by the merchant banker, which in turn should mitigate risks for investors. Previously, SDI Regulations neither prescribed a minimum face value nor mandated appointment of merchant bankers in case of private placements.

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Although the above proposals’ aim to reduce the ticket size is commendable, SEBI must remain vigilant regarding the heightened risks. It is crucial for SEBI to ensure that issuers provide sufficient and accurate disclosures to prevent potential problems such as mis-selling and down-selling of these debt securities.

Ease of access

Listed issuers (whose debt securities or specified securities are listed on recognised stock exchange), in compliance with the regulations, have to disclose financial information from time to time. The regulator has proposed that issuers that have existing listed outstanding NCDs may insert a QR code in the offer document. Upon the scanning of the QR code, a web-link for the Audited Financials for last three financial years and stub period (for less than a full period) financials in the offer document will open. Such link will direct the user to the stock exchange’s website where such data is hosted.

The inclusion of a QR code benefits users by offering efficient, transparent, and user-friendly access to essential financial information, ultimately supporting more informed investment decisions.

Separately, SEBI plans to ask for details of certain information required for the current year — such as related party transactions, remuneration of directors, etc. to be specified as required up to the latest quarter. Under present regulatory provisions, providing information for preceding three financial years and current financial year is required. The shift in disclosure requirements will benefit investors by providing them with more timely, relevant, and transparent information.

Standardised dates

There is a proposal to standardise the record date/shut period at 15 days before the due date of payment of interest/redemption. In market parlance, shut period refers to the number of days between the record date and interest payment date/redemption date. Record date is the date on which the investor must be the owner of the debt securities for corporate actions.

The existing system led to inconsistency in terms of the duration of the shut period, which is said to vary from 1 to 45 days across issuers/issuances. If the new proposal is implemented, there will be uniformity and standardisation in terms of market practice for treatment of record dates. This would create a more orderly and efficient environment for investors, promoting transparency, predictability, and fair treatment. This can contribute to a healthier and more investor-friendly financial market ecosystem.

Fast track public issuances

Presently, eligible issuers can raise funds through a public issuance of debt securities or by way of a private placement of non-convertible securities. The SEBI has proposed to consider, like equity issuances, an avenue to debt issuers to make issuances of public issues on a ‘fast track’ basis. The fast track public issue of debt securities could be kept open for 1 to 10 working days (regular issuance: 3 to 10 days).

The regulator plans to have requirement of GID (General Information Document) and KID (Key Information Document) for fast track public issuance. The GID will be common for all issues made by the issuer for the year (public or private). The KID for the private placement will be sent only to a select group of persons for subscription, whereas the KID for a fast track public issue will be made available to the public. The timeline for listing of fast track public issue of debt securities could be specified at ‘T+3’, as opposed to ‘T+6’ for a regular public issue.

SEBI has also drawn up norms relating to eligibility of the issuers for fast track public issuance. For instance, the debt securities being issued as part of the fast track public issue would have a rating of not less than “AA-” or equivalent by atleast one credit rating agency. There would have been no downgrade in the rating of the issuer, by two notches (say, AAA to AA) or more, in the last 2 financial years preceding the date of filing of GID/ KID. Such checks and balances will ensure a safer experience for investors.

Overall, the proposals seem geared towards expediting and simplifying the process of debt securities issuance, providing investors with quicker access to information and opportunities. However, the actual benefits would depend on the effectiveness of the implementation and how well the proposed changes align with investor needs and market dynamics.

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