SEBI SAGA: WHETHER AMENDMENT TO LISTING REGULATIONS TIGHTEN THE REINS ON HIGH-VALUE DEBT ENTITIES?

This article has been authored by Surabhi Srinivasan, a 4th-year student from Symbiosis Law School, Hyderabad.

Introduction

The capital markets in India are regulated by the Securities Exchange Board of India (SEBI). The Securities Contract (Regulation) Act, 1956 gives rise to a set of disclosure norms that companies listed with stock exchanges are supposed to abide by. SEBI possesses the powers to specify the disclosure standards and requirements. To ensure smooth sailing, SEBI promulgated the SEBI (Listing Obligations and Disclosure Requirements) Regulations (LODR Regulations) in the year 2015 and has since continued to amend it at regular intervals.

The backdrop to the most recent amendment is that, in August 2021, SEBI combined a set of rules and a set of regulations namely, the Issue and Listing of Debt Securities Rule(ILDS) and Non-Convertible Redeemable Preference Shares Regulations (NCRPS) into one regulation, the SEBI (Issue and Listing of Non-Convertible Securities) Regulations. (ILNCS)

Role of the merged regulation

The ILDS dealt specifically with only debt instruments, whereas NCRPS regulated hybrid instruments. The term hybrid instrument refers to those instruments that are a combination of debt and equity instruments. One of the key rationales behind merging the regulations was to avoid the multiplicity of regulations, as both the ILDS and NCRPS were similar in nature.

The ILNCS now regulates not only Debt Securities and Non-Convertible Redeemable Preference Shares but also various other Non-Convertible Securities as well as Commercials papers.

The interplay between ILNCS and LODR regulations lies in the fact while ILNC applies to issuing and listing of both debt securities and non-convertible securities (NCS) through public by an issuer, and the LODR regulations apply to NCS which are listed on any recognized stock exchange. Therefore, ILNCS plays an integral role in the listing of the NCS which in turn is directly related to the 5th amendment of the LODR Regulations.

The 5th Amendment and the introduction of high- value debt listed entities

On 7th September 2021 SEBI notified the 5th Amendment to the LODR regulations. By way of the amendment, certain key issues have been addressed. The rationale behind the amendment was to ensure that SEBI can run a tight ship by setting the tone with laying down stringent requites for debt-listed entities to comply with.

One of the crucial amendments that have been made is that as per Chapter V of the LODR regulations all debt-listed entities are required to submit financial results on a quarterly basis. Prior to the amendment, the entities were submitting the financial results bi-annually.

The concept of high-value debt-listed entities (HVDs) has been introduced. Regulation 15 which lays down the applicability is now followed by sub-regulation 1A, which ensures the applicability of regulation 16 to regulation 27 on entities that have listed non-convertible debt securities (NCDs). However, the applicability is subject to the listed NCDs having an outstanding of Rs. Five Hundred Crore and above. All NCDs having an outstanding value of Rs. Five Hundred Crore and above will come under the purview of HVDs.

Further, the cogs in the wheels regarding intimation and disclosure have been tightened for all entities that have listed NCDs.

With respect to intimation Regulation 50, now mandates that the NCDs have to give intimation to the stock exchanges at least two working days ahead of time; not inclusive of the day wherein the board meeting was held as well as the day of intimation.

Whereas the amendment in regards to disclosure, specifically Regulation 30 now mandates for a few events to de disclosed during the time of occurrence of those events, which causes a burden on those entities.

Compliances to be dealt with by HVDs

All High value listed debt entities will have to satisfy certain requisites as mandated by the amendment. The requisites are to be met at the earliest.

Firstly, the composition of the board must now comply with Regulation 17. The regulation requires for (a) at least one women director to be on the board as well as not more than 50% of the board to consist of non-executive directors (NED); (b) Independent women director must be appointed; (c) The minimum number of directors on the board is six; and (d) If the chairperson is a non-executive director, then 1/3rd of the board must consist of independent directors.

Secondly, the HVDs are required to form all the committees which are required, furthermore, they are required to constitute a Risk Management Committee (RMC).

Thirdly, and most important to take note of, they are required to comply with all Corporate Governance requirements including but not limited to seeking approval from shareholders through a special resolution in cases where a NED who is above the age of 75 is being appointed. Formulating and abiding by the integral policies such as ‘Whistle-Blower Policy’, ‘Related Part Policy’, ‘Risk Management Policy’ & ‘Policy on Material Subsidy’ is also a requisite of corporate governance compliance as per the new amendment; however the job doesn’t end with a mere abiding, they have to be in line with the website disclosures and have to publish on the website of the entities.

The aforementioned are the compliances that have been acted upon and met with by the HVDs in consonance with the amendment.

Conclusion

The amendment tightens the reins on HVD entities, especially HVDs which are either private companies or wholly public limited companies. To meet the board composition requirements will indeed be cumbersome on the HVDs as in certain cases it would require heavy reshuffling.

Furthermore, if a private entity is an HVD, then meeting the requirement of having an independent director goes against the very essence of private companies.

The amendment has been received with mixed signals. While the Ministry of Corporate Affairs is striving to loosen the reins on debt-listed entities, SEBI by promulgating the 5th amendment aims to do the converse and regulate debt-listed entities with an iron fist.

Nonetheless, only time will tell if the amendment will bring further order with regards to debt listed entities and thereby keep intact the security of investors.