SEBI Tightens Disclosure Norms For Listed Debt Entities

While the higher level of governance requirements will benefit investors, companies will find it tough to comply with some of them, especially if they are closely held, experts told BloombergQuint

Last week, the Securities and Exchange Board of India notified amendments to its Listing Obligations and Disclosure Regulations ushering in stringent disclosures for entities with listed non-convertible debt securities above the threshold of Rs 500 crore.

These requirements have come after the market regulator had liberalised the listed debt market in June this year to enable smaller players and smaller issue sizes to access the listed bond market.

Just few months ago, the market regulator had allowed for greater access to the listed debt market by removing several hurdles, Sahil Arora, partner at Saraf & Partners, said. SEBI had removed restrictions on offer size, number of offers in a given year, allowing certain issuers who have been in existence for less than three years to access debt market, flexibility on charge creation, etc.

But now, for large players raising substantial money through the listed debt space, compliance on certain critical aspects have been brought on par with entities having listed equity securities, Arora told BloombergQuint.

The threshold, that is the outstanding of debt will have to be tested at the end of each financial year. Entities touching the Rs 500-crore threshold will be categorised as 'high debt listed entity'.

For these HVD listed entities, SEBI regulations which are otherwise applicable to all equity listed entities, will now apply on “a comply or explain” basis till March 31, 2023 and on a mandatory basis thereafter.

The new disclosures for listed debt companies include:

• Composition of various committees of the board of directors, a code of conduct for them and senior management.

• Terms and conditions of appointment of independent directors.

• Criteria of making payments to non-executive directors.

• Policy on dealing with related party transactions and determining ‘material’ subsidiaries.

• Reporting outcome of board meetings to stock exchanges within 30 minutes.

• Fraud/defaults by promoter, key managerial personnel, director, employees of listed entity or by listed entity or arrest of KMP, promoter.

• Change in directors, KMPs, auditors.

• Detailed reasons in case of auditor resignation.

• Resolution plan, restructuring in relation to loans or borrowings from banks, financial institutions.

• Details of corporate insolvency resolution process if applicable.

These new set of disclosures for HVD listed entities are similar to that of listed equities. While well intended, many requirements such as independent, non-executive board of directors, audit committee, risk management committee etc. will be tough to comply with especially for closely held companies, Upasana Rao, partner at Trilegal, said.

Raising The Disclosure Bar

With effect from April 1, 2021, company law provisions for privately placed listed debt securities and non-convertible redeemable preference shares have been relaxed. Both have been excluded from the definition of 'listed company' under Companies Act, 2013.

This meant considerable compliance relaxations for such issuers under the company law, Nischal Arora, partner at Nangia Anderson, said. But clearly, SEBI wants tighter corporate governance for entities with high listed debt, he said.

The industry, however, would've appreciated a heads-up, Arora said.

SEBI disclosure requirements will be an additional compliance burden besides applicable disclosures under company law or guidelines issued by Reserve Bank of India, experts said.

According to Rao, one such prominent example is that of financial companies and NBFCs which routinely employ the listed NCD route. The challenge is that these entities also have disclosure requirements mandated by RBI. So, parallel compliances will now run for these companies which will certainly be cumbersome, she added.

That said, investors will surely benefit from higher disclosures. The stricter requirements will certainly result in companies being more transparent and accountable to their investors.

The regulations, as they stand, mean that once an entity touches the Rs 500 crore outstanding debt mark and becomes subject to these enhanced disclosures, they will continue to be governed by these disclosures even if the debt falls subsequently, Rao explained.