The new SEBI headquarters in Mumbai. (Photographer: Santosh Verma)

SEBI Issues Framework On 25% Borrowing Via Corporate Bonds For Large Corporates

To deepen the corporate bonds market, the Securities and Exchange Board of India today came out with a framework that will require large corporates to raise 25 percent borrowings through this route from the next fiscal.

In case a large corporate is unable to comply with the requirement, the SEBI said such entities will have to provide an explanation for such shortfall to the stock exchanges in a prescribed manner.

For the entities following April-March as their financial year, the framework will come into effect from Apr. 1, 2019, and for the firms which follow calendar year as their financial year, the guidelines will become effective from Jan. 1, 2020.

"A listed entity...shall be considered as a Large Corporate and such a LC shall raise not less than 25 percent of its incremental borrowing during the financial year by way of issuance of debt securities," the market regulator said in a circular.

Defining a large corporate, the SEBI said such firms need to have an outstanding long-term borrowing of at least Rs 100 crore, a credit rating of ‘AA’ and above, and a target to finance themselves with long-term borrowings (over 1 year).

The guidelines come after a proposal was made in Union Budget 2018-19 that the SEBI would consider mandating, beginning with large corporates, meeting about one-fourth of the companies' financing needs from the bond market.

This is part of an effort to reduce reliance on banks for financing corporates and simultaneously developing a liquid and vibrant corporate bond market. From financial year 2021-22, SEBI said that the requirement of mandatory borrowing by a large corporate in a financial year will need to be met over a contiguous block of two years.

At the end of the block, if there is any deficiency in the requisite bond borrowing, a monetary penalty of 0.2 percent of the shortfall will be levied and the same will be paid to the stock exchange.

Also read: SEBI Releases New Rules For Re-Classification Of Promoters

A listed entity, identified as an LC, will have to disclose the fact that they are identified as an LC to the exchanges, within 30 days from the beginning of a financial year. Besides, it needs to disclose details of the incremental borrowings done during the financial year within 45 days of the end of the financial year.

These disclosures will have to be certified both by the company secretary and the chief financial officer of the company and also form part of audited annual financial results of the entity.

With regard to responsibilities of exchanges, SEBI said that bourses will have to collate the information about the companies disclosed on their platform and submit the same to the regulator within 14 days of the last date of submission of annual financial results.

In the event of a shortfall in the requisite borrowing, exchanges will collect the fine and the penalty so collected will be remitted by the bourses to SEBI’s Investor Protection and Education Fund within 10 days from the end of the month in which the fine was collected.

Also read: Delisting: SEBI Allows Promoters To Make Counter Offer