Debt Listing Disclosures: Raised To Par With Equity

In recently amended regulations, the Securities and Exchange Board of India has raised the compliance requirement of listed debt entities, thereby bringing them closely at par with listed equity entities in terms of disclosure and corporate governance requirements.

While the regulatory intent may be to bring parity in terms of corporate governance and boost investor confidence in the Indian debt capital market, the change does come the increased baggage of compliances that may act as entry barriers for smaller companies.

The recently notified SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2021 make two key changes.

One being information submission, disclosure requirements (set out in Chapter V of the LODR as amended) applicable to all debt listed entities.

The other being the corporate governance requirements (set out in Chapter IV) being applicable only to ‘High Value Debt Listed Entities’ or HVDLEs. These are entities having outstanding listed debt of Rs 500 crore and above (as on March 31, 2021).

Impact On NBFCs

The new corporate governance provisions applicable to HVDLEs come with a set of compliances more diverse and exhaustive than those applicable to a private or public unlisted company having listed debt securities in terms of the erstwhile regulations.

But, as this quantum of listed debt is usually raised by non-banking financial companies which are anyway regulated by Reserve Bank of India’s rules and regulations the impact may not be viewed as a major setback. Upon undertaking some minor alignment of board composition, they may be able to ensure compliance with the amended regulations.

Too Cumbersome For Some?

For private or unlisted public companies there will be important changes to the board – appointment of independent directors, constitution of committees, enhanced disclosures of related party transactions, etc.

This is in complete contrast to the provisions and exemptions applicable to a private company under the Companies Act, 2013.

While, these are investor-friendly measures they may be viewed as cumbersome especially to unlisted public companies or private companies who were unwilling to dilute their board and management control, and hence opted for the liberalised listed-debt route for raising funds.

Upon appointment of an independent director, the closely held private companies will lose the very fabric of their existence i.e., ‘privacy’ which is the DNA of a private company.

This will result in increased activities in external commercial borrowing space and availing of foreign currency loans (including lending by foreign portfolio investors).

Such routes may be opted by corporate players venturing into micro-lending business and looking for cheaper financing.

The regulatory changes may also hurt fintech startups that were in advanced stages of raising finance by way of listing debt securities.

Carrot Over Stick, With A Short Leash

SEBI has provided a ‘comply or explain’ mechanism as a carrot to these issuer companies to wade off the stick of additional compliance requirements of corporate governance norms.

This mechanism provides that either the company complies with the requirements on or before March 31, 2023, or in the event of non-compliance or partial compliance provides cogent explanation along with steps initiated/undertaken by them to ensure compliance, on a quarterly basis.

Private companies not desirous of these new regulatory requirements may resort to the early redemption of such listed debt by refinancing or other means to ensure that the entire listed debt is discharged by March 31, 2023.

We, therefore, expect to see a lot of refinancing of such debt-listed securities issued by private companies in the near future.

While it may be argued that the mind and heart of the legislature behind the new regulations appear to be in the right place and in tandem with the overall sentiments of preparing the Indian debt capital market to be robust, investor-friendly, and competent to compete with its Asian counterparts in the long run, the immediate after-effects may result in existing listed entities opting out of the Indian debt capital market and look for structured refinancing, availing of loans from cross border entities, that are less cumbersome, not severely regulated and interest rate friendly.

Siddharth Srivastava is Partner, and Henna Vadhera is Principal Associate, at Khaitan & Co.

The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.