SEBI Delisting of Non-Convertible Debt Securities: Proposed Mechanism and Process
SEBI released a consultation paper titled “Delisting of Non-Convertible Debt Securities” on May 12, 2023. The paper was published because current regulations, such as the SEBI (Issue and Listing of Non-Convertible Securities) regulations, 2021 (NCS Regulations) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, fail to deal with non-convertible debt securities delisting.
The lack of regulations for delisting non-convertible debt securities necessitated SEBI’s consultation paper. Current regulations allow entities to delist by notifying the stock exchange, but delisting can impact investors’ benefits. The proposed mechanism aims to prohibit voluntary delisting by entities with more than 200 non-QIB holders and mandates permission from all holders of non-convertible debt securities within 15 working days.
This article explores the proposed mechanism, reasons for delisting, scope and applicability, and the process of obtaining in-principle approval and making the final delisting application.
Current Regulations
Current delisting regulations allow entities to delist by merely notifying the stock exchange of a board of directors meeting where the motion for voluntary delisting is considered, Presently, in case of any change in the structure of the non-convertible debt securities and non-convertible redeemable preference shares, the threshold for the approval as per Regulation 59 of Listing Regulations is inter-alia specified as three-fourth by value of holders of such securities
However, delisting of non-convertible debt securities will take away the benefits of listed securities from the investors such as transparency, efficient discovery of prices of such securities, opportunity of investing and exiting through the stock exchange mechanism, recourse to the investor protection mechanisms for any reasons including change/removal of the debenture trustee or in case default. Thus, the approval of all the holders of nonconvertible debt securities is necessitated.
Defining the Terms
The term “delisting” refers to the permanent removal of securities from the trading platform of a recognised Stock Exchange, either voluntarily or involuntarily; once delisted, no trade in the securities is permitted. Long-term financial instruments that cannot be converted into shares or equity are known as non-convertible securities. Non-convertible debentures (NCDs) are a form of security that cannot be converted.
Reasons for Delisting
Non-convertible debt securities may be delisted voluntarily by a listed entity for a variety of reasons. Some non-convertible debt securities may have very few investors, most of whom intend to retain them until maturity. As a result, they may not reap any further benefits from continuing listing. As a result, they may decide to delist such non-convertible debt securities
Due to financial difficulties or otherwise, the entity may plan to restructure non-convertible debt securities and delist such restructured non-convertible debt instruments. Delisting may be considered a result of a merger in which one entity acquires and/or merges with another. If the purchasing entity is also a listed company, the merged entity’s non-convertible debt securities will continue to be traded. If the purchasing entity is not listed, the combined/merged entity may not want the non-convertible debt securities to be listed.
Scope and Applicability of the proposed mechanism
SEBI has recommended prohibiting listed entities with more than 200 non-QIB holders of non-convertible debt securities from delisting voluntarily. Within 15 working days of receiving notification of delisting, the listed entity must acquire permission from all holders of non-convertible debt securities.
Current delisting norms allow entities to delist by simply giving a prior intimation to the stock exchange about the meeting of the board of directors, where the proposal for a voluntary delisting is considered.
The proposed mechanism for delisting non-convertible debt securities would allow all listed non-convertible debt securities to be delisted voluntarily. Entities would not be authorised to delist certain securities while selectively listing others. It would not, however, apply to the delisting of non-convertible debt securities in the following situations:
- Delisting as a consequence of stock exchange sanctions or measures taken against the entity
- Delisting due to the redemption of the non-convertible debt securities
- Delisting as a result of the redemption of non-convertible debt securities.
The proposed procedure would not apply to the delisting of a listed entity’s non-convertible debt securities that have been delisted by the stock exchanges as a result of any penalty or delisted under a resolution plan authorised under the IBC. Under the IBC, the information of delisting such non-convertible debt instruments must be communicated to the recognised stock exchanges within one day of the resolution plan being approved.
Issuers may apply to one or more stock exchanges for permission in principle to list non-convertible securities under Regulation 6 of the NCS Regulations. In the proposed approach, non-convertible debt securities can be listed on one or more stock exchanges and delisted from one or more stock exchanges. If a listed entity’s non-convertible debt securities are listed on more than one recognised stock exchange, it may delist them from all but one such recognised stock exchange with countrywide trading terminals.
Obtaining in-principle approval from the stock exchanges
As the initial stage in initiating the delisting procedure, the proposed mechanism specifies a procedure for obtaining in-principle clearance from the stock exchange. The listed entity must apply to the appropriate recognised stock exchange, using the prescribed form, within fifteen working days of passing the special resolution or gaining any other necessary authorisation, whichever is later. Following that, the recognised stock exchange shall process the application for in-principle approval within fifteen working days of receiving a complete application. While granting in-principle permission once the firm has met particular compliance standards, the recognised stock exchange shall ensure the following.
Delisting disclosure
When the stock exchanges provide in-principle permission, the listed entity must guarantee that the process of gaining consent from all holders of non-convertible debt securities commences within three working days. The listed entity must comply with Regulation 51 of the Listing Regulations and disclose all events related to the proposed delisting of non-convertible debt securities to the stock exchanges. Furthermore, the listed entity must disclose the necessary information specified by the draught process on its website and to the stock exchanges within one working day after getting in-principle approval.
Final Delisting Application
The listed entity must seek consent from all holders of such securities and apply to the appropriate recognised Stock Exchange within five working days to make the final application for delisting of non-convertible debt securities. Stock Exchange applications must meet the required format and be accompanied by the necessary information. Once the final application has been received by the recognised stock exchange, it must be acted upon within fifteen working days. Non-convertible debt securities of the entity will be permanently delisted from the Stock Exchange once the Stock Exchange rejects the final application.
Conclusion: SEBI’s consultation paper on delisting of non-convertible debt securities presents a proposed mechanism to address the absence of specific regulations. The article provides insights into the reasons for delisting, scope and applicability, obtaining in-principle approval, and the process of making the final delisting application. By considering these proposed measures, SEBI aims to establish a well-defined process for delisting non-convertible debt securities while safeguarding investors’ interests.
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