Reduction in Denomination of Debt Securities & NCRPS by SEBI

Reduction in denomination of debt securities and non-convertible redeemable preference shares (NCRPS)

Background:

SEBI vide circular dated July 03, 2024 has amended Chapter V (Denomination of issuance and trading of Non-convertible Securities) of the Master Circular for issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper dated May 22, 2024.

Chapter V of Master Circular, prescribes provisions pertaining to denomination of issuance and trading of non-convertible securities. Master Circular prescribed that the face value of each debt security or non-convertible redeemable preference share (NCRPS) issued on private placement basis shall be Rs. 1,00,000/-

Pursuant to said the amendment, the ticket size of debt securities has been reduced to encourage more non- institutional investors to participate in the corporate bond market which in turn may also enhance liquidity.

Applicability:

All issues of debt securities and NCRPS, on private placement basis that are proposed to be listed from the date of issuance of this circular i.e. from July 03, 2024.

Gist of the amendment:

• Now, the Issuer may issue debt security or NCRPS on private placement at a face value of Rs. 10,000/-. However, the issuer shall satisfy following conditions:

1. Appoint at least one Merchant Banker and the role, responsibilities and obligations of the Merchant Banker(s) shall be same as they would be in case of public issue of debt security or NCRPS.

2. Such debt security or NCRPS shall pay coupon/ dividend at regular intervals with a fixed maturity without any structured obligations.

• The following credit enhancements shall be permitted in the aforesaid securities:

a) Guaranteed bonds;

b) Partially guaranteed bonds;

c) Standby Letter of credit (SBLC) backed securities;

d) Debt backed by pledge of shares or other assets;

e) Guaranteed Pooled bond issuance (PBI), not through a trust;

f) Obligor/ Co-obligor structures or cross default guarantee structures; and

g) Debt backed by Payment Waterfall /Escrow, or DSRA etc., but with Full Guarantee or DSRA Replenishment Guarantee from a third part.

• In respect of the credit enhancements specified above, Credit Rating Agencies (CRAs) shall verify the documentation related to the specified support  considerations in order to protect the interest of the investors.
• The issuer may raise funds through tranche placement memorandum or Key Information Document at a face value at Rs. 10,000/- w.r.t valid shelf placement memorandum or General Information Document (GID), as applicable provided at least one Merchant Banker is appointed to carry out due diligence in respect of such issuances and necessary addendum shall be issued by such issuer to the aforesaid shelf placement   memorandum or GID, as applicable.

Omission of Clauses under Chapter V of the Master Circular pursuant to said amendment:

• Clause 2.1 mandating the face value of a listed debt security or NCRPS issued on private placement basis traded on a  stock exchange or OTC basis shall be Rs. One lakh has been omitted.
• Further, Clause 2.2 mandating the face value of a listed security mentioned under Chapter V of SEBI NCS Regulations, 2021 and Chapter 13 of this circular traded on a stock exchange or OTC basis shall be Rs. One crore will stand deleted.
• Clause 2.3 has been modified stating that the Trading lot of listed debt security or NCRPS issued on private placement basis and listed security, traded on a Stock Exchange or OTC basis shall always be equal to face value.

Conclusion

The non-institutional investors consider the high-ticket size as a deterrent which restricts their ability to access the market and acts as an entry barrier for such non-institutional investors to participate in the corporate bonds market. To increase participation of especially non-institutional investors, a reduction in the minimum face value of debt securities and NCRPS issued on private placement basis was paramount step undertaken by SEBI. Consequently, the appointment of Merchant banker is necessary for mitigation and management of risk to safeguard and protect the interest of such non-institutional investors.