Amendment to the SEBI (Issue and listing of Debt Securities) Regulations, 2008 to provide for “Consolidation and Re-issuance of debt securities in the Corporate Bond Market” and “Call and Put Options”.
1. Objective
1.1. This Board Memorandum seeks approval of the Board to make an amendment to the SEBI (Issue and listing of Debt Securities) Regulations, 2008) to incorporate a provision on the “Consolidation and Re-issuance of Debt Securities” and “Call and Put options”, as proposed in the draft SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2015 as Annexed in Annexure-A
2. Consolidation in Corporate Bond Market
2.1. Background
The report of High Level Expert Committee on Corporate Bonds and Securitization (Dr. R.H. Patil Committee) had recommended for consolidation of privately placed bonds so as to avoid fragmentation of debt market with multiple issues and for re-issuances which help in creation of large floating stocks which is needed to enhance market liquidity.
2.2. Consolidation in G-Sec Market
In the Government Securities (G-Sec) market, the gradual extinguishing of illiquid, infrequently traded and reissue of liquid bonds has helped in improving liquidity. Gandhi Committee Report (“Report of the Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets”) has recommended active and passive consolidation modes for consolidating the G-sec market and bringing liquidity in the market. In the G-Sec market, a policy of passive consolidation through reissuance was started in 1999 in order to improve fungibility among the securities and to facilitate consolidation of debt. The larger stock size of securities has greatly improved market liquidity and helped the emergence of benchmark securities in the market.
2.3. Deliberations on the issue of Consolidation and Re-issuance.
SEBI placed an agenda item on the issue of incorporation of provisions regarding consolidation and re-issuance in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 before the “Corporate Bonds and Securitization Advisory Committee” (CoBoSAC) Meeting. The Committee, after holding discussion on the matter, recommended that appropriate amendment be made to these Regulations to incorporate provisions regarding consolidation and re-issuance, subject to fulfillment of certain conditions.
2.4. Legal Framework for Consolidation and Re-issuance
(The details have been excised for reasons of confidentiality).
2.5. Public Consultation on Consolidation and Re-issuance
2.5.1. Taking the above into consideration, SEBI prepared a concept paper on the consolidation and re-issuance of debt securities containing proposed amendment and placed it on its website on December 4, 2014 for public consultation.
2.5.2. Comments on the draft amendment were received from 4 entities. A summary of the comments received is enclosed as Annexure- B (SEBI comments have been excised for reasons of confidentiality).
2.5.3. The feedbacks received mostly pertain to the operational and procedural aspects of the consolidation and re-issuance such as the introduction of the Umbrella Disclosure Document, linked to an Umbrella ISIN, creation of security, distinction of re-issued bonds, price bids etc. The abovesaid procedural aspects would be appropriately considered at the time of issue of operating procedure or circular, if any. One of the comments received, which has been considered suggests inclusion of the requirement of fresh credit rating for each re-issuance.
3. Call and Put Options
The issuer of debt securities may provide for call options and/or put options in order to give flexibility in redemption of debt securities. While a put option gives flexibility to the investors, a call option gives flexibility to the issuer. In a scenario of falling interest rates, the call option may provide benefit to the issuer as the issuer would like to take advantage of a lower interest regime and reduce his cost of debt. In the scenario of rising interest rates, the put option may provide benefit to the investors who would like to take advantage of a higher interest regime and make investment in new instruments. It is proposed to provide an express provision for enabling such call and/or put options. The call and/or put options may be provided by the issuers either to all investors or exclusively to the retail investors in order to provide an exit opportunity to investors. The latter provision may attract more retail investors to the corporate bond markets.
It is proposed to amend SEBI (Issue and Listing of Debt Securities) Regulations, 2008 by incorporating express enabling provision for call and put options in respect of debt securities.
4. Amendments proposed
The public issue of debt securities is covered under SEBI (Issue and Listing of Debt Securities) Regulations, 2008. Therefore, amendments are proposed to the aforesaid regulations, to include provisions to authorize issuers to carry consolidation and re-issuance and call and put options in respect of debt securities. The amendments are annexed in Annexure-A.
5. Proposal
5.1. The Board is requested to consider and approve the draft amendments in SEBI (Issue and Listing of Debt Securities) Regulations, 2008 as enclosed in Annexure-A.
5.2. The Board is also requested to authorize the Chairman to make necessary amendments in SEBI (Issue and Listing of Debt Securities) Regulations, 2008 as mentioned in Paras 2 and 3 and Annexure-A and to make consequential and incidental amendments in this regard.
Annexure-A
THE GAZETTE OF INDIA
EXTRAORDINARY
PART – III – SECTION 4
PUBLISHED BY AUTHORITY
NEW DELHI , 2015
SECURITIES AND EXCHANGE BOARD OF INDIA
NOTIFICATION
Mumbai, the , 2015
SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE AND LISTING OF DEBT SECURITIES) (AMENDMENT) REGULATIONS, 2015
No. .─ In exercise of the powers conferred by section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following Regulations to further amend the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008, namely:─
1. These Regulations may be called the Securities and Exchange Board of India (Issue and Listing of Debt Securities) (Amendment) Regulations, 2015.
2. They shall come into force on the date of their publication in the Official Gazette.
3. In the Securities and Exchange Board of India (Issue and Listing of Debt Instruments) Regulations, 2008, following amendments shall be made:
(i) After Regulation 17, Regulation 17A shall be inserted namely-
“Call and Put options”
17A. An Issuer making public issue of debt securities may provide call option and/or put option to all the investors or only for retail investors, subject to the following:
(i) Such option is exercised in accordance with the terms of issue and detailed disclosure in this regard is made in the offer document including date from which such option is exercisable, period of exercise (which shall not be less than three working days), redemption amount (including the premium or discount at which such redemption shall take place), In case of partial exercise of such option in accordance with the terms of the issue, it shall be done on proportionate basis only;
(ii) No such option shall be exercisable before expiry of 24 months from the date of issue of such debt security;
(iii) Issuer shall sent notice to all the eligible holders at least 21 clear days before the date from which such option is exercisable;
(iv) Issuer shall also provide a copy of such notice to the stock exchange where the debt securities are listed, for wider dissemination and shall make a advertisement in the newspaper having wide circulation in the city where the registered office of the issuer is situated indicating the details of such option and eligibility of the holders who are entitled to avail such option ;
(v) Issuer shall repay the redemption proceeds to the investors along with the interest due to the investors within 15 days from the last day within which the option can be exercised;
(vi) Issuer shall pay penal interest @15% p.a. for the period of delay, if any,
(vii) After the completion of the option exercise, Issuer shall submit a detailed report to the Stock Exchange for public dissemination regarding the debt securities surrendered during the option period and details of redemption thereof.
Explanation:
(i) Call option is a right which entitles the issuer of debt securities to call back and redeem the debt securities before the original maturity in accordance with the terms of the issue;
(ii) Put option is a right which entitles the holder of debt securities to demand early redemption of the debt securities before the original maturity in accordance with the terms of the issue;
(iii) Retail Investors shall mean holders of debt securities having face value not more than Rupees Two Lakhs
(iv) After Regulation 20, Regulation 20A shall be inserted namely:-
“Consolidation and Re-issuance”
20A. An issuer may carry out consolidation and re-issuance of its debt securities, subject to the fulfillment of the following conditions:
a) there is such an enabling provision, in its articles under which it has been incorporated;
b) the issue is through private placement;
c) the issuer has obtained fresh credit rating for each re-issuance from at least one credit rating agency registered with the Board and is disclosed;
d) such ratings should be revalidated on a periodic basis and the change if any, shall be disclosed;
e) appropriate disclosures are made with regards to consolidation and re-issuance, in the Term Sheet.
***********
Annexure B: Comments received on consolidation and re-issuance of debt securities
| S No. | Pertains to | Suggestion/Recommendation | Rationale |
| 1 | Regulation 18 (A) (c) | Clarity may be brought to wordings of the regulation to ensure that a fresh rating is assigned to each re-issuance | It is important that each re-issuance has a fresh rating like any new instrument. This will ensure that the rating is current at the time of re-issuance, which is not very clear from the current wordings |
| 2 | Disclosure Document and ISIN | The concept of “Umbrella Disclosure Document” (“UDD”) may be introduced which shall be linked to an “Umbrella ISIN” (“UISIN”). | The concept of “Umbrella ISIN” is similar to the mechanism currently followed in the G-Sec and SDL issues |
| 3 | Procedure for re-issuance | Procedure for re-issuance needs to be similar to the procedure followed by international issuers like – International Finance Corporation (IFC) for their “Global Medium-Term Note Program for issues of Notes with maturities of three months or longer from the date of the original issue: | Meet international standards |
| 4 | Validity of the “Umbrella Disclosure Document” | Upto the amount proposed to be raised and specified in the UDD or the maturity date of the securities proposed to be issued under the UDD, whichever is earlier | This is proposed to ensure issuer companies make optimum utilization of this regulatory opportunity and it translates into increase of securities float in the market to enable enhanced liquidity. |
| 5 | Fund raising by issuers |
Re-issuance of debt securities under the UDD needs to run concurrent to other fund raising by the issuer company through public issue or private placement of any kind of security | Re-issuance in corporate bonds being a new concept for the market participants needs to be flexible in order to attract and encourage issuers to re-issue securities rather than make fresh issuances. |
| 6 | Security Creation | Clarification relating to security creation on two aspects:
a) Stamp Duty b) Security creation by |
Unlike G-Secs which are unsecured instruments, corporate bonds are mostly secured in nature.
a) stamp duty is applicable in case of issuance and re-issuance. It is higher in comparison with international standards. It is also not uniform across the states. b) Reserve Bank of India, vide its circular titled “Raising Money through Private Placement by NBFCs-Debentures etc” dated 27th June 2013; and also, National Housing Bank vide its circular titled “Housing Finance Companies issuance of Non-Convertible Debentures on private placement basis (NHB) Directions, 2014” dated 19th March 2014 require NBFCs and housing finance companies (HFCs) issuing non-convertible debentures to ensure that at all points of time such debentures are fully secured. Hence, in adherence to the above circulars, NBFCs and HFCs create security upfront for up to the amount of proposed NCD issuance. |
| 7 | Point 3. – Clause 18 (A) c – Credit Rating to be taken for the amount. |
If any issuer has taken a rating for the total borrowing limits of one financial year and the borrowing limit changes over the next few years when the re-issuance is proposed, then whether the issuer has to again take the rating for the new borrowing limits or the previous rating is valid or it has to be revalidated? | The issuer may take the rating for the borrowing limits approved in a current financial year by the board of directors which may carry on over for a few years or it may be changed every financial year depending on the issuer and thus it is required to be mentioned the way the rating is to be taken by the issuer in case of re-issuance. |
| 8 | No. of Allotees pursuant to the re- issuance | If the re-issuance is done in the same financial year whether the No. of allotees should be less than 200 or a waiver in this respect will be provided to the issuer? | As per Section 42 of the Companies Act, 2013 read with Chapter 3 Rules, wherein the issuer cannot do private placement to more than 200 no. of allotees in a current financial year. Thus, the issuer has to comply this point in case of a re-issuance or will be exempted from the same. |
| 9 | Trading and distinction of bonds re- issued |
For trading purpose can there be made any distinction for bonds re-issued for investors to be aware of the fact that the particular series of bonds are re-issuance under the previous issue. | For the facilitation of clarity on interest payment calculation to the investors , can there be a unique distinction over the bonds which are re-issued |
| 10 | Term sheet and Information Memorandum |
Whether the same Information Memorandum is valid and only the term sheet is required at the time of re-issuance or a fresh Information Memorandum along with the term sheet is to be filed in the case of re-issuance? | In case of a Shelf Information Memorandum, the same is valid for a period of not more than 180 days and thus whether the same Information Memorandum can be valid in case of re-issuance even if there is a gap of few years between the first issue and the re-issue. |
| 11 | Regulation 18(A) | It is suggested that a clause needs to be inserted in this regulation which shall require price bids received during the period to be reported on the exchanges. | This addition shall bring required transparency and efficient price discovery in private placements |
| 12 | NA | Systemic solution needs to be provided through this regulation or another guideline to help issuers tide over the liquidity risk which may arise out of consolidation. | For the private sector players, consolidation of large quantum of debts which shall come up for repayment on the same day would pose significant liquidity risks |
| 13 | Proposed Sec 18 (A) Sub Section (b) | the issue is through private placement & public issue | This will enhance liquidity of public issue in secondary markets |
| 14 | Proposed Sec 18 | the reissuance details shall be a updated on both the depositories viz. NSDL and CDSL | Pursuant to SEBI Circular No. CIR/IMD/DF/17/2013 dated October 22, 2013 about Centralized Database for Corporate Bonds/ Debentures. Both the depositories’ viz. NSDL and CDSL, jointly, shall be the repository of information pertaining to the corporate bonds/debentures. |
| 15 | Chapter II Section 4 and Chapter III Section 20 | the issuer cannot make more than 6 issuance each quarter i.e. January 1 to March 31, April 1, to June 30, July 1, to September 31 and October 1 to December 31 |
Illiquidity premium across securities of the same issuer leads to shallow trading of individual securities. This change will encourage liquidity thus trading volume will not be skewed to few securities. |
| 16 | Chapter II Section 4 and Chapter III Section 20 | reissuance of securities in case of close maturities within 6 months | YIELD CURVE BY CREATING BENCHMARKS -There are numerous instances of issues with minor difference in maturity issued by an entity on the same date or within a gap of few days. Issuances with minimum variation in maturity may present a chance for consolidation. Making re-issue and consolidation compulsory issuers should be encouraged to consolidate their issues into a few larger issues that can serve as benchmark. Consolidation would enhance liquidity through that is fragmented due to multiple issuances. |
| 17 | Chapter II Section 4 and Chapter III Section 20 | reissuance will be recognized and considered as a fresh issue of securities | Currently, re-issuance is not recognized as a fresh issue of securities. As a result, re-issuing securities attracts stamp duty, thereby making the process economically infeasible. Since no fresh securities are actually being issued, there should be no incidence of stamp duty. |
