Applicability of Corporate Governance Provisions to Non-Convertible Debt Listed Entities

 Vallabh Joshi

Background

The Securities and Exchange Board of India (‘SEBI’) has distinctly set out the compliance framework for listed entities under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR’). The application of corporate governance norms for entities with listed Non-Convertible Debt securities (‘NCDs’) has evolved and now stands on unambiguous grounds, determined by the relevant chapters of LODR and the outstanding value of such securities.

SEBI had while discussing the proposed amendment relating to applicability of corporate governance provisions to non-convertible debt listed entities had stated that, “An entity that has solicited money through an issue of debt is under obligation to pay interest and repay the principal to investors. Corporate Governance is an initiative by SEBI to improve transparency about the functioning of the issuer entity and ensures enhanced disclosures to the investors. Given that debt issuers have repayment obligations to investors, the requirements of corporate governance are equally relevant to them. As per data collected from Stock Exchanges, 587 entities have listed only their debt securities as on December 31, 2020. Of these 587 entities, 211 entities have debt outstanding of ₹500 crores and above. 95 entities among these 211 are either Banks, NBFCs, HFCs or PSUs, which are already required to comply with certain corporate governance norms, as prescribed by their respective regulators (like RBI, CPSE etc.).  Thus, to begin with, it is proposed that the following corporate governance norms may be made applicable to entities with outstanding listed debt securities of ₹500 crores and above”[1]. So, it is necessary for debt listed entities to understand whether corporate governance provisions are applicable to it or not?

Applicability of Corporate Governance provisions

1. Entities having their specified securities listed along with listing of high value debt: Regulation 15(1A)

As per Regulation 15(1A) of the SEBI LODR, the comprehensive corporate governance requirements of Regulations 16 to 27 (including board composition, independent directors, committee constitution, etc.) are applicable to a listed entity that:

• Has its specified securities (such as equity shares) listed; AND
• Also has listed NCDs with an outstanding value of ₹1,000 crore or more as of the end of the previous financial year.

For these entities, full-fledged corporate governance requirements under Chapter IV (Regulations 16-27) must be complied with, ensuring enhanced transparency and oversight. Corporate governance provisions mentioned in Chapter VA are not applicable to these entities. Such entities may also be governed by circulars, guidance etc. issued by the SEBI from time to time.

2. Applicability of corporate governance provisions for entities that have listed their non-convertible debt securities only – Regulation 62C and Chapter VA

Regulation 62C of LODR provides for applicability of corporate governance provisions to entities that have their outstanding value of listed NCDs crossing ₹1,000 crore making them High Value Debt Listed Entities (HVDLEs). As per Reg. 62C of LODR, once an entity becomes a HVDLE then provisions of corporate governance as specified under Reg 62D to 62Q of SEBI LODR becomes applicable to it. Hence entities who have their only non-convertible debt securities listed and the outstanding value of same is crossing 1000 crore, a separate compliance regime is outlined in Chapter VA. Such entities may also be governed by circulars, guidance etc. issued by the SEBI from time to time.

3. Regulation 49 and Chapter V – Only non-convertible debt listed entity

Regulation 49(1) states that an entity that has listed its NCDs only on a recognized stock exchange, shall comply with Chapter V of LODR and other applicable provisions. This chapter prescribes periodic disclosures and obligations specific to entities with listed debt securities, distinct from overarching corporate governance norms. Hence entities that have listed only their non-convertible debt securities, with an outstanding value less than ₹1,000 crore, are not mandated to comply with the comprehensive corporate governance provisions (Regulations 16-27) neither they are required to comply with provisions of corporate governance as specified in chapter VA.

Conclusion: Applicability in Different Scenarios

• Entities with listed specified securities (equity) and listed NCDs exceeding ₹1,000 crore: Full corporate governance regime (Regulation 16-27/Chapter IV) applies (i.e., HVDLE compliance).
• Entities that have listed only NCDs, with outstanding value less than ₹1,000 crore: Chapter VA applies, not the comprehensive corporate governance provisions.
• Entities with only NCDs and value ≥₹1,000 crore: Chapter VA compliance is mandatory. If they do not also have listed specified securities, full corporate governance under Chapter IV does not apply—Chapter VA is intended as a tailored framework in this case.

Thus, for entities that have listed only their non-convertible debt securities and the outstanding value of these is not more than ₹1,000 crore, comprehensive corporate governance provisions (Chapter IV, Regulations 16–27) do not apply. Instead, only the obligations set forth in Chapter VA are applicable, providing a lighter compliance framework.

Conclusion

Applicability Table

This division ensures that only entities with significant public debt exposure or a combination of equity and high-value debt are subject to the most stringent corporate governance requirements.

Notes:

[1] https://www.sebi.gov.in/sebi_data/meetingfiles/sep-2021/1631782376088_1.pdf – SEBI board meeting agenda file dt: August 6,2021.[3.1.2]