A business may require funds from time to time to expand and/or diversify its operations. It may resort to a variety of financial resources, initially broken into two broad categories, debt and equity. ‘Debt’ involves borrowing money to be repaid, plus interest, while “equity” involves raising money by selling interests in the company.
If and when the company seeks to raise the funds via issue of debt securities it undertakes certain financial obligations i.e. to repay the borrowed fund to the lenders (public or private). The SEBI in order to protect the interests of the debenture holders has put in place various regulations that are to be adhered by the Issuer of the debt securities. One of such regulation is the SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
The SEBI (ILDS) Regulations were issued and notified on June 6, 2008 enumerating the process, procedures, rules and regulations with respect to issue of debt securities in the market. These regulations along with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 are the bedrock of a strong foundational debt securities market in India, protecting the interest of the investors. These regulations outline the pre-requisites that needs to be strictly adhered to by an issuer prior to floating his debt securities in the market and all disclosure mandates and obligations to be adhered prior and subsequent to issue of such debt securities.
The SEBI ILDS Regulations are applicable to be adhered when the Issuer wants,
1. public issue of debt securities, and/ or
2. listing of debt securities issued via public issue or private placement basis on a recognized stock exchange [Regulation 3].
Hereinafter, Issuer means any company, public sector undertaking or statutory corporation which,
a) makes or proposes to make an issue of debt securities, or
b) which has its securities listed on a recognized stock exchange or which seeks to list its debt securities on a recognized stock exchange,
and includes a Trust registered with the Board as a Real Estate Investment Trust or an Infrastructure Investment Trust and whose units are listed in recognized stock exchange(s).
Public issue of debt securities means that an offer or invitation by an issuer to public to subscribe to the debt securities which is not in the nature of a private placement.
Private placement means an offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in section 42 of the Companies Act, 2013.
2. QUALITATIVE RESTRICTION ON ISSUER & MANDATORY COMPLIANCE
In order for the Issuer to issue debt securities to the public at large (public issue), it has to issue an offer letter (prospectus or shelf-prospectus) whereby subscription to debt securities are invited from the public. But not every issuer can go ahead and issue a prospectus. SEBI (hereinafter also referred to as ‘Board’) puts 2 qualitative restrictions on the Issuer as provided under Regulation 4 of the ILDS Regulations, namely:
i. Issuer or any of its promoter or its director should not be restrained or debarred by the SEBI.
ii. Issuer or any of its promoter or its director should not be categorised as a willful defaulter.
In addition to these, SEBI mandates that as on the date of filing of the offer letter the following arrangements are to be mandatorily made by the Issuer as provided under Regulation 4, namely:
i. Issuer has made application for listing of such securities to one or more recognized stock exchanges and the Issuer has received approval for the same.
ii. Issuer has obtained credit rating from registered credit rating agency, which is to be disclosed in the offer document.
iii. Issuer has entered into an arrangement with a recognized depository for dematerialization of such securities.
iv. Issuer has appointed one or more registered merchant bankers, at least one of whom should be designated as lead merchant banker.
v. Issuer has appointed one or more debenture trustees (acc. to §71of Companies Act, 2013).
vi. Issuer shall not issue debt securities to any person who is part of the same group or who is under the same management.
Compliance with these regulations by the Issuer is a sine qua non before proceeding to the next step of the issue of debt securities in the market.
3. OFFER DOCUMENT: DISCLOSURES AND FILING
Now let us understand what constitutes an offer document and what disclosures are mandated by SEBI to be presented in the Offer Document. An Offer Document means a prospectus or a shelf prospectus and includes any such document or advertisement whereby the subscription to debt securities are invited by the issuer from public. The offer document must contain all material disclosures relevant for making an informed investment decision.
Regulation 5 of the SEBI (ILDS) Regulations provides for the following disclosures in the offer letter by the Issuer and the lead merchant banker, namely:
i. Disclosures as specified in the Companies Act, 2013.
ii. Disclosures as specified in Schedule 1 of the SEBI (ILDS) Regulations, 2008 namely:
a) MoA and AoA and necessary resolutions for allotment of debt securities,
b) Copy of last three years audited Annual Reports,
c) Statement containing particulars of, dates of, and parties to all material contracts and agreements,
d) Disclosures to be made to the Debenture Trustee in electronic form,
e) Issuer Information namely, summary of business activity, detailed company financials, Issuer Issue details, Disclosures pertaining to willful default, summary term sheet, et al
iii. Additional disclosures as may be specified by the Board.
Prior to making the offer document public, it is mandatory for the issuer to file a draft offer letter with the designated stock exchange through the lead merchant banker. The same draft offer document needs to be posted on the website of the designated stock exchange for seeking public comments for a period of 7 working days from the date of filing the draft offer document with the designated exchange [Regulation 6 (1) and (2)]. The draft offer document may also be displayed on the website of the issuer and the merchant banker. [Regulation 6(3)]
The onus of suitably addressing all comments received on the draft offer documents is on the Lead merchant banker, prior to filing the offer document with the Registrar of Companies [Regulation 6(5)]. Furthermore, the Lead merchant banker and the Debenture trustee are to ensure that the due diligence certificate is furnished to the Board prior to filing and opening of the public issue respectively. [Regulation 6(7) and (8)]
Hereinafter the Offer document is ready to be filed with the RoC and simultaneously to be filed with the designated stock exchange. The Issuer shall now make an advertisement in a national daily with wide circulation, on or before the issue opening date and such advertisement shall, amongst other things, contain the disclosures as per Schedule IV [Regulation 8]. Regulation 9 imposes a duty on the Issuer as well as Lead merchant banker to ensure that every application form issued is accompanied by a copy of abridged prospectus. The Issuer proposing to issue debt securities to the public through the on-line system of the designated stock exchange shall comply with the relevant applicable requirements as may be specified by the Board. [Regulation 10]
The issuer may determine the price of debt securities in consultation with the lead merchant banker and the issue may be at fixed price or the price may be determined through book building process in accordance with the procedure as may be specified by the Board. [Regulation 11]
4. ALLOTMENT OF SECURITIES AND PAYMENT OF INTEREST
Prior to allotment of debt securities to the public the issuer may decide the amount of minimum subscription which it seeks to raise by issue of debt securities and disclose the same in the offer document. In the event of non-receipt of minimum subscription all application moneys received in the public issue shall be refunded forthwith to the applicants. [Regulation 12]
Issuer has to ensure that the allotment of securities offered to public shall be made within 30 days of closure of the public issue. A penal interest of 15% is payable by the Issuer in case where the debt securities are not allotted and/or application moneys are not refunded within the stipulated period of 30 days. [Regulation 12A]
Regulation 13 of the ILDS Regulations provides for Underwriting of the debt securities by a registered underwriter with the Board and in such a case adequate disclosures regarding underwriting arrangements shall be disclosed in the offer document.
5. DEBENTURE TRUST DEED, DEBENTURE TRUST DEED AND CREATION OF SECURITY INTEREST
The Issuer shall ensure execution of a trust deed for securing the issue of debt securities in favour of the debenture trustee within 3 months of closure of issue. Where an issuer fails to execute the trust deed within the abovementioned period of 3 months, without prejudice to any liability arising on account of violation of the provisions of the SEBI Act 1992 and the SEBI (ILDS) Regulations, the issuer shall also pay interest of at least two percent per annum to the debenture holder, over and above the agreed coupon rate, till the execution of the trust deed. [Regulation 15 (1A)]
Every trust deed shall consist of 2 parts namely:
a) Part A containing statutory/standard information pertaining to the debt issue.
b) Part B containing details specific to the particular debt issue. [Regulation 15(2)].
It is important to note that the trust deed should not contain any stipulation which has the effect of-
a) limiting or extinguishing the obligations and liabilities of the debenture trustee or the issuer in relation to the rights or interests of the issuer,
b) limiting or restricting or waiving the provisions of the SEBI Act 1992, the SEBI (ILDS) regulations and circulars or guidelines issued by the Board;
c) indemnifying the debenture trustees or the issuer for loss or damage caused by their act of negligence or commission or omission. [Regulation 15(3)]
In accordance with §71(4) of the Companies Act 2013 and Regulation 16 of the ILDS Regulations, the issuer shall create a Debenture Redemption Reserve out of the profits of the company available for payment of dividend.
In case of issue of a secured debt security, an issuer has to provide for a charge or security in respect of the secured debt securities. The issuer shall give an undertaking in the offer document asserting that the assets on which charge is created are free from any encumbrances and if the assets are already charged to secure a debt, the permissions or consent to create second or pari pasu charge on the assets of the issuer have been obtained from the earlier creditor. The issue proceeds shall be kept in an escrow account until the documents for creation of security as stated in the offer document, are executed. [Regulation 17]
6. REDEMPTION, EARLY REDEMPTION AND ROLL-OVER
An issuer making public issue of debt securities may recall such securities prior to maturity date at his option (call) or provide such right of redemption prior to maturity date (put) to all the investors or only to retail investors, at their option, subject to the following:
a) Such right to recall or redeem debt securities prior to maturity date 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 right 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);
b) The issuer or investor may exercise such right with respect to all the debt securities issued or held by them respectively or with respect to a part of the securities so issued or held;
c) In case of partial exercise of such right in accordance with the terms of the issue by the issuer, it shall be done on proportionate basis only;
d) No such right shall be exercisable before expiry of twenty-four months from the date of issue of such debt securities;
e) Issuer shall send notice to all the eligible holders of such debt securities at least twenty-one days before the date from which such right is exercisable;
f) Issuer shall also provide a copy of such notice to the stock exchange where the such debt securities are listed for wider dissemination and shall make an advertisement in the national daily having wide circulation indicating the details of such right and eligibility of the holders who are entitled to avail such right;
g) Issuer shall pay the redemption proceeds to the investors along with the interest due to the investors within fifteen days from the last day within which such right can be exercised;
h) Issuer shall pay interest at the rate of fifteen per cent. per annum for the period of delay, if any,
i) After the completion of the exercise of such right, the issuer shall submit a detailed report to the stock exchange for public dissemination regarding the debt securities redeemed during the exercise period and details of redemption thereof. [Regulation 17]
The issuer shall redeem the debt securities in terms of the offer document. Where the issuer desires to roll-over the debt securities issued by it, it shall do so only upon passing of a special resolution of holders of such securities and give fifteen days’ notice of the proposed roll over to them. The notice shall contain disclosures with regard to credit rating and rationale for roll-over. The issuer shall, prior to sending the notice to holders of debt securities, file a copy of the notice and proposed resolution with the stock exchanges where such securities are listed, for dissemination of the same to public on its website. [Regulation 18(1), (2), (3) and (4)]
The debt securities issued can be rolled over subject to the following conditions: –
(a) The roll-over is approved by a special resolution passed by the holders of debt securities through postal ballot having the consent of not less than 75% of the holders by value of such debt securities;
(b) atleast one rating is obtained from a credit rating agency within a period of six months prior to the due date of redemption and is disclosed in the notice referred to in sub-regulation (2);
(c) fresh trust deed shall be executed at the time of such roll –over or the existing trust deed may be continued if the trust deed provides for such continuation;
(d) adequate security shall be created or maintained in respect of such debt securities to be rolled –over. [Regulation 18(5)]
It is to be noted that the issuer shall redeem the debt securities of all the debt securities holders, who have not given their positive consent to the roll-over. [Regulation 18(6)]
7. LISTING OF DEBT SECURITIES IN CASES OF PRIVATE PLACEMENT
An issuer can also list its debt securities issued on a private placement basis on a recognized stock exchange. In order to do so, it should ensure that:
a) Issuer to obtain a credit rating from at least one registered credit rating agency.
b) The debt securities proposed to be listed are in dematerialized form.
c) Disclosures as specified in Schedule 1 of the SEBI (ILDS) Regulations, 2008 namely:
i. MoA and AoA and necessary resolutions for allotment of debt securities,
ii. Copy of last three years audited Annual Reports,
iii. Statement containing particulars of, dates of, and parties to all material contracts and agreements,
iv. Disclosures to be made to the Debenture Trustee in electronic form
v. Issuer Information namely, summary of business activity, detailed company financials, Issuer Issue details, Disclosures pertaining to willful default, summary term sheet et al,
d) Issuer to make an application for listing to one or more recognized stock exchanges. [Regulation 20]
It is to be noted that any issuer issuing debt securities on private placement basis, shall comply with the conditions relating to the issue of International Securities Identification Number, as may be specified by the Board from time to time. [Regulation 20B]
In case of issue of a secured debt security, an issuer has to provide for a charge or security in respect of the secured debt securities. The issuer shall give an undertaking in the offer document asserting that the assets on which charge is created are free from any encumbrances and if the assets are already charged to secure a debt, the permissions or consent to create second or pari pasu charge on the assets of the issuer have been obtained from the earlier creditor. [Regulation 21B]
8. OBLIGATIONS OF INTERMEDIARIES AND ISSUERS
The debenture trustee is appointed by the Issuer and is a person who safeguards the interest of debenture holders and serves as a liaison between the issuer company and the debenture holders. The powers, duties and functions of the debenture trustee are laid down under the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, the trust deed and the offer document. The debenture trustee holds a fiduciary duty towards the investors and shall carry out its duties and functions with due care, diligence and loyalty.
The debenture trustee has the right to appoint a nominee director on the board of the issuer in consultation with the institutional holders of such securities. The debenture trustee shall ensure disclosure of all material events on an ongoing basis. The debenture trustees shall also supervise the implementation of the conditions regarding creation of security for the debt securities and debenture redemption reserve. [Regulation 25]
The issuer shall ensure disclosure of all the material facts in the offer documents issued or distributed to the public and shall ensure that all the disclosures made in the offer document are true, fair and adequate and there is no misleading or untrue statements or misstatement in the offer document. [Regulation 26]
The Merchant Banker shall verify and confirm that the disclosures made in the offer documents are true, fair and adequate and ensure that the issuer is in compliance with these regulations as well as all transaction specific disclosures required in Schedule I of these regulations and the Companies Act, 2013 and the Rules made thereunder. [Regulation 26]
9. PROCEDURE FOR ACTION IN CASE OF VIOLATION OF THE REGULATIONS:
The Board is the adjudicating authority in all matters arising out of the violation of the SEBI (ILDS) Regulations and possesses the power of inspection. The Board may suo-moto or upon information received by it, appoint one or more persons to undertake the inspection of the books of account, records and documents of the issuer or merchant banker or any other intermediary associated with the public issue, disclosure or listing of debt securities. The Board may in the interests of the securities market, issue or pass such directions as it deems fit. [Regulation 27 and 28]
Any person aggrieved by an order of the Board or Adjudicating Officer under the Act or these regulations, may prefer an appeal to the Securities Appellate Tribunal in accordance with section 15T of the Act read with the Securities Appellate Tribunal (Procedure) Rules, 2000. [Regulation 29]
 For the purpose of this regulation, “material” means anything which is likely to impact an investors’ investment decision.