In general, non-convertible securities are those financial instruments that cannot be converted into other type of securities like equity or another debt instrument. For example debt securities and bonds that cannot be converted into equity.
These instruments carries some common characteristics such as fixed income, predetermined maturity period and offers their holders a regular income with low risk.
In this article, issue of non-convertible securities (debt securities) on private placement basis and listing thereof is discussed. The regulatory framework covers:
1. SEBI ((Issue and Listing of Non-Convertible Securities) Regulations, 2021/NCES Regulation
2. SEBI Master Circular SEBI/HO/DDHS/PoD1/P/CIR/2024/54 dated May 22, 2024
3. Companies Act, 2013
The term non-convertible securities is defined in the NCES Regulation itself and includes the perpetual instruments also. It is defined as;
- Debt securities,
- Non-convertible redeemable preference shares,
- Perpetual non-cumulative preference shares
- Perpetual debt instruments and
- Any other securities as specified by SEBI.
According to the NCES Regulation, the issuer shall make an application to one or more stock exchange(s) and obtain an in principle approval for listing of its non-convertible securities from the stock exchange(s) where such securities are proposed to be listed.
The issuer shall appoint a Registrar to the Issue, which has established connectivity with all the depositories.
The issuer shall enter into an arrangement with a depository for dematerialization of the non- convertible securities in accordance with the Depositories Act, 1996 and regulations made thereunder and also take such steps to ensure that such securities are admitted on all the depositories.
Depositories shall activate the ISINs of securities issued on private placement basis only after the stock exchange(s) have accorded approval for listing of such securities.
The issuer shall appoint a debenture trustee in case of an issue of debt securities.
The issuer and the debenture trustee shall execute the trust deed and if an issuer fails to execute the trust deed within the period specified the issuer shall also pay interest of at least 2% p.a. or such other rate, as specified.
Every debenture trustee shall amongst other matters, accept the trust deeds which shall contain the matters as provided under Section 71 of the Companies Act, 2013 and Form No. SH.12 of the Companies (Share Capital and Debentures) Rules, 2014.
Trust deed shall consist of two parts:
(a) Part A containing statutory/standard information pertaining to the debt issue.
(b) Part B containing details specific to the particular debt issue.
The debenture trustee shall submit a due diligence certificate to the stock exchange:
(a) in case of secured debt securities, in the format as specified in Part B of Schedule IV of these regulations; and
(b) in case of unsecured debt securities, in the format as specified in Part B of Schedule IVA of these regulations.
The stock exchange(s) shall list the debt securities only upon receipt of the due diligence certificate from the debenture trustee. The stock exchange shall disclose/upload the placement memorandum and the due diligence certificates provided by the debenture trustee on its website.
The issuer shall create a recovery expense fund with the designated stock exchange depositing such amount and in such form
Every issuer desirous of listing its non-convertible securities on a recognised stock exchange(s) shall execute an agreement with such stock exchange(s)
The designated stock exchange shall collect a regulatory fee as specified in Schedule VI of these regulations from the issuer at the time of their listing.
The issuer shall create a debenture redemption reserve or capital redemption reserve in accordance with the relevant provisions of the Companies Act, 2013.
The issuer shall obtain credit rating from at least one credit rating agency, which shall be disclosed in the offer document.
The issuer shall apply for Securities and Exchange Board of India Complaints Redress System (SCORES) authentication in the format specified by the Board and shall use the same for all issuance of non-convertible securities.
The issuer shall ensure that the secured debt securities are secured by hundred percent security cover or higher security cover as per the terms of the offer document and/or Debenture Trust Deed, sufficient to discharge the principal amount and the interest thereon at all times.
The issuer shall fix a record date for the purposes of payment of interest, dividend and payment of redemption or repayment amount or for such other purposes. This record date shall be fixed at fifteen days prior to the due date of payment interest or dividend, repayment of principal or any other corporate actions.
All payments required to be made by an issuer shall be made on a working day. In case the due date of any amount payable by the issuer falls on a day which is not a working day, such payments shall be made in a manner as specified by the Board.
An issuer making a private placement of non-convertible securities, and seeking listing thereof on stock exchange(s), shall file a general information document with the stock exchange(s), which shall contain the following disclosures, namely, –
(a) disclosures specified in Schedule I of these regulations;
(b) disclosures specified in the Companies Act, 2013 , as applicable; and
(c) additional disclosures as may be specified by the Board:
The general information document shall be valid for a period of one year from the date of opening of the first offer of non-convertible securities made under that general information document.
In respect of a second or subsequent offer of non-convertible securities, during the period of validity of that general information document , no further general information document shall be required to be filed.
An issuer making a private placement of second or subsequent offer of non-convertible securities, during the validity of the general information document. shall file a key information document for each such second or subsequent offer of non-convertible securities
The key information document shall contain the following information:
(a) details of the offer of non-convertible securities;
(b) financial information, if such information provided in the general information document is more than six months old;
(c) material changes, if any, with respect to information provided in the general information document;
(d) any material developments not disclosed in the general information document, ; and
(e) in case the second or subsequent offer is made during the validity of the shelf prospectus for which no general information document has been filed ; disclosures applicable in case of private placement of non-convertible securities as specified in schedule I.
The issuer shall file the following documents along with the listing application to the stock exchange and with the debenture trustee (in case of debt securities):
- Placement Memorandum/A document filed with stock exchange for issue of securities on private placement basis
- MOA and AOA;
- Copy of Board Resolution authorizing the borrowing and provided the list of authorised signatories for the allotment of securities
- Copy of last three years Annual Reports;
- Statement containing particulars, dates and parties to all material contracts and agreements;
- An undertaking from the issuer stating that;
The necessary documents for creation of the charge, if any, including the Trust Deed has been executed within the time frame and the same would be uploaded on the website of the designated stock exchange, where such securities is proposed to be listed.
- An undertaking that permission / consent from the prior creditor has been obtained for a second or pari- passu charge being created, if any, and
- Any other particulars or documents that the recognized stock exchange may call for as it deems fit:
In brief, the steps involved in issuance and listing of non-convertible securities (debt securities on private placement basis) are:
- Receipt of in-principle approval from the stock exchange(s) where it wishes to list its proposed debt issuance/ securities, prior to issue open date
- Bidding announcement (open and close date) is to be disclosed by the Issuer in the Placement memorandum.
- Finalisation of allotments to investors on issue closure date
- Communication about allotments and pay-in obligations to the investors on issue closure date.
- Receipt of ISIN from a Depository prior to pay in and/ apply to other Depository(ies) for admission
- Receipt of funds by the Issuer from investors;
- Finalisation of allocation by the Issuer;
- Payment of stamp duty by Issuer;
- Filing of Corporate action file by RTA;
- Conclusion of Corporate action/ demat credit by the Depositories;
- Issue of credit confirmation letter by Depositories to Issuer;
- Submit an application for listing, complete in all respects, including the submissions and disclosures.
- Confirmation of listing permission to Issuer by the stock exchange(s).
An issuer making issuance of non-convertible securities shall:
(a) have the right to recall such securities prior to the maturity date (call option); or,
(b) shall have a right to provide such right of redemption of debt securities prior to the maturity date (put option) to all the investors or only to retail investors.
This right of issuer is not exercisable before the expiry of one year from the date of issue of such non-convertible securities. Issuer shall pay interest at the rate of 15% p.a. for the period of delay, if any.
Consolidation and re-issuance .
An issuer may carry out consolidation and re-issuance of its debt securities, subject to the fulfilment of the following conditions:
(a) Articles of Association of the issuer shall not contain any contrary provision, whether express or implied,
(b) Issuer has obtained fresh credit rating for each re-issuance and is disclosed; these ratings shall be reviewed on a periodic basis and the change, if any, shall be disclosed;
(d) appropriate disclosures are made with regard to consolidation and re-issuance in the placement memorandum.
A private placement of debt securities shall be made through the Electronic Book Provider Platform (EBP), if it is:
| ISSUE SIZE | UNRELATED TO ISSUE SIZE | TIME BASED/ISSUER EXISTENCE |
| – a single issue including green shoe option, if any, of Rs. 50 crore or more
– a shelf issue consisting of multiple tranches, which cumulatively amounts to Rs. 50 crore or more, in a financial year – a subsequent issue, where aggregate of all previous issues by an issuer in a financial year equals or exceeds Rs. 50 crore |
– issuance of instruments of similar nature which are essentially non-equity regulatory instruments forming part of a bank’s or NBFC’s capital and listed under Chapter V of the SEBI NCS Regulations, 2021, irrespective of the issue size | – Issues of debt securities, by issuers who are in existence for less than three years |
References:
- SEBI Website
- SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021/NECS Regulation.
- SEBI Master Circular SEBI/HO/DDHS/PoD1/P/CIR/2024/54 dated May 22, 2024.
- Companies Act, 2013
- WhatsApp Meta AI/Meta AI
Note: Readers are advised to go through the original content of the Regulations/Act/Rules/Circular/given references.
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