SEBI’s move of enforcing governance through new regulations that seems as a measure to fill the gap between equity and debit listed entities
It is an undeniable fact that debt in India is mostly privately placed which largely involves the Qualified Institutional Buyers (QIBs). Public participation is almost negligible resulting in no injustice to them at large. Keeping that in mind, the debt listed entities were treated differently from the equity listed entities and were not subject to stricter compliances. Securities And Exchange Board Of India (“SEBI”) has put an end to the easy going journey of a debt listed entity by placing them at par with the equity listed entities.
On 7th September 2021, SEBI amended (Note 1) the provisions of Non-Convertible Securities (“NCS”) laid down in the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) mandating entities that have listed non-convertible securities to disclose financial results on a quarterly basis, including assets & liabilities and cash flows.
The evolution of these amendments was brought in by the Ministry of Corporate Affairs through the amendment ((Note 2) issued on 19th February 2021 which changed the definition of the listed company. Public companies which have not listed their equity shares but have debt or preference shares listed will not be counted as listed entities. Similarly, private limited companies with listed debt securities will also not be considered as listed. It was always considered that SEBI would do whatever is required to protect the interest of the public. Accordingly, SEBI came out with the alternative provision to strengthen the governance of the debt-listed companies.
Provision of these amendments would apply to high-value debt listed entities (“HVDLE”) (Note 3) and the threshold is to be determined on the outstanding principal as of 31st March 2021. Most of the corporate governance requirements that are laid down under regulations 15 to 27 Of Chapter IV of Securities and Exchange Board Of India (Listing Obligations And Disclosure Requirements) Regulations, 2015 which earlier used to apply to equity listed entities would now apply to debt listed entities too. SEBI has given a reasonable time to such companies to completely comply with these requirements. Effectively there is 18 months window (Up to March 2023) within which the companies need to comply with these requirements on a explained basis. if they can’t comply, they need to provide an explanation and give justification. From 1st April 2023, this becomes a mandatory requirement.
SEBI, on 5th October 2021 issued the revised format (Note 4) for filing financial information by companies whose non-convertible securities are listed. The format for statement of cash flow on half yearly basis is to be submitted to securities exchange, debenture trustees and on the companies website. The format will be prepared under the indirect method as prescribed in accounting standard 3 or Indian accounting standard 7 mandated under sec 133 of the companies act 2013. Where the listed entity does not have corresponding cashflow statement for the half year ended September 2020, the reporting of corresponding For listed entities that becomes HVDLE subsequently, would be required to comply with six months of such applicability. Under the amended regulations, debt listed entities are mandated to submit audited financial results within 60 days from the end of the financial year. Another major change brought under the amended regulation is the requirement of written consent of atleast 3/4th (by value) of securities holders is to be taken before proceeding with any material modification in the structure of NCS. Earlier there was no clarity under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 with respect to appointment of debenture trustees for private placement of debts securities. Post issuance of NCS regulation, this dilemma has been eliminated.
Further to these regulations, SEBI on 14th October 2021, issued a revised format (Note 5) for issuance of limited review report/audit report for issuers of nonconvertible securities. The formats for limited review/ audit reports on financial information to be implemented by listed entities other than insurance companies. Insurance companies would disclose limited review/ audit reports as per the formalities specified by IRDAI.
The formats for limited review/ audit reports on financial information is categorized as below:
1. Limited Review Report for quarterly standalone financial results for entities other than Banks, NBFC
2. Limited Review Report for quarterly standalone financial results for Banks and NBFCs.
3. Audit Report for quarterly standalone financial results for entities other than Banks, NBFCs
4. Audit Report for quarterly standalone financial results for Banks and NBFCs
5. Audited Annual consolidated Financial Results for entities other than Banks, NBFCs
6. Audited Annual consolidated Financial Results for Banks and NBFCs
Limited Review Report will now be conducted as per the ICAI standards on Review Engagement (SRE) 2410 on “review of interim financial information”. Earlier the these were conducted as per the SRE 2400 on “Engagement to review of historical financial statements”.
Authors take :
The status of debt-listed companies had undergone a change after the amendment in the definition of listed companies which is made effective from 1st April, 2021. this led to loose ends in the corporate governance of such debt-listed companies. SEBi’s move of enforcing governance through these framework seems as a measure to fill the gap. These new framework are now in sync with what is applicable to equity listed entities.These step are majorly inspired by the need for more transparency and promptness of information. The extension of chapter IV to HVDIEs is and alarm for debt-listed entities which are not HVDLEs as of now.
1. notification No. SEBI/LAD-NRO/GN/2021/47 dated 7th September 2021 issued by SEBI.
2. notification No G.S.R. 123(E). dated 19th February 2021 issued by Ministry Of Corporate Affairs
3 HVDLE mean listed entities that have listed their NCS and have an outstanding value of listed NCS of `500 crore or more.
4. Circular no SEBI/HO/DDHS/CIR/2021/0000000637 dated 5th October 2021 issued by SEBI.
5. Circular no SEBI/HO/DDHS/CIR/2021/0000000638 dated 14th October 2021 issued by SEBI.