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Ease of Doing Business and development – Revision in framework for fund borrowings by Large Corporates

Regulation 50B of SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, mandates large corporates (LCs) to raise a minimum of 25% of their incremental borrowings in a financial year through the issuance of debt securities. This requirement was initially set to be met over a contiguous block of three years starting from FY 2022.

However, due to prevailing market conditions and representations from market participants, the framework for fundraising through the issuance of debt securities by LCs has been revised. The revised framework specifies the following:

1. Applicability: The revised framework is applicable from April 01, 2024, for LCs whose financial year follows April-March and from January 01, 2024, for LCs following January-December as their financial year.

2. Definition of Financial Year: The term “Financial Year” implies April-March or January-December, depending on what is followed by the entity. Therefore, FY 2025 would mean either April 01, 2024 – March 31, 2025, or January 01, 2024 – December 31, 2024, depending on the financial year followed by the entity.

This revision in the framework aims to address the changing market dynamics and ensure more effective fundraising by large corporates through debt securities issuance.

The framework for fundraising through the issuance of debt securities by large corporates (LCs), as per Regulation 50B of SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, applies to all listed entities (except for Scheduled Commercial Banks) meeting the following criteria as of the last day of the financial year (March 31 or December 31):

a) Have their specified securities, debt securities, or non-convertible redeemable preference shares listed on a recognized stock exchange(s) in accordance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) and,

b) Have outstanding long-term borrowings of Rs. 1000 Crore or above. “Outstanding long-term borrowings” exclude certain types of borrowings, including External Commercial Borrowings, Inter-Corporate Borrowings involving holding companies and/or subsidiary and/or associate companies, grants, deposits, funds received as per government guidelines, borrowings arising from interest capitalization, and borrowings for schemes of arrangement involving mergers, acquisitions, and takeovers and,

c) Have a credit rating of “AA”/”AA+”/”AAA”, where the credit rating pertains to unsupported bank borrowing or plain vanilla bonds of the entity, without any built-in structuring/support.

Explanation 3 clarifies that if a listed entity has multiple ratings from different rating agencies, the highest of these ratings will be considered for the purpose of this framework.

A listed entity meeting the above criteria is considered a “Large Corporate” (LC) under this framework. This framework outlines the requirements and obligations for LCs regarding fundraising through the issuance of debt securities.

According to the framework outlined:

1. An LC (Large Corporate) must raise at least 25% of its qualified borrowings through the issuance of debt securities in the financial years following the year in which it is identified as an LC.

Explanation 4 defines “qualified borrowings” as incremental borrowing between two balance sheet dates with an original maturity of more than one year. However, certain borrowings are excluded from this definition, such as External Commercial Borrowings, Inter-Corporate Borrowings involving holding companies and/or subsidiaries and/or associate companies, grants, deposits, funds received as per government guidelines, borrowings arising from interest capitalization, and borrowings for schemes of arrangement involving mergers, acquisitions, and takeovers. The qualified borrowings for a financial year are determined based on audited accounts filed with the stock exchanges.

2. From the financial year 2025 onwards, the requirement of mandatory qualified borrowing by an LC in a financial year must be met over a contiguous block of three years. For entities following April-March or January-December as their financial year, the LC status is determined on the last day of March 31 of the previous financial year (T-1) or December 31 of the previous financial year (T-1). The LC must fulfill the requirement of qualified borrowing for the financial year “T” over the financial years “T,” “T+1,” and “T+2.”

3. If, at the end of the three-year period (i.e., the last day of financial year “T+2”), there is a surplus in the requisite borrowings (i.e., the actual borrowings through debt securities exceed 25% of the qualified borrowings for financial year “T”), the LC is eligible for incentives, including a reduction in the annual listing fees of financial year “T+2” pertaining to debt securities or non-convertible redeemable preference shares as specified in the framework. This framework aims to encourage large corporates to raise funds through debt securities issuance while providing incentives for compliance.

4.Continuing from the previous framework, the following points detail the incentives and disincentives for LCs based on their borrowing compliance:

i. Credit in the form of reduction in contribution to the Core Settlement Guarantee Fund (SGF) of LPCC: The reduction in contribution is specified in Table II and Table III of Annex-I to the circular.

ii. Disincentive in the form of additional contribution to the core SGF: If, at the end of three years (i.e., the last day of FY “T+2”), there is a shortfall in the requisite borrowings (i.e., the actual borrowings through debt securities are less than 25% of the qualified borrowings for FY “T”), a disincentive applies. This takes the form of additional contribution to the core SGF as specified in Table IV and Table V of Annex-I to the circular.

Explanation 5 clarifies the process of adjustment of actual borrowing against any deficit from previous years. The actual borrowing in FY “T” is adjusted first against any deficit from FY “T-2,” then against any deficit from FY “T-1,” and the remaining amount is adjusted against the mandatory borrowings for FY “T.” This adjustment process helps minimize any disincentive resulting from a shortfall in borrowings.

Responsibilities of Stock Exchanges include:

1. Identification of LCs: Stock Exchanges, upon submission of financial results by listed entities as per regulations 33 and 52 of LODR Regulations, shall determine the list of LCs for the financial year. This should be done by June 30 for LCs following April-March as their financial year or by March 31 for LCs following January-December as their financial year. The Stock Exchanges shall coordinate and release a uniform list of LCs for the financial year on their websites and notify identified LCs via email to ensure compliance.

2. Calculation of incentives or disincentives: Based on financial results submitted by LCs, Stock Exchanges, in coordination with each other, shall calculate the incentive or disincentive as of the last day of FY “T+2” for the three-year block starting from FY “T.” This calculation should be done by March 31 for LCs following January-December as their financial year or by December 31 for LCs following April-March as their financial year. Stock Exchanges shall notify LCs of the calculated incentive or disincentive accordingly.

Continuing with the responsibilities outlined for Stock Exchanges and LPCC, as well as the requirements for LCs identified based on the erstwhile criteria:

3. Sharing information with LPCC: Stock Exchanges shall share relevant information regarding the incentive/disincentive concerning the contribution to the core SGF with the LPCC by May 31st for LCs following April-March as their financial year or by February 28th/29th for LCs following January-December as their financial year, as applicable.

4. Amendments to bylaws, rules, and regulations: Stock Exchanges shall make necessary amendments to the relevant bylaws, rules, and regulations to implement the directions provided in the circular. They shall coordinate with each other to ensure uniformity in approach.

5. System implementation: Stock Exchanges shall establish the necessary systems and infrastructure for the implementation of the circular

6. Responsibilities of LPCC: LPCC shall make changes and establish necessary infrastructure and systems to facilitate LCs’ compliance with the provisions regarding incentives and disincentives concerning contribution to the core SGF. They shall also coordinate with Stock Exchanges to ensure LCs’ compliance with these provisions.

Conclusion: The revised framework for fund borrowings by large corporates (LCs) reflects a proactive approach to accommodate evolving market dynamics while ensuring regulatory compliance. By fostering an environment conducive to streamlined fundraising, these amendments contribute to the broader goal of promoting ease of doing business, thereby facilitating sustainable economic growth.

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