Revision in the framework for fund raising by issuance of debt securities by large corporates (LCs)
Background:
SEBI had issued Circular for “Fund raising by issuance of debt securities by Large Entities” in November 2018, which is now incorporated under chapter XII of the SEBI Master Circular dated July 07, 2023 mandating Large Corporates (LCs) to raise at least 25% of their incremental borrowings during a financial year (FY) by issuing debt securities. This measure was envisaged to assist in deepening the corporate bond market in India.
To further enhance the ease of doing business and development of corporate bond markets and taking into account prevailing market conditions, SEBI vide Circular dated October 19, 2023 has revised the framework for fund raising by issuance of debt securities by LCs.
Applicability of Framework:
The framework shall be applicable for all listed entities (except for scheduled Commercial Banks) which meets the following criteria as on last day of FY and shall be classified as LCs:
| Criteria | ||
| whose specified securities or debt securities or non-convertible redeemable preference shares listed on a recognised Stock Exchange(s) in terms of SEBI (LODR) Regulations, 2015. | Have outstanding long term borrowings1 of Rs.1000 crore or above.
|
Having a credit rating2 of “AA”/“AA+”/AAA”, where the credit rating relates to the unsupported bank borrowing or plain vanilla bonds of an entity, which have no structuring/ support built in. |
1’Outstanding long term borrowings’ for the purpose of this framework shall mean any outstanding borrowing with an original maturity of more than one year but shall exclude the following:
i. External Commercial Borrowings;
ii. Inter-Corporate Borrowings involving the holding company and/ or subsidiary and/ or associate companies;
iii. Grants, deposits or any other funds received as per the guidelines or directions of Government of India;
iv. Borrowings arising on account of interest capitalization; and
v. Borrowings for the purpose of schemes of arrangement involving mergers, acquisitions and takeovers.
2In case of multiple ratings from multiple rating agencies, the highest of such ratings shall be considered for this framework.
Timeline of applicability of the framework:
| FY | Effective date |
| LCs following April -March as FY | April 01, 2024 |
| LCs following January-December as FY | January 01, 2024 |
Mandatory incremental borrowings by LC
LC shall raise atleast 25% of its qualified borrowings3 by way of issuance of debt securities in the financial years subsequent to the financial year in which it is identified as an LC.
3 ‘qualified borrowings’ shall mean incremental borrowing between two balance sheet dates having original maturity of more than one year but shall exclude the following:
i. External Commercial Borrowings;
ii. Inter-Corporate Borrowings involving its holding company and/ or subsidiary and/ or associate companies;
iii. Grants, deposits or any other funds received as per the guidelines or directions of Government of India;
iv. Borrowings arising on account of interest capitalization; and
v. Borrowings for the purpose of schemes of arrangement involving mergers, acquisitions and takeovers.
From FY 2025 onwards, the requirement of mandatory qualified borrowing by an LC in a FY shall be met over a contiguous block of three years.
Introduced incentives and dis-incentives for LC:
Penalty provisions done away with and SEBI has introduced incentives and dis-incentives for LC which has complied or failed to comply with the aforesaid framework respectively:
| Surplus/ Deficiency in requisite borrowing | Incentive / Disincentive |
| If at the end of three years there is a surplus in the requisite borrowings.
|
Following incentive shall be available to the LC:
a. Reduction in the annual listing fees pertaining to debt securities or non-convertible redeemable preference shares. b. Credit in the form of reduction in contribution to the Core Settlement Guarantee Fund (SGF) of Limited Purpose Clearing Corporation (LPCC). Please refer annexure -I of the Circular. |
| If at the end of three years there is a deficiency in the requisite borrowings.
Note: Adjustment of shortfall is explained in Annexure – II to the Circular. |
Dis-incentive in the form of additional contribution to the core SGF shall apply. |
The Circular further states that LCs which were identified based on the erstwhile criteria as on FY 2020-2021, 2021-2022 and 2022-2023 shall endeavor to comply with the requirement of raising 25% of their incremental borrowings done during FY 2022, FY 2023 and FY 2024 respectively by way of issuance of debt securities till March 31, 2024, failing which, such LCs shall provide a one-time explanation in their Annual Report for FY 2024.
Responsibilities of Stock Exchanges:
The Stock Exchanges shall determine the list of LCs for the financial year and release a uniform list of LCs for the financial year and place the same on their websites.
Responsibilities of the LPCC:
The LPCC shall make changes and put in place necessary infrastructure and system for LCs to comply with the provisions of incentive and dis-incentive w.r.t contribution to the core SGF.
Conclusion:
- By mandating that LC to raise 25% of their qualified borrowings through issuance of debt securities, the Circular aims to deepening of the emerging corporate bond market in India.
- It was felt that the threshold of outstanding long term borrowing should be aligned with the threshold of “high value debt listed entity” to have uniformity in the Regulations.
- Imposition of penalty for failure to achieve specified level of borrowings has been removed keeping in mind the spirit of ease of doing business.
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