SEBI Might Allow Unlisted Firms To Sell Debt Securities On Exchanges

The Securities and Exchange Board of India (SEBI) shall make it simple for unlisted firms in order to raise funds by means of selling debt securities on the stock exchange platform. The main consideration shall be on firms who have not listed their shares but would want to list only their debt instruments. Many corporations have stayed away from listing their debt securities as they had to conform to rules similar to equity listings on the exchanges.

It was held by many people that lower disclosure necessities; exemptions from insider trading rules as well as statutory auditor standards along with an increase in the frequency of filing of results towards 1 year from 6 months are some of the relaxations the regulator has been considering.

This move is perceived as an effort to make it simple for firms to tap the listed debt market in India. It would also assist the firms which already have listed debt. The data from SEBI had shown that as on October 2019, unlisted firms have debt papers to a tune of Rs 5,38,000 crore that is presently traded on stock exchanges, 

An email sent in the direction of SEBI looking for response remained unanswered. SEBI shall soon start the consultation procedure with the market participants. The main intent is to make Indian debt markets striking for smaller firms. However, it is also needed to ensure that market transparency is not compromised in the procedure of easing norms.

This development comes as the market regulator conducted extensive dialogues with the Company Law Committee selected through the Ministry of Corporate Affairs which is supervised by the Corporate Affairs Secretary Injeti Srinivas. The committee had suggested that such firms must be excluded from the purview of listed companies under the SEBI Act and Companies Acts.

However furnishing a blanket exemption towards such firms, exemption from all the listing regulations, as suggested by the committee, looks problematic as mutual funds are key investors in such papers. There is public money riding and also it was held that if an issuer wants to sell debt paper towards public investors, they have to follow at least the basic standards.

Companies decide on to list their debt towards attracting a larger base of investors, particularly mutual funds. While MFs are permissible to invest in unlisted papers, there are numerous limitations including a cap on the maximum investment that an MF scheme could make in unlisted instruments.

A number of private corporations are considered as listed companies presently as their debt is traded on the stock exchanges as well as hence are obliged towards following SEBI’s listing rules.

Furthermore, they are also required to follow SEBI’s board requirements for instance appointment of key managerial personnel (KMP), rotation of auditors as well as disclosure of median and average salaries paid by the corporation. Insider trading rules are an additional key compliance burden on them even although there are no listed shares.  The suggested changes towards excluding debt listed private companies from tighter norms would lessen the compliance burden along with inspiring private companies to raise funds by means of listing the debentures.

Up to 2012, each private placement was exempted from following the responsibilities and compulsions of a listed company provided they allocated securities to below 49 investors. Though, the Supreme Court decision in the Sahara Real Estate case urged the government to revisit the standards in the new Companies Act, 2013. The meaning of securities has been extended to even hybrid instruments which include optionally convertible debentures. By reason of this, even firms with only listed debt have been construed as listed companies and hence was requisite to follow the pertinent regulations.

These actions are comprehended as a part of the government’s efforts in the direction of reviving the Indian debt market which was revolving under liquidity crunch ever since the IL&FS default along with issues in few more non-banking financial companies triggered into a market varied issue. Since then, lenders were shying away from lending towards lesser-known firms that have a rating below ‘AAA’.

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eStartIndia Team