Issue of Debt Securities by Corporates and SEBI Monitoring

Issue of Debt Securities by Corporates and SEBI Monitoring

Executive Summary:

• Issuers of debt securities need to follow conditions specified by SEBI such as obtain permission from stock exchanges to list securities, credit rating, appointing intermediaries, creating reserve expense fund and security of charge.
• Intermediaries and Issuers are also required to furnish additional disclosures to SEBI.

Introduction:

A debt security can be termed as capital raised through public loan. Apart from bank loans, capital can also be raised with the issue of bonds. It allows the issuer to raise funds and is one of the most preferred methods of raising capital. Corporates issue debt securities for projects or expansion. Such securities are usually issued through the process of underwriting where firms purchase the entire issue from the issuer and then resell them to interested investors. The Securities and Exchange Board of India (SEBI) regulates the debt securities market through the regulations and issue of circulars and guidelines to supplement the same.

How SEBI Monitors Debt Securities Issued by Companies:

SEBI has prescribed conditions for the issue of debt securities to be adhered to by the issuers, intermediaries and Stock Exchanges and in compliance to such conditions, issuers, intermediaries and Stock Exchanges are required to make disclosures to the regulator which aids the process of monitoring compliance with the required conditions. A few of the conditions are listed which will provide a better insight of the legal requirements to be followed for the issue of debt securities. Debt securities are governed by the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, guidelines and circulars issued by SEBI.

Conditions for Issue of Debt Securities:

Issuer shall:

• a) obtain permission from stock exchange(s)to list debt securities and enter into agreement with stock exchange
• b) obtain credit rating from at least one credit rating agency registered with the Board
• c) appoint depository, registered with the Board, for dematerialization of the debt securities
• d) appoint merchant bankers and debenture trustees
• e) file draft offer document with stock exchange and display on the website of the issuer, merchant bankers and the stock exchanges where it is to be listed
• f) file draft offer document with stock exchange and display on the website of the issuer, merchant bankers and the stock exchanges where it is to be listed
• g) advertise in one English daily newspaper and one Hindi daily newspaper, both with wide circulation, on or before issue opening date and decide price
• h) allot securities within with in thirty days of the closure of the public issue
• i) contribute an amount equal to 0.01% of the subject to maximum of issue Rs. 25 lakhs per issuer towards the creation of Recovery Expense Fund
• j) create security to secure debt (assets should be free from encumbrances)

Conditions for listing of debt securities issued on private placement basis:

An Issuer:

• a) issue such debt securities in compliance with the provisions of the Companies Act, 2013 (Section 42), rules prescribed thereunder and other applicable laws;
• b) obtain credit rating from at least one credit rating agency registered with the Board;
• c) ensure the debt securities are in dematerialized form;
• d) the disclosures as provided in regulation 21 have been made;

In addition to the issuer of debt securities, intermediaries are also under an obligation to disclose information to SEBI e.g. Lead Merchant Banker and Debenture Trustee are required to furnish to the Board a due diligence certificate as per Schedule II of the regulations, verify the correctness of the information disclosed to the Board. The Debenture Trustees are also responsible to conduct due diligence independently to ensure that the assets of the Issuers are sufficient to discharge the interest and principal amount with respect to debt securities of the Issuers at all times. All the issuers and intermediaries are required to adhere to all the conditions specified by SEBI till the time the securities listed on the stock exchanges, the contravention of the conditions can lead to the imposing of penalties by SEBI. All these reporting requirements and disclosures enable SEBI to regulate the debt market, mitigate fraud, assess the drawbacks in the monitoring process or areas of improvement requiring more stringent implementation, and above all, secure interests of investors.

Even though, SEBI has time and again made attempts to strengthen the monitoring process by issuing amendments, circulars and guidelines, still, raising capital through bonds still remains a good option for the companies especially those with high creditworthiness.

Regards, Legal Team Proind Business Solutions Private Limited 306, Tower B, I-thum, Plot No A-40, Sector 62, Noida, UP, India- 201301 No.: +91 120 4224203 Email: info@proind.in, website: www.proind.in