India: Amendment To The NCS Regulations

The Securities Exchange Board of India ("SEBI") has recently amended the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 ("NCS Regulations") by introducing the SEBI (Issue and Listing of Non-Convertible Securities) (Amendment) Regulations, 2023 ("Amendment Regulations"). The NCS Regulations were introduced on August 9, 2021 and merged the provisions of SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013. The Amendment Regulations come into force on the date of publication i.e., February 2, 2023.

Pursuant to the Amendment Regulations, SEBI has introduced the following changes:

1. Timeline for appointment of Nominee Director

Under Regulation 24 of the NCS Regulation, the debenture trustee is vested with powers for protecting the interests of the debenture holders, including by appointing a nominee director on the board of directors of the issuer company in consultation with the debenture holders. By way of the Amendment Regulations, SEBI has now mandated that the debenture trust deed shall contain a provision requiring the issuer company to appoint a nominee director within 1 (one) month from the date of receipt of nomination from the debenture trustee. For issuer companies whose debentures are listed as on February 2, 2023, an amendment to the debenture trust deed to incorporate the aforementioned timeline is required on or before September 30, 2023.

2. Amendment to the Articles of Association

Regulation 23 of the NCS Regulations provides for the obligations of the company issuing the debentures wherein sub-regulation (6) was introduced by way of the Amendment Regulations. Regulation 23(6) provides that the issuer company shall ensure that its articles of association require its board of directors to appoint a nominee director of the debenture trustee in terms of Regulation 15 (1)(e) of the SEBI (Debenture Trustee Regulations), 1999 ("DT Regulations").

The DT Regulations cast a duty on the debenture trustee to appoint a nominee director on the board of the issuing company inter-alia upon two consecutive defaults in payment of interest, default in creation of security for the debentures and default in redemption of debentures. Issuer companies whose debentures are listed as on February 2, 2023 are required to amend their articles of association to incorporate the concept of appointment of nominee director on or before September 30, 2023.

The Amendment Regulations further provide that an issuer, who has defaulted in payment of interest or repayment of principal amount in respect of listed debentures, is required to appoint the person nominated by the debenture trustee as a director on its board of directors, within 1 (one) month from date of receipt of nomination from the debenture trustee or February 2, 2023, whichever is later.

3. Redemption prior to maturity

The NCS Regulations were silent on the manner in which the notice for exercising the right of recall or redemption of debentures under Regulation 15 of the NCS Regulations is to be circulated by the issuer prior to maturity of such debentures. The Amendment Regulations shed light on the timeline for circulating such notice by specifying that a notice of at least 21 (twenty-one) days before the date from which such right of recall or redemption is exercisable shall be circulated by the issuer to the debenture holders and debenture trustees in the following manner:

1. soft copy of such notice shall be sent to the debenture holders who have registered their email address(es) either with the listed issuer or with any depository;
2. hard copy of the notice shall be sent to the debenture holders who have not registered their email address(es) either with the listed issuer or with any depository.

Regulation 15 (7) of the NCS Regulations has been substituted thereby removing the requirement of circulating an advertisement in an english national newspaper and regional newspaper having circulation at the place where the registered office of the issuer is situated, indicating the details of such rights and eligibility of the holders who are entitled to avail such right. The requirement of providing a copy of such notice to the stock exchanges where the debentures are listed has however, been retained.

4. Scope of Green Debt Security

The scope of a 'green debt security' has been widened pursuant to the Amendment Regulations to align it with the Green Bond Principals published by International Capital Market Association and now includes:

1. climate change adaptation including efforts to make infrastructure more resilient to impacts of climate change and information support systems such as climate observation and early warning system;
2. pollution prevention and control (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling and energy efficient or emission efficient waste to energy) and sectors mentioned under the India Cooling Action Plan launched by the Ministry of Environment, Forest and Climate Change;
3. blue bonds which comprise of funds raised for sustainable water management including clean water and water recycling, and sustainable maritime sector including sustainable shipping, sustainable fishing, fully traceable sustainable seafood, ocean energy and ocean mapping;
4. yellow bonds which comprise of funds raised for solar energy generation;
5. transition bonds which comprise of funds raised for transitioning to a more sustainable form of operations, in line with India's Intended Nationally Determined Contributions.

5. Period of Subscription

The Amendment Regulations have filled the longstanding lacuna by providing definite timelines for subscribing to debentures in case of a public issue and appointment of a nominee director. A definite timeline to appoint a nominee director would go a long way in reinforcing confidence in the minds of the debenture holders as there have been instances of long delays in actual appointment by the issuer company, despite receiving instructions for the same by the debenture trustee.

The expansion of the definition of a 'green debt security' is another step towards achieving the goal of sustainable development and aligning the extant framework with the Green Bond Principles which are recognized by the International Organization of Securities Commissions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.