The Securities and Exchange Board of India (SEBI) on 5 July 2023, has notified the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) (Second Amendment) Regulations, 2023 (Second Amendment Regulations) which amends the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations) and is effective immediately. The Second Amendment Regulations primarily focus on alignment of disclosure requirements for private placements of listed non-convertible debt securities (NCS) with public issues of NCS, curbing the need to file voluminous private placement memoranda with repetitive disclosures for multiple issues of NCS and commercial papers (CPs) in the same year by the same issuer, removal of identical disclosures and streamlining the format of the disclosure document, enhancement of disclosures for issue expenses and introduction of disclosures for key managerial personnel (KMP) and senior management for enhanced transparency in disclosures.
Key Amendments to the NCS Regulations:
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Parity in disclosures introduced for Public Issue and Private Placement of NCS
Pursuant to the theme of this amendment to bring alignment, SEBI has deleted separate disclosure schedules for public issue prospectuses and private placement memoranda and substituted it with a common schedule of disclosures for both, largely making the disclosures uniform for public issues and private placements of NCS. To this end, Schedule I (Disclosures for Public Issue of Debt Securities and Non-Convertible Redeemable Preference Shares) and Schedule II (Disclosures for Private Placement of Non-Convertible Securities) of the NCS Regulations has been replaced by a common and new Schedule I (Disclosures for Issue of Securities) of the Second Amendment Regulations. The revamped Schedule I also consolidates certain disclosures specified under the Companies (Prospectus and Allotment of Securities) Rules, 2014 issued under the Companies Act, 2013 which were applicable for private placements and certain identified disclosures from Form PAS-4 have now been applied for public issues as well. This was introduced at the behest of market participants that felt investors need to have access to detailed information (without information asymmetry between placement memorandum for private placement and a prospectus for a public issue) as privately placed NCS could also find its way to non-institutional investors as well.
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General Information Document and Key Information Document introduced for Private Placements: Shelf Placement Memorandum to be phased out
In order to avoid multiplicity of placement memoranda filed for listed NCS by entities in the same year as well as to reduce the operational costs involved in such documentation, SEBI has introduced the concept of a general information document (GID) and key information document (KYID) for entities proposing to list NCS. Chapter VA (Issuance and listing of NCS on a private placement basis) has been introduced in the NCS Regulations mandating issuers proposing to list NCS on a private placement basis to file a GID with the stock exchange(s), containing specific disclosures as set out in the unified and new Schedule I of the Second Amendment Regulations. GID is a replacement and substantively streamlined version of the shelf placement memorandum (SPM) and while SPM as a concept has been retained in the NCS Regulations, it will cease to be of relevance post the time period specified in the already existing SPMs and going forward GIDs will be filed.
- Commencement of disclosures under GID and KYID format:
The disclosure requirements in terms of Second Amendment
Regulations shall be applicable on a 'comply or explain'
basis until 31 March 2024 and on a mandatory basis thereafter.
'Comply or explain' has been explained to
mean that an issuer shall endeavor to comply and achieve full
compliance of the newly introduced Regulation 50A (which comprises
Chapter VA and replaces the earlier disclosures with the revamped
Schedule I) of the Second Amendment Regulations until 31 March
2024, by filing a GID instead of a placement memorandum for private
placement of NCS sought to be listed. However, an issuer not filing
GID must provide reasons for such non-compliance or partial
compliance, along with the steps taken to achieve full compliance
in the form and manner specified by SEBI. The directions regarding
the manner in which reasons for such non-compliances are to be
provided is still awaited from SEBI.
- Validity of GID: GID shall be valid for a period of 1
(one) year from the date of opening of the first offer of NCS made
under such GID and no further GID shall be required to be filed in
respect of a second or subsequent offer of NCS, during the validity
period of 1 (one) year of such GID. GID may indicate the size of
the issue i.e., the amount of monies which the issuers propose to
raise during the period of validity of GID.
- One-time yearly disclosure under GID format and
pricing supplement like KYID for Private Placements going
forward: SEBI has clarified that:
- issuers who have filed a GID for the primary issue of listed
NCS on a private placement basis and subsequently intend to issue
further NCS within the validity of such GID, shall now be required
to file only a KYID with the stock exchanges and shall be exempted
from filing a separate GID;
- issuers who have previously filed a SPM1 for issue
of listed NCS on private placement basis prior to the date of the
Second Amendment Regulations, coming into force, and intend to
issue further NCS within the validity of such SPM, shall now be
required to file only a much leaner KYID with the stock exchanges
and will be exempted from filing a GID for each such subsequent
issuance within the validity of SPM;
- issuers who have previously filed a shelf prospectus for public
issue of NCS, and subsequently intend to issue NCS on a private
placement basis within the validity period of such shelf
prospectus, shall only file the KYID and are not required to file
GID;
- issuers who have previously filed a GID for issue of NCS on
private placement basis and subsequently intend to issue a listed
commercial paper within the validity of such GID, shall now be
required to file only a KYID with the stock exchanges and will be
exempted from filing a separate GID; and
- issuers who have previously filed a shelf prospectus for public
issue of NCS, and subsequently intend to issue listed CPs on a
private placement basis within the validity period of such shelf
prospectus, shall only file the KYID and are not required to file
GID.
- issuers who have filed a GID for the primary issue of listed
NCS on a private placement basis and subsequently intend to issue
further NCS within the validity of such GID, shall now be required
to file only a KYID with the stock exchanges and shall be exempted
from filing a separate GID;
- Contents of KYID: KYID is akin to a pricing supplement
and replaces a tranche placement memorandum or the need to do a
completely new placement memorandum for subsequent issues of NCS
and CPs by the same issuer during the validity of the GID or SPM or
prospectus. KYID is required to be kept very lean and disclosures
are limited to material changes since the GID and the terms of the
new offer of NCS being made under the KYID. The disclosures
prescribed for KYID is as follows:
- details of the offer of NCS in respect of which the KYID is
being issued;
- financial information, if such information provided in the GID
is more than 6 (six) months old;
- material2 changes, if any, in the information
provided in the GID;
- any material developments not disclosed in the already filed
GID; and
- disclosures applicable in case of private placement of NCS as
specified in Schedule I of the Second Amendment Regulations, in
case the subsequent offer is made during the validity of the shelf
prospectus for which no GID has been filed.
Filing of a KYID, in the case of private placements, will simplify the listing procedures of NCS for frequent issuers of NCS and a full-fledged SPM or GID will not be required to be filed within its respective validity periods.
- details of the offer of NCS in respect of which the KYID is
being issued;
- Financial Information under GID and KYID aligned for all
types of NCS issue: Under the amended NCS Regulations, audited
financial statements provided (for both private placement and
public issue of NCS) by an issuer seeking listing of NCS must now
be audited and certified by the statutory auditor(s) who holds a
valid certificate issued by the peer review board of the Institute
of Chartered Accountants of India (ICAI). It is the first time SEBI
has introduced the requirement of the financials being audited by a
peer reviewed auditor for issuers issuing NCS similar to the
requirement for issuers issuing equity shares by way of an initial
public offer (IPO).
The requirement of providing a columnar representation of financial statements disclosed in the placement memoranda or prospectus of NCS is done away with.
Further, SEBI has updated the requirements for disclosure of certain key operational and financial parameters (both on a standalone and consolidated basis) by replacing the line items that were largely aligned with IGAAP disclosures and have been replaced the same with line items as per IND AS.
SEBI has however continued with the requirement of including audited financial statements disclosed by issuers in the GID or KYID (as the case may be) which aren't older than 6 (six months) from the date of the issue document or issue opening date, as applicable. Exceptions have been made for listed companies and their subsidiaries which are in compliance with the continuous disclosure requirements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (LODR). Such companies may disclose unaudited financial information as filed with the stock exchanges (under Regulation 33 or Regulation 52 of LODR), as applicable, instead of audited financial statements for the interim period in the format as specified under the LODR, along with the limited review report.
- GID v Placement Memorandum – Private Placement
Disclosures - Key changes:
Pursuant to the Second Amendment Regulations, there is now a single common schedule i.e. Schedule I (Disclosures for Issue of Securities) under the NCS Regulations, which sets out the disclosure requirements both private placements and public issues of listed NCS. As a result of aligning the disclosures to be made in a GID or KYID under the NCS Regulations, both private placements and public issues of NCS will require significant additional disclosures going forward which include:
- Issue Expenses: Disclosure of details of expenses
incurred in relation to the issue along with the breakup for each
item of expense will now have to be disclosed in the Issue
Document. This will also include details of fees payable to various
intermediaries and advisors in relation to the issue in terms of
the amount payable as a percentage of total issue expenses and as a
percentage of total issue size.
- Financials: Last 3 years audited financials completed
years must now be audited and certified by statutory auditor(s)
holding a valid certificate issued by the peer review board of the
ICAI.
- Litigations: Details of any outstanding litigation
involving the issuer, promoter, director, subsidiaries, group
companies (identification now required) or any other person, whose
outcome could have material adverse effect on the financial
position of the issuer is now required to be disclosed. This was
previously applicable only for public issues to retail investors
but has now been made applicable for private placements as well.
Further, details of pending proceedings initiated against the
issuer for economic offences are required to be disclosed.
- Director information: Detailed disclosures including
particulars of directors' nature of interest along with the
extent of such interest in the issuer (during the current year and
preceding three financial years) and contributions made by the
directors of the issuer either as a part of the issue or separately
in furtherance of such objects have been included.
- Guarantee and other contingent liabilities: Amount of
corporate guarantees, letters of comfort, contingent liability
including put options issued by the issuer or debt service reserve
accounts along with name of the counterparty on behalf of whom it
has been issued, are required to be disclosed.
- Related Party Transactions: Inclusion of indebtedness
and guarantees with related parties are now required to be
disclosed.
- Issue Proceeds: Detailed disclosures are to be
provided for the use of proceeds including granular disclosures of
the properties purchased and businesses acquired. If acquisition of
shares are contemplated, these must be backed by reports of a
chartered accountant.
- Consents: Consents of the directors, experts, legal
counsel, merchant banker and co-managers (if appointed), bankers to
the issue, guarantors, lenders (if required under their contracts)
and arrangers for an issue of NCS will be required going
forward.
- KMP and senior management personnel (SMP): Additional
disclosures including declaration of their financial or material
interest of SMP, in addition to directors, promoters and KMP have
been introduced. SMP are largely functional heads who either report
to the Board or chief executive officer of the issuer or are one
level below the board of directors.
- Other disclosures: Changes in the capital structure,
details of the equity share capital, change in directors, change in
auditors, default and non-payment of statutory dues, and material
frauds committed against the issuer are now required to be made in
respect of the current financial year as well, in addition to the
last three financial years.
- Rating frequency eased: Debt equity ratio
disclosure removed: Issuers are no longer required to disclose
details pertaining to debt-equity ratio (calculated both on a
pre-issue and post-issue basis) in the placement memoranda.
- Credit rating for the NCS do not need to be revalidated every
month and can now be used so long as not older than a year.
- Issue Expenses: Disclosure of details of expenses
incurred in relation to the issue along with the breakup for each
item of expense will now have to be disclosed in the Issue
Document. This will also include details of fees payable to various
intermediaries and advisors in relation to the issue in terms of
the amount payable as a percentage of total issue expenses and as a
percentage of total issue size.
- Public Issue Prospectus - Key changes in Disclosures for
Public Issues of NCS: SEBI has introduced certain key
amendments to the disclosure regime for public issue of NCS under
the Second Amendment Regulations. These changes came into effect
upon publication of the amendment on Official Gazette and unlike
private placements there is no option for explaining any
non-compliance, until 31 March 2024. While the disclosures for
public issues are largely aligned with the GID format of private
placements, there is no change in the nomenclature of draft
prospectus or draft shelf prospectus followed by prospectus or
shelf prospectus and tranche prospectus. Prominent changes
introduced include:
- Duplication removed for certain disclosures of
financials: Dispensation of the need to include columnar
representation of the audited financial statements both on a
standalone and consolidated basis along with the auditors'
report and replacing the same with the requirement to include
audited financial statements for the last three financial years
(from a certified by statutory auditor(s) holding a certificate
issued by the peer review board of the ICAI) and subsequent stub
period in the prospectus.
- KMP and SMP disclosures introduced: Introduction of
disclosure requirements in relation to SMP, along with KMP, in line
with the disclosure format followed in public issue of equity
shares.
- Easing of certain disclosures: Rationalisation of the
disclosure requirements of statement of capitalisation by
dispensing the requirement of disclosing details pertaining to
debt-equity ratio (calculated both on a pre-issue and post-issue
basis).
- Rating revalidation dispensed: Credit ratings do not
need to be revalidated every month and can now be used so long as
not older than a year, allowing issuers to raise funds by way of
subsequent tranche issues under the same shelf prospectus without
the need to revalidate the rating within the period of validity of
the shelf prospectus.
- Additional disclosures for the current financial year
added: In addition to disclosures for last three fiscal years,
disclosures for the current financial year have to be provided for
changes in the capital structure, details of the equity share
capital, change in directors, change in auditors, default and
non-payment of statutory dues, and material frauds committed
against the issuer.
- Duplication removed for certain disclosures of
financials: Dispensation of the need to include columnar
representation of the audited financial statements both on a
standalone and consolidated basis along with the auditors'
report and replacing the same with the requirement to include
audited financial statements for the last three financial years
(from a certified by statutory auditor(s) holding a certificate
issued by the peer review board of the ICAI) and subsequent stub
period in the prospectus.
- Commencement of disclosures under GID and KYID format:
The disclosure requirements in terms of Second Amendment
Regulations shall be applicable on a 'comply or explain'
basis until 31 March 2024 and on a mandatory basis thereafter.
'Comply or explain' has been explained to
mean that an issuer shall endeavor to comply and achieve full
compliance of the newly introduced Regulation 50A (which comprises
Chapter VA and replaces the earlier disclosures with the revamped
Schedule I) of the Second Amendment Regulations until 31 March
2024, by filing a GID instead of a placement memorandum for private
placement of NCS sought to be listed. However, an issuer not filing
GID must provide reasons for such non-compliance or partial
compliance, along with the steps taken to achieve full compliance
in the form and manner specified by SEBI. The directions regarding
the manner in which reasons for such non-compliances are to be
provided is still awaited from SEBI.
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Definitions and Disclosures of KMP and SMP Introduced
Prior to the Second Amendment Regulations, the terms "Key Managerial Personnel" and "Senior Management", had been referenced to in the NCS Regulations, but not been defined. In order to bring them on par with the definitions provided under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR), and LODR, SEBI has now incorporated the following definitions under the NCS Regulations:
"Senior Management" shall mean the officers and personnel of the issuer who are members of its core management team, excluding the Board of Directors, and shall also comprise all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Board of Directors) and shall specifically include the functional heads, by whatever name called and the Company Secretary and the Chief Financial Officer.
Key Managerial Personnel" shall mean a key managerial personnel as defined in sub-section (51) of section 2 of the Companies Act, 2013.
Section 2(51) of the Companies Act in turn defines 'key managerial personnel', to mean (i) the chief executive officer or the managing director or the manager; (ii) the company secretary; (iii) the whole-time director; (iv) the chief financial officer; (v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and (vi) such other officer as may be prescribed.
Clarity in relation to the above definitions will now ensure uniformity in the identification of KMP and SMP both during pre-listing and post-listing of NCS going forward. Additionally, Schedule I of the NCS Regulations requires disclosures to be made in relation to the SM and KMP of an issuer, for any financial or material interests held by them in the offer of the NCS
Comment
The introduction of the GID and KYID under the Second Amendment Regulations will address the need for investors to have access to detailed information for private placements, akin to a prospectus for a public issue. This is a welcome move since the new framework proposed by SEBI will aid investment decisions by debenture holders by providing more comprehensive disclosures by issuers. Further, the requirement to disclose expenses (in the nature of fees, commissions, costs and expenses incurred as well as on-going costs and expenses) for both publicly issued and privately placed debt securities will bring greater transparency in the issue process for the benefit of all stakeholders. While there are many additional disclosures added, there have been relaxations in terms of dispensation of disclosure of debt-equity ratio and certain repetitive financial information data. With the recent increase in the number of investors registering on online bond platforms to trade in bonds/debentures, SEBI has now attempted to finally bridge the information gap between disclosures in private placement documents and public issue documents. The flip side is that the initial list of GID disclosures are very detailed and may be daunting for non-listed issuers or issuers who are not regularly using the e-bidding platforms through NCS for fund raising. Further, the detailed disclosures may also add to the timelines for drafting the disclosures. However, for large corporates and high value debt issuers, entities requiring leverage financing from foreign investors, issue and listing of debt securities will remain the main source of fund raising and the alignment of disclosures with the standard of disclosures used for retail investors is likely to encourage institutional investors and foreign investors to view the Indian bond markets more favorably.
Footnotes
1. Under Regulation 50A of the Second Amendment Regulations: "Shelf placement memorandum" means a placement memorandum in relation to the first issuance of non-convertible securities issued on a private placement basis, issued prior to this regulation coming into force and valid as on the date of the Second Amendment Regulations coming into force.
2. For the purpose of NCS Regulations, the term "material" means anything which is likely to impact an investor's informed investment decision.
The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com
