Reduction in Denomination of Face Value: SEBI

Nikhil Mogha

04 Nov, 2022

The SEBI in pursuance of powers granted under Section 11(1) of SEBI Act 1992 and Regulation 55 (1) of the SEBI (Issue & Listing of Non-Convertible Securities) has issued a circular on the “Reduction in the denomination for Debt Securities and Non-convertible Redeemable Preference shares” dated 28^th October 2022. The circular on reduction in denomination issued by SEBI is in the interest of investors for the promotion, development and regulation of securities in the market. The SEBI, through this circular, bring changes in Chapter V of Circular no. SEBI/HO/DDHS/P/CIR/2021/613 dated 10th August 2021, which is discussed below in this article.

What was the previous limit on the face value of debt securities?

The SEBI, through a circular “SEBI/HO/DDHS/P/CIR/2021/613” dated 10^th August 2021, has issued an operational circular for the issue & listing of Non-convertible Securities. It is stated by the circular that the face value of each of the debt security or non-convertible redeemable preference shares shall be Rs 10 lakh, and the lot for that trading shall be equal to the face value.

What are the changes brought up by the Current circular?

The recommendations received from various market participants, including issuers has prompted the SEBI to issue a circular on reduction in denomination of the face value. It is contended by the participants, especially the non-institutional investors that the high ticket size of the securities is a deterrent for them as it restricts their ability to access the market for corporate bonds.

Henceforth, it is recommended that by reducing the face value and trade lot, more investors will participate, which will, in turn, improve or enhance the liquidity in the corporate bond market.

Therefore, keeping in view of the above recommendations, the SEBI has brought up the following changes, which will inter alia amend the Chapter V (Denomination of issuance and Trading of Non- Convertible Securities) of the operational circular.

• Paragraph 1.1 of Issuance of Non- Convertible Securities

The face value of each non-convertible redeemable preference share and debt security issued on a private placement basis shall be Rs 1 lakh.

• Paragraph 2.1 of Trading of Non-Convertible Securities

The face value of the listed non-convertible redeemable preference shares and debt securities shall be Rs 1 lakh if they are:

1. Issued on a Private Placement Basis
2. Traded on Stock Exchange or OTC

What is the applicability of circular?

The provisions of the circular on reduction in denomination shall apply to all issues of non-convertible redeemable preference shares and debt securities issued on a private-placement basis through new ISINs (International Securities Identification Numbers)^[1] on or after 1^st January 2023.

However, the issuer can keep the face value at Rs 10 lakh or 1 Lakh for the shelf prospectus memorandum, valid as on 1^st January 2023, while raising funds through a tranche placement memorandum. It is further required that the issuer shall include the necessary addendum while issuing shelf placement.

Conclusion

The SEBI is a securities market regulator that aims to protect investors in the market. It regulates the stock exchanges and financial intermediaries by issuing various operational structures. One such operational structure issued by SEBI is regulating the issuance and trading of debt securities and non-convertible redeemable preference shares. The said circular has mandated that the face value shall be Rs 10 lakh for all debt securities and non-convertible redeemable preference shares. However, the said limitation is acting as a deterrent for the non-institutional investors to access the market in corporate bonds as high ticket size restricts their ability. Therefore, the SEBI has issued the operational circular on Reduction in Denomination, which will reduce the value to Rs 1 Lakh and, consequently, will enhance the investor’s participation in the corporate bond market.

Read Our Article: Guidelines for Compulsorily Convertible Preference Shares under FEMA