SEBI

Revised SEBI Framework for Fund Borrowing by Large Corporates

The Securities Exchange Board of India rationalized the framework for fund borrowing by large corporates, which led to an increase in the threshold value and the formulation of a new incentive-disincentive framework in 2023. The circular issued by SEBI analyzed the prevailing market conditions to facilitate the ease of doing business and fundraising by issuing debt securities.

Historical Perspective of SEBI Framework for Large Corporates

Earlier, the Securities Exchange Board of India (SEBI) introduced many frameworks governing fund borrowing by large corporates. The criteria for long-term borrowings were governed under the framework for borrowings by large corporates issued by a SEBI circular in 2018-2019.

Also, the framework mandated the investors and insurers to invest a particular percentage of their incremental receipts in corporate bonds and debt securities. However, the insurers struggled to comply with mandatory requirements even after the 4 years of the framework introduction. This led to the introduction of a revised SEBI framework for fund borrowing by large corporates.

SEBI’s Revised Borrowing Framework Effective from April 2024

The Securities Exchange Board of India revised the framework for borrowing by large corporates in a circular dated 2023. Thus, the revised framework is mainly issued to facilitate the ease of doing business and the development of corporate bond markets.

The applicability of the revised framework came into fact from April 1st, 2024, for the large corporates following the April-March financial year. Also, the framework applies to all listed entities except scheduled commercial banks, which have a financial year ending on either March 31st or December 31st.

Terminologies under the SEBI Revised Framework

SEBI revises terminologies under the new framework for fund borrowing by large corporates issued in 2023. The following are the terminologies defined under the revised framework:

1. Financial Year

The financial year implies the year ending either from April to March or January to December. The financial years are decided based on the choice of entities. For example, FY 2025 means a financial year either following April 1st, 2024 – March 31st, 2025, or January 1st, 2024 – December 31st, 2024.

2. Fund Borrowing by Large Corporates

Fund borrowing by large corporates is a process through which large corporations raise funds by issuing debt securities in the financial year.

3. Large Corporates

The large corporates are listed entities having an outstanding long-term borrowing of Rs. 1000 crores or above and a credit rating agency of AA/AA+/AAA. Also, large corporates list their non-convertible redeemable preference shares, debt, and specific securities on a recognized stock exchange.

4. Outstanding Long Term Borrowings

Outstanding long-term borrowings include outstanding borrowing with an original maturity of more than 1 year. The following borrowings are excluded from the ambit of outstanding long-term borrowings:

  • External commercial borrowings, i.e., ECB;
  • Inert-corporate borrowings;
  • Grants, deposits, and other funds received following the guidelines of the Indian Government;
  • Interest capitalization borrowings;
  • Borrowings for mergers, acquisitions, and takeovers.
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5. Qualified Borrowings

Qualified or incremental borrowings are issued between 2 balance sheet dates with an original maturity of more than 1 year. The qualified borrowings are determined under the audited accounts for the year filed with the stock exchange.

Objective of Revised Framework for Large Corporates

The objective behind the issuance of the revised framework for fund borrowing by large corporates is provided below:

  • To facilitate the ease of doing business;
  • For the development of corporate bond markets;
  • Address the changing market dynamics;
  • Ensure effective fundraising through the issuance of debt securities.

Key Features of SEBI Revised Framework for Large Corporates

SEBI has issued a circular for amending and revising the provisions of the old framework for large corporates in 2018-2019. The following are the features of the revised framework for fund borrowing by large corporates:

1. Fundraising by Large Corporates

Large corporates can raise at least 25% of incremental or qualified borrowings in the financial year. The fundraising is accompanied by issuing debt securities in the financial year after the end of the financial year when the entity was identified as a large corporates.

2. Threshold Value of Outstanding Long-Term Borrowing

The revised framework in 2023 provides for a rise in the threshold value of the outstanding long-term borrowing of large corporates. This increase in the threshold value from Rs. 100 crores to Rs. 1000 crores or above led 17 entities to qualify as large corporates.

3. Retention of Credit Rating Requirements

The amendment discusses retaining entities with long-term outstanding borrowings of Rs. 500 crores or above. The entities are required to have a credit rating of AA/AA+/AAA and above.

4. Retention of Block Period

Large corporates are required to raise the mandatory qualified or incremental borrowings over a contiguous block of 3 years. This retention of the block period is applicable from the financial year 2025 simplifying the process of raising debt securities.

5. Applicable Incentives

Applicable incentives are attracted in case there is any surplus in the requisite borrowings (i.e., actual borrowing by way of debt securities is more than 25% of the incremental borrowings) by the end of the three years. Large corporates enjoy the following incentives, as provided below:

  • A reduction in annual listing fees of the financial year T+2 in consonance with the debt securities or debt securities and non-convertible redeemable preference shares;
  • Credit reduction in the amount of contribution made to the core settlement guarantee fund (SGF) of LPPC.

6.    Disincentive in Case of Shortfall

Disincentive leading to additional contributions to the core SGF is applied in case there is a shortfall in the requisite borrowings of the large corporates.

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Responsibilities of the Stock Exchange

The stock exchange holds specific responsibilities for securing fund borrowing by large corporates. The following are the responsibilities of the stock exchange:

1. Identification of Large Corporates

Regulations 33 and 52 of the LODR Regulations authorize the stock exchange to release a uniform list of large corporates for the financial year. The list determining the large corporations must be released on the official website of the Stock Exchange.  Also, the stock exchange shall notify regarding the identification of the listed entities as large corporates by way of email or any other means.

2. Calculation of Incentives or Disincentives

The stock exchange, in coordination with each other, is authorized to calculate the incentive and disincentive as of the last day of the financial year T+2. The calculation of incentives or disincentives is facilitated based on the financial results submitted by large corporates.

Also, the stock exchange is authorized to convey the same to the large corporates by the following deadlines:

  • By May 31st for large corporates following the April-March financial year;
  • By February 28th or 29th for large corporates following the January-December financial year.

3. Sharing Information with LPCC

Next, the stock exchange is authorized to share the relevant information (regarding the contribution made to the core SGF) with the Limited Purpose Clearing Corporations (LPCC).

The information is required to be shared by May 31st for large corporates following the April-March financial year and by the 28th/29th of February for large corporates following the January-December financial year.

4. Amendments to Bylaws, Rules & Regulations

Also, the stock exchange must make necessary amendments to the applicable by-laws, rules, and regulations issued to implement and comply with the SEBI framework for Fund Borrowing by Large Corporates.

5. Ensure System Implementation

Lastly, the stock exchange is responsible for establishing the necessary systems and infrastructure to implement the SEBI circular for fund borrowing by large corporates.

Responsibilities of LPPC

The framework also enumerates the responsibility of the Limited Purpose Clearing Corporations (LPCC) to make changes and place the necessary infrastructure for securing compliance of the large corporates. Also, the LPPC is required to coordinate with the stock exchange to ensure compliance of large corporates.

Relaxations to Large Corporates by SEBI

Certain relaxations are given to the large corporates as identified till date. The following is the list of relaxations the Securities Exchange Board of India gives.

  • SEBI has provided disclosure for the identification of the listed entity;
  • Annual disclosure for incremental borrowings of FY 2024;
  • Annual disclosure for mandatory borrowing done through the issuance of debt securities;
  • Disclosure for actual borrowing made by debt securities in the financial year.
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Comparative Analysis of Old and Revised SEBI Framework

There exists a difference between the old and revised SEBI framework which aims to incentivize large corporates. The comparative analysis of the old and revised framework is provided below:

Subject MatterFramework of 2018-19Framework of 2023
Definition of Large CorporatesIncludes long-term borrowing of Rs. 100 crores or moreIncludes long-term borrowings of Rs. 1000 crores or more
Excluded BorrowingsExternal commercial and inert-corporate borrowings between a parent and subsidiaryGrants, deposits, or other funds (issued by the Indian government’s direction), borrowing arising on account of interest capitalization, borrowing for mergers, acquisitions, and takeovers
IncentivesNo incentivesIncentives for reduced annual listing fees and contributions to SGF
PenaltyA penalty of 0.2% of the shortfall in the borrowed amountNo penalty

Conclusion

The SEBI revised framework for fund borrowing by large corporates attempts to tackle the hindrances faced by legal entities classified as large corporates. The changes made to the old framework led to the deepened bond market through the issuance of mandatory debt securities. Generally, these amendments promote the ease of doing business by facilitating sustainable economic growth in the fund borrowing by large corporates.

FAQ’s

  1. What is the threshold value limit of outstanding long-term borrowing?

    The threshold value limit for outstanding long-term borrowing of large corporates has increased from Rs. 100 crores to Rs. 1000 crores or above.

  2. What are large entities as per SEBI?

    Large corporates are listed entities with outstanding long-term borrowing of Rs. 1000 crores or more and a credit rating of AA/AA+/AAA.

  3. What are the initial disclosure requirements for large entities?

    The initial disclosure of the identification of the listed entity, name of the stock exchange, incremental borrowings, and actual borrowing made by debt securities in the FY is mandatorily required for large entities.

  4. What is fund borrowing by large corporates?

    Fund borrowing by large corporates is a process through which large corporations raise funds by issuing debt securities in the financial year.

  5. What is large corporate borrowing in SEBI?

    Large corporate borrowings, also known as qualified borrowings, are incremental borrowings issued between 2 balance sheet dates with an original maturity of more than 1 year.

  6. What are the key features of the revised framework for fund borrowing by large corporates?

    The revised framework for fund borrowing by large corporates includes a rise in at least 25% of incremental or qualified borrowings, the threshold value of the outstanding long-term borrowing in the financial year, retention of credit rating requirements, and a block period of 3 years.

  7. Who revised the regulation for fund borrowing by large corporates?

    The Securities and Exchange Board of India revised the regulation for fund borrowing by large corporates in 2023.

  8. What are the objectives of the revised regulation?

    Facilitating the ease of doing business, developing corporate bond markets, addressing the changes in market dynamics, and ensuring effective fundraising through the issuance of debt securities are the main objectives of the revised SEBI regulation for fund borrowing by large corporates.

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