Ease of Doing Business and Development of Corporate Bond Markets – An Insight into SEBI’s Revised Framework

Narendra Kumar

23 Oct, 2023

The Securities and Exchange Board of India (SEBI) remains an integral entity in shaping the financial markets of India. Its guidelines and circulars continually mold the ecosystem, making it more robust and aligned with the evolving economic landscape. One of the recent circulars, SEBI/HO/DDHS/DDHS-RACPOD1/P/CIR/2023/172 dated October 19, 2023, brings to light the revisions made to the framework concerning the fund-raising by issuance of debt securities by large corporates. Let’s delve deep into the essence of this directive.

Background:

SEBI, in its effort to develop corporate bond markets and ease business conduct, had previously implemented Regulation 50B of SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations) paired with Chapter XII of the NCS Master Circular. The directive obliged large corporates (LCs) to secure at least 25% of their fresh borrowings during a fiscal year through the issuance of debt securities. This norm was slated to be operational over a successive span of three years, starting from the Financial Year 2022.

Rationale for Revision:

Acknowledging the prevailing market conditions and in response to the feedback from market participants, SEBI deemed it fit to make certain alterations to the framework governing fund-raising through debt securities issuance by LCs.

Revised Applicability Framework:

3.1 Timeline:

• LCs that adhere to an April-March fiscal year will see this framework come into play from April 01, 2024.
• For LCs that operate within a January-December financial year, the revised rules will be applicable from January 01, 2024.Clarification: The term “Financial Year” can denote either April-March or January-December, contingent on the practice adopted by the entity. Hence, FY 2025 can either indicate the span from April 01, 2024, to March 31, 2025, or January 01, 2024, to December 31, 2024.

3.2 Entities Under the Purview: The revised framework will be operational for:

• All listed entities, barring Scheduled Commercial Banks.
• Entities that, as of the last day of the FY (March 31 or December 31), have: a) Their securities (specified or debt or non-convertible redeemable preference shares) listed on recognized Stock Exchanges. b) Outstanding long-term borrowings equal to or exceeding Rs. 1000 crore.Exclusions: The term ‘outstanding long-term borrowings’ will not encompass External Commercial Borrowings, inter-corporate borrowings within the corporate group, funds accrued per government directives, borrowings stemming from interest capitalization, or borrowings aligned with schemes pertaining to mergers, takeovers, or acquisitions.c) Entities possessing a credit rating of “AA”, “AA+”, or “AAA”, relevant to the entity’s primary bank borrowings or plain vanilla bonds without in-built support or structuring.Note on Multiple Ratings: If an entity has varied ratings from diverse agencies, the paramount rating will be used for the application of this framework.

Definition of ‘Large Corporate’:

4.1 A listed entity adhering to the aforementioned criteria (paragraph 3.2) will be deemed as a “Large Corporate” (LC).

Conclusion:

SEBI’s revised framework signifies its adaptive approach to market dynamics and stakeholder feedback. By offering clarity and revising benchmarks, it further underlines its commitment to facilitate business operations while ensuring financial market stability. The move is expected to refine the debt market, striking a balance between corporate needs and market security. As businesses and investors navigate this revised landscape, SEBI’s continued oversight ensures that India’s corporate bond market remains vibrant, transparent, and efficient.