SEBI on fund raising by listed entities from debt market
November 1, 2018
In order to operationalize the Union budget announcement for 2018-19, that large entities be mandated to meet one fourth of their financing needs from the debt market, the Securities and Exchange Board of India (SEBI) has issued detailed guidelines on ‘Fund raising by issuance of Debt Securities by Large Entities’ on 28 November 2018.
The guidelines apply to all listed entities (except Scheduled commercial banks) which fulfil the following requirements as on the last day of the Financial Year (i.e. March 31 or December 31):
- have their specified securities, debt securities and non-convertible redeemable preference shares (NCRPS) listed on a recognised stock exchange in terms of the SEBI LODR Regulations; and
- have an outstanding long term borrowing of Rupees 100 crores or above, with original maturity of one year, excluding External Commercial Borrowings(ECBs) and inter-corporate borrowings(ICBs) between a parent and subsidiary(ies); and
- have a credit rating of AA and above.
- Such a listed entity, fulfilling the aforesaid criteria will be considered as a “Large Corporate” (LC).
An LC shall raise not less than 25% of its incremental borrowings, during the financial year subsequent to the financial year in which it is identified as an LC, by way of issuance of debt securities as defined under SEBI (Issue and Listing of Debt Securities) Regulations 2008. “Incremental borrowings’ shall mean any borrowing done during a particular financial year, of original maturity of more than 1 year, irrespective of whether such borrowing is for refinancing/repayment of existing debt or otherwise and shall exclude ECBs and ICBs between a parent and subsidiary(ies).
For FY 2020 and 2021, the requirement of meeting the incremental borrowing norms shall be applicable on an annual basis. In case the LC is unable to comply with this requirement it shall provide an explanation for such shortfall to the stock exchange. From FY 2022, the requirement of mandatory incremental borrowing in a FY will need to be met over a contiguous block of two years. If, at the end of two years i.e. last day of FY “T+1” there is a shortfall i.e. the actual borrowing through debt securities is less than 25% of the incremental borrowings for FY “T”, a monetary penalty/fine of 0.2% of the shortfall shall be levied.
The LC shall make disclosures to the stock exchanges that it is identified as LC within 30 days and regarding the incremental borrowings done during the FY within 45 days of the end of the FY, in the prescribed formats. The disclosures shall be certified by the company secretary and the CFO of the LC and shall form part of the audited annual financial results of the entity.
SAM & Co comment
These guidelines aim to accomplish a twin objective. Firstly, to be a catalyst that facilitates in the deepening of the corporate bond market thereby making it vibrant and liquid; and secondly, to give a push in the direction where corporates reduce reliance on banks for the purpose of financing.