SEBI Circular on issuance of debt securities by ‘Large Corporates’
With a view to providing an impetus to corporate bonds and being consistent with budget announcements, SEBI, on November 26, 2018 released guidelines for mandatory issue of debt securities by a Large Corporate, a term used for listed entities which have:
a) specified securities or debt securities or non-convertible redeemable preference shares listed on recognized stock exchanges (RSEs); and
b) which have outstanding long term borrowings of Rs 100 crores or above, with original maturity of more than one year (excluding ECBs and inter corporate borrowings between parent – subsidiary (ICBs)); and
c) which have a credit rating of AA and above for unsupported bank borrowings and plain vanilla bonds.
Notably, the term ‘Listed Entities’ also refers to those entities which have debt securities listed on the debt segment of the RSE. Therefore, this circular appears to apply to private companies whose debt securities are listed, if such company also fulfills the other criteria referenced in the circular.
The circular mandates a Large Corporate (LC) to meet at least 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 issue of debt securities. There is no minimum amount specified for the incremental borrowings and it covers all borrowings with maturity of 1 year or more (excluding ECBs and ICBs). This may be restrictive for entities since they might be required to incur the cost of public issue or privately placing debt securities even for smaller amounts of incremental borrowings.
The requirement to meet incremental borrowing norms by way of issuing debt securities shall be applicable for FY2020 and FY2021 on an annual basis, and if the LCs are unable to comply, the shortfall shall be explained to the stock exchange. Therefore, for entities following the April-March as their financial year, the framework shall come into effect from April 1, 2019.
However, from FY2022, the requirement must be met over a contiguous block of 2 years and a shortfall (i.e. amount required to be raised through debt securities but not so raised) shall be subject to a penalty of 0.2% of the shortfall. The penalty shall be paid to the stock exchanges, who will remit this amount to SEBI Investor Protection and Education Fund.
The Large Corporates are required to disclose the fact of their being Large Corporates as per the circular and the incremental borrowings during the financial year to the stock exchanges as well as to include the disclosures in their audited annual financial results. The disclosures made by the Large Corporates are to be certified both by the Company Secretary and the Chief Financial Officer of the Large Corporate.
Relaxation in NBFC Securitization Guidelines
The Reserve Bank of India vide circular dated November 29, 2018 (“RBI Circular”) relaxed the Minimum Holding Period (MHP) for certain transactions to facilitate assignment of loans / receivables by NBFC’s.
As per the RBI Circular, the MHP requirement for originating NBFCs, in respect of loans of original maturity above 5 years, has been reduced to receipt of repayment of six monthly instalments or two quarterly instalments (as applicable). Therefore, the MHP has effectively been reduced from 1 year to 6 months. Provided however, Minimum Retention Requirement for such securitisation/assignment transactions are to be 20% of the book value of the loans being securitised/20% of the cash flows from the assets assigned.
The above dispensation is only applicable to securitisation/assignment transactions carried out during a period of six months from the date of issuance of the RBI Circular.
SEBI Circular on Alternative Investment Funds (AIFs) in International Finance Service Centres (IFSCs)
These guidelines provide for the setting up of AIFs in an International Financial Service Centre (IFSC) (so far, only Gujarat International Finance Tec-City or GIFT) by incorporation as a trust, company, LLP or body corporate. The AIFs can apply for registration under SEBI AIF Regulations, 2012. Non-residents and resident institutional or individual investors eligible under FEMA to invest offshore can invest in these AIFs as per SEBI IFSC Guidelines, 2015. These AIFs can now invest in India through the FVCI / FDI route, in addition to the Foreign Portfolio Investment route. Some requirements in relation to such AIFs can be tabled as under:
|Minimum scheme corpus||USD 3mn.|
|Minimum investment from an investor (other than employees / Directors of AIF or Manager)||USD150000|
|Minimum investment from employees or Directors of AIF or Manager||USD40000|
|Minimum continuing interest of Manager or Sponsor (except for category III AIF)||Two and half percent of corpus or USD750000 whichever is lower|
|Minimum continuing interest of Manager or Sponsor for category III AIF||Five percent of the corpus or USD1.5mn whichever is lower|
It is mandatory for a category III AIF to appoint a SEBI registered custodian, while for category I and II AIFs, it is mandatory to appoint a custodian if the corpus is more than USD70mn.
The circular also provides for Angel Funds to be set up in IFSCs, with the following requirements:
|Minimum net tangible assets of an individual investor who invests in an angel fund (excluding value of his principal residence)||USD300000|
|Minimum net tangible assets of a corporate angel investor||USD1.5mn|
|Minimum investment in angel fund by an angel investor||USD40000 up to maximum 5 years|
|Minimum continuing interest of Manager or Sponsor||Two and half percent of corpus or USD80000 whichever is lesser|