Sebi proposes changes in rules for mandatory bond market borrowing by large corporates

The Sebi has proposed several changes in the rules for mandatory borrowing by the large corporates (LCs) from bond markets. These changes include an increase in the threshold for outstanding long-term borrowings, removal of requirement of rating as a criterion for identifying any entity as large corporates and removal of penalty in case LCs fail to adheres to the minimum 25% borrowing from bond markets.

Change in definition of large Corporates

The threshold for the outstanding long-term borrowings is proposed to be increased to Rs.500 crore or more (from the existing Rs 100 crore or more), which is in line with the present threshold for an entity to be called as ‘high value debt listed entity’.

The capital market regulator believes that the threshold should be aligned with the threshold of “high value debt listed entity” to have uniformity in the Regulations. This would also be a breather for companies with outstanding long-term borrowings of less than Rs.500 crores to prepare themselves for compliance with these provisions once the framework becomes applicable to them.

The Securities and Exchange Board of India (SEBI) has mandated that Large Corporates should make at least 25% of their incremental borrowing by way of issuance of debt securities.

As per the existing definition, an entity will be termed as large corporate for the purpose of mandatory borrowing from bond markets if it: a) has specified securities or debt securities or non-convertible redeemable preference shares, listed on a recognized stock exchange(s) in terms of SEBI LODR Regulations, 2015; and b) has an outstanding long-term borrowing of Rs 100 crore or above, where outstanding long-term borrowings shall mean any outstanding borrowing with original maturity of more than one year and shall exclude external commercial borrowings and inter-corporate borrowings between a parent and subsidiary(ies); and c) has a credit rating of “AA and above”, where credit rating shall be of the unsupported bank borrowing or plain vanilla bonds of an entity, which have no structuring/ support built in; and in case, where an issuer has multiple ratings from multiple rating agencies, the highest of such ratings shall be considered for the purpose of applicability of this framework.”

More exclusions from incremental, long-term borrowings

It has been proposed that the term “incremental borrowings” may be replaced with “qualified borrowings”.

Currently, the term ‘outstanding long-term borrowings’ and ‘incremental borrowings’ excludes external commercial borrowings and inter-corporate borrowings between a parent and subsidiaries.

Further, in addition to the specified exclusions, the following are proposed to be excluded from the definition of the term ‘outstanding long-term borrowings’ and ‘incremental borrowings (now to be referred as qualified borrowings)’: a) Inter-Corporate Borrowings between its holding company and/or subsidiary and /or associate companies; b) Grants, deposits or any other funds received as per the guidelines or directions of Government of India; and c) Borrowings arising on account of interest capitalization.

Removal of rating requirement

The Sebi has propose removal of rating requirement as a criterion for identifying any entity as LC. According to Sebi, since the threshold of long-term outstanding borrowings as an identifying criterion is proposed to be increased from Rs. 100 Crores to 500 Crores, most of the entities with long-term outstanding borrowings of Rs. 500 Cr or above would fall under the bracket of credit rating of ‘AA and above’. Further, the definition of “high value debt listed entity” also doesn’t entail any credit rating criterion. Thus, it is suggested to remove the criteria of credit rating.

Removal of penalty in case of non-compliance

Imposition of penalty for failure to achieve specified level of borrowings (25%) is proposed to be removed keeping in mind the spirit of ease of doing business. Instead of levy of penalty, an incentive and disincentive structure in relating to contribution to the core Settlement Guarantee Fund (SGF) of the Limited Purpose Clearing Corporation (LPCC) has been proposed.

Removal of block period of three years

From FY2022 onwards, the requirement of mandatory borrowing by a LC in a financial year has to be met over a contiguous block of three years.

In order to ease the manner of computation and simplify the process of reckoning the specified level of borrowing (25%), it has now been proposed that the requirement of specified level of borrowing (25%) by a LC will be made applicable on an annual basis. Accordingly, a listed entity identified as a LC, as of FY “T-1”, shall have to fulfil such requirement of specified level of borrowing (25%) for FY “T” in FY “T” itself.

The proposed approach of compliance on an annual basis simplifies the manner of reckoning the specified level of borrowing (25%) by way of issuance of debt securities as it is required to be achieved in the present financial year. This would eliminate the need of multi-year tracking by LCs, thereby easing and simplifying the manner of computation.

Also See: NeSL data shows Rs 14.63 lakh crore loan defaults as on 30 June 2023