Overhaul of Listed Debt Securities Regime –Disclosures Aligned for Private Placements and Public Issues

1.     

Parity in disclosures introduced for Public Issue and Private Placement of NCS

Pursuant to the theme of this amendment to bring alignment, SEBI has deleted separate disclosure schedules for public issue prospectuses and private placement memoranda and substituted it with a common schedule of disclosures for both, largely making the disclosures uniform for public issues and private placements of NCS. To this end, Schedule I (Disclosures for Public Issue of Debt Securities and Non-Convertible Redeemable Preference Shares) and Schedule II (Disclosures for Private Placement of Non-Convertible Securities) of the NCS Regulations has been replaced by a common and new Schedule I (Disclosures for Issue of Securities) of the Second Amendment Regulations. The revamped Schedule I also consolidates certain disclosures specified under the Companies (Prospectus and Allotment of Securities) Rules, 2014 issued under the Companies Act, 2013 which were applicable for private placements and certain identified disclosures from Form PAS-4 have now been applied for public issues as well. This was introduced at the behest of market participants that felt investors need to have access to detailed information (without information asymmetry between placement memorandum for private placement and a prospectus for a public issue) as privately placed NCS could also find its way to non-institutional investors as well.

2.     

General Information Document and Key Information Document introduced for Private Placements: Shelf Placement Memorandum to be phased out

In order to avoid multiplicity of placement memoranda filed for listed NCS by entities in the same year as well as to reduce the operational costs involved in such documentation, SEBI has introduced the concept of a general information document (GID) and key information document (KYID) for entities proposing to list NCS. Chapter VA (Issuance and listing of NCS on a private placement basis) has been introduced in the NCS Regulations mandating issuers proposing to list NCS on a private placement basis to file a GID with the stock exchange(s), containing specific disclosures as set out in the unified and new Schedule I of the Second Amendment Regulations. GID is a replacement and substantively streamlined version of the shelf placement memorandum (SPM) and while SPM as a concept has been retained in the NCS Regulations, it will cease to be of relevance post the time period specified in the already existing SPMs and going forward GIDs will be filed.

a)

Commencement of disclosures under GID and KYID format: The disclosure requirements in terms of Second Amendment Regulations shall be applicable on a ‘comply or explain’ basis until 31 March 2024 and on a mandatory basis thereafter. ‘Comply or explain’ has been explained to mean that an issuer shall endeavor to comply and achieve full compliance of the newly introduced Regulation 50A (which comprises Chapter VA and replaces the earlier disclosures with the revamped Schedule I) of the Second Amendment Regulations until 31 March 2024, by filing a GID instead of a placement memorandum for private placement of NCS sought to be listed. However, an issuer not filing GID must provide reasons for such non-compliance or partial compliance, along with the steps taken to achieve full compliance in the form and manner specified by SEBI. The directions regarding the manner in which reasons for such non-compliances are to be provided is still awaited from SEBI. 

b)

Validity of GID: GID shall be valid for a period of 1 (one) year from the date of opening of the first offer of NCS made under such GID and no further GID shall be required to be filed in respect of a second or subsequent offer of NCS, during the validity period of 1 (one) year of such GID. GID may indicate the size of the issue i.e., the amount of monies which the issuers propose to raise during the period of validity of GID.

c)

One-time yearly disclosure under GID format and pricing supplement like KYID for Private Placements going forward: SEBI has clarified that:

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issuers who have filed a GID for the primary issue of listed NCS on a private placement basis and subsequently intend to issue further NCS within the validity of such GID, shall now be required to file only a KYID with the stock exchanges and shall be exempted from filing a separate GID;

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issuers who have previously filed a SPM[1] for issue of listed NCS on private placement basis prior to the date of the Second Amendment Regulations, coming into force, and intend to issue further NCS within the validity of such SPM, shall now be required to file only a much leaner KYID with the stock exchanges and will be exempted from filing a GID for each such subsequent issuance within the validity of SPM;

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issuers who have previously filed a shelf prospectus for public issue of NCS, and subsequently intend to issue NCS on a private placement basis within the validity period of such shelf prospectus, shall only file the KYID and are not required to file GID;

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issuers who have previously filed a GID for issue of NCS on private placement basis and subsequently intend to issue a listed commercial paper within the validity of such GID, shall now be required to file only a KYID with the stock exchanges and will be exempted from filing a separate GID; and

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issuers who have previously filed a shelf prospectus for public issue of NCS, and subsequently intend to issue listed CPs on a private placement basis within the validity period of such shelf prospectus, shall only file the KYID and are not required to file GID.

d)

Contents of KYID: KYID is akin to a pricing supplement and replaces a tranche placement memorandum or the need to do a completely new placement memorandum for subsequent issues of NCS and CPs by the same issuer during the validity of the GID or SPM or prospectus. KYID is required to be kept very lean and disclosures are limited to material changes since the GID and the terms of the new offer of NCS being made under the KYID. The disclosures prescribed for KYID is as follows:

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details of the offer of NCS in respect of which the KYID is being issued;

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financial information, if such information provided in the GID is more than 6 (six) months old;

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material[2] changes, if any, in the information provided in the GID;

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any material developments not disclosed in the already filed GID; and

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disclosures applicable in case of private placement of NCS as specified in Schedule I of the Second Amendment Regulations, in case the subsequent offer is made during the validity of the shelf prospectus for which no GID has been filed.

Filing of a KYID, in the case of private placements, will simplify the listing procedures of NCS for frequent issuers of NCS and a full-fledged SPM or GID will not be required to be filed within its respective validity periods.

e)

Financial Information under GID and KYID aligned for all types of NCS issue: Under the amended NCS Regulations, audited financial statements provided (for both private placement and public issue of NCS) by an issuer seeking listing of NCS must now be audited and certified by the statutory auditor(s) who holds a valid certificate issued by the peer review board of the Institute of Chartered Accountants of India (ICAI). It is the first time SEBI has introduced the requirement of the financials being audited by a peer reviewed auditor for issuers issuing NCS similar to the requirement for issuers issuing equity shares by way of an initial public offer (IPO).

The requirement of providing a columnar representation of financial statements disclosed in the placement memoranda or prospectus of NCS is done away with.

Further, SEBI has updated the requirements for disclosure of certain key operational and financial parameters (both on a standalone and consolidated basis) by replacing the line items that were largely aligned with IGAAP disclosures and have been replaced the same with line items as per IND AS.

SEBI has however continued with the requirement of including audited financial statements disclosed by issuers in the GID or KYID (as the case may be) which aren’t older than 6 (six months) from the date of the issue document or issue opening date, as applicable. Exceptions have been made for listed companies and their subsidiaries which are in compliance with the continuous disclosure requirements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (LODR). Such companies may disclose unaudited financial information as filed with the stock exchanges (under Regulation 33 or Regulation 52 of LODR), as applicable, instead of audited financial statements for the interim period in the format as specified under the LODR, along with the limited review report.

f)

GID v Placement Memorandum – Private Placement Disclosures - Key changes:

Pursuant to the Second Amendment Regulations, there is now a single common schedule i.e. Schedule I (Disclosures for Issue of Securities) under the NCS Regulations, which sets out the disclosure requirements both private placements and public issues of listed NCS. As a result of aligning the disclosures to be made in a GID or KYID under the NCS Regulations, both private placements and public issues of NCS will require significant additional disclosures going forward which include:

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Issue Expenses: Disclosure of details of expenses incurred in relation to the issue along with the breakup for each item of expense will now have to be disclosed in the Issue Document. This will also include details of fees payable to various intermediaries and advisors in relation to the issue in terms of the amount payable as a percentage of total issue expenses and as a percentage of total issue size.

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Financials: Last 3 years audited financials completed years must now be audited and certified by statutory auditor(s) holding a valid certificate issued by the peer review board of the ICAI.

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Litigations: Details of any outstanding litigation involving the issuer, promoter, director, subsidiaries, group companies (identification now required) or any other person, whose outcome could have material adverse effect on the financial position of the issuer is now required to be disclosed. This was previously applicable only for public issues to retail investors but has now been made applicable for private placements as well. Further, details of pending proceedings initiated against the issuer for economic offences are required to be disclosed.

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Director information: Detailed disclosures including particulars of directors’ nature of interest along with the extent of such interest in the issuer (during the current year and preceding three financial years) and contributions made by the directors of the issuer either as a part of the issue or separately in furtherance of such objects have been included.

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Guarantee and other contingent liabilities: Amount of corporate guarantees, letters of comfort, contingent liability including put options issued by the issuer or debt service reserve accounts along with name of the counterparty on behalf of whom it has been issued, are required to be disclosed.

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Related Party Transactions: Inclusion of indebtedness and guarantees with related parties are now required to be disclosed.

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Issue Proceeds: Detailed disclosures are to be provided for the use of proceeds including granular disclosures of the properties purchased and businesses acquired. If acquisition of shares are contemplated, these must be backed by reports of a chartered accountant.

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Consents: Consents of the directors, experts, legal counsel, merchant banker and co-managers (if appointed), bankers to the issue, guarantors, lenders (if required under their contracts) and arrangers for an issue of NCS will be required going forward.

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KMP and senior management personnel (SMP): Additional disclosures including declaration of their financial or material interest of SMP, in addition to directors, promoters and KMP have been introduced. SMP are largely functional heads who either report to the Board or chief executive officer of the issuer or are one level below the board of directors.

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Other disclosures: Changes in the capital structure, details of the equity share capital, change in directors, change in auditors, default and non-payment of statutory dues, and material frauds committed against the issuer are now required to be made in respect of the current financial year as well, in addition to the last three financial years.

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Rating frequency eased: Debt equity ratio disclosure removed: Issuers are no longer required to disclose details pertaining to debt-equity ratio (calculated both on a pre-issue and post-issue basis) in the placement memoranda.

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Credit rating for the NCS do not need to be revalidated every month and can now be used so long as not older than a year.

g)

Public Issue Prospectus - Key changes in Disclosures for Public Issues of NCS: SEBI has introduced certain key amendments to the disclosure regime for public issue of NCS under the Second Amendment Regulations. These changes came into effect upon publication of the amendment on Official Gazette and unlike private placements there is no option for explaining any non-compliance, until 31 March 2024. While the disclosures for public issues are largely aligned with the GID format of private placements, there is no change in the nomenclature of draft prospectus or draft shelf prospectus followed by prospectus or shelf prospectus and tranche prospectus. Prominent changes introduced include:

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Duplication removed for certain disclosures of financials: Dispensation of the need to include columnar representation of the audited financial statements both on a standalone and consolidated basis along with the auditors’ report and replacing the same with the requirement to include audited financial statements for the last three financial years (from a certified by statutory auditor(s) holding a  certificate issued by the peer review board of the ICAI) and subsequent stub period in the prospectus.

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KMP and SMP disclosures introduced: Introduction of disclosure requirements in relation to SMP, along with KMP, in line with the disclosure format followed in public issue of equity shares.

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Easing of certain disclosures: Rationalisation of the disclosure requirements of statement of capitalisation by dispensing the requirement of disclosing details pertaining to debt-equity ratio (calculated both on a pre-issue and post-issue basis).

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Rating revalidation dispensed: Credit ratings do not need to be revalidated every month and can now be used so long as not older than a year, allowing issuers to raise funds by way of subsequent tranche issues under the same shelf prospectus without the need to revalidate the rating within the period of validity of the shelf prospectus.

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Additional disclosures for the current financial year added: In addition to disclosures for last three fiscal years, disclosures for the current financial year have to be provided for changes in the capital structure, details of the equity share capital, change in directors, change in auditors, default and non-payment of statutory dues, and material frauds committed against the issuer.

3

Definitions and Disclosures of KMP and SMP Introduced

Prior to the Second Amendment Regulations, the terms “Key Managerial Personnel” and “Senior Management”, had been referenced to in the NCS Regulations, but not been defined. In order to bring them on par with the definitions provided under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR), and LODR, SEBI has now incorporated the following definitions under the NCS Regulations:

“Senior Management” shall mean the officers and personnel of the issuer who are members of its core management team, excluding the Board of Directors, and shall also comprise all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Board of Directors) and shall specifically include the functional heads, by whatever name called and the Company Secretary and the Chief Financial Officer.

Key Managerial Personnel” shall mean a key managerial personnel as defined in sub-section (51) of section 2 of the Companies Act, 2013.

Section 2(51) of the Companies Act in turn defines ‘key managerial personnel’, to mean (i) the chief executive officer or the managing director or the manager; (ii) the company secretary; (iii) the whole-time director; (iv) the chief financial officer; (v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and (vi) such other officer as may be prescribed.

Clarity in relation to the above definitions will now ensure uniformity in the identification of KMP and SMP both during pre-listing and post-listing of NCS going forward. Additionally, Schedule I of the NCS Regulations requires disclosures to be made in relation to the SM and KMP of an issuer, for any financial or material interests held by them in the offer of the NCS