Capital Markets Bulletin-Issue Vii

7/31/2019 Capital Markets Bulletin-Issue Vii

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Issue VII June 2008

Disclaimer This bulletin is for information purposes and should not be construed as legal advice. PSA 20081

CAPITAL MARKETSBULLETIN

CAPITAL MARKETS: SUMMERINNOVATIONS

Contents

Introduction ..........................................2A. SEBI Securitised Debt Instruments

Regulations............................................2B. SEBI Listing of Debt Securities

Regulations............................................3

PSALegal CounsellorsE-601, Gauri Sadan5, Hailey Road

New DelhiIndia

Tel: + 91 11 43500-500Fax: + 91 11 43500-502


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Issue VII June 2008


INTRODUCTION

In an endeavor to simplify the regulatory framework, SEBI has issued two notifications for the

capital markets on May 26, 2008 and June 6, 2008. The former is covered in SEBI (Public Offer and Listingof Securitised Debt Instruments) Regulations, 2008 (SEBI Securitised Debt InstrumentsRegulations) and deals with public offer and listing of securitized debt. The latter is SEBI (Issue andListing of Debt Securities) Regulations, 2008 (SEBI Listing of Debt Securities Regulations) andprovides for issuance and listing of non-convertible debt securities (excluding Government bonds) issued byany company, public sector undertaking or statutory corporations.

This bulletin highlights the key aspects of these two regulations which have paved trading of simplerdebt products in the Indian market.

A. SEBI Securitised Debt Instruments Regulations

Securitization, by its very nature, enables risk-holders to spread the risk over a wide range ofinvestors (especially in the case of public offering of a securitized debt), and this can result in a rapid spreadand sharing of the risk amongst a large set of people. In India, the definition of securities in the SecuritiesContracts (Regulation) Act, 1956 (SCRA) included corporate instruments, government securities,derivatives and rights or interests in securities. However, securitized instruments (instruments created bysecuritizing loans) such as mortgage-backed securities and asset-backed securities fell outside the ambit of thedefinition, and were ineligible for listing and trading on stock exchanges. As a consequence, securitizationdeals were done principally by means of private placements.

By qualifying such instruments as securitiesby means of an amendment to the SCRA in 2007, a legalframework was created for public issue and secondary market trading of such instruments. The definition

now stipulates that a securitized debt instrument is any certificate or instrument (by whatever name called),issued to an investor by any issuer being a special purpose distinct entity which possesses any debt orreceivable, including mortgage debt, assigned to such entity, and acknowledging the beneficial interest ofsuch investor in such debt or receivable, including mortgage debt, as the case may be.

Prior to the notification of the regulations for listing and trading of securitized debt instruments,only private placement to Qualified Institutional Buyers was permitted for these instruments.

The key highlights of the regulations include:

It is necessary that the entity making a public offer of securitized debt instruments or seeking listingfor securitized debt instruments must be a special purpose distinct entity, and all the trustees areregistered with SEBI;

If a debenture trustee, or a securitization company or an asset reconstruction company areregistered with regulators such as Reserve Bank of India, SEBI or National Bank for Agriculture andRural Development, no separate registration will be required;

Key permissible structures are provided for special purpose entities; The securitized debt instruments issued to public or listed on a recognized stock exchange will be in

dematerialized form;


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The instrument will have to acknowledge actual benefit accrued to the investors in underlying debtor receivables;

There is flexibility in terms of pay-through/pass-through structures; The assignment of assets to the issuer must be a true sale which means that, according to SEBI, the

"debt or receivables assigned to the issuer should be able to generate identifiable cash flows for thepurpose of servicing the instrument and the originator should have valid enforceable interests in theassets and in cash flow of assets prior to securitization;"

The originator1 must be an independent entity from the issuer and its trustees should not exerciseany control over the issuer;

The issuer cannot acquire any debt from any originator who is part of the same group or under thesame management as the trustee;

SEBI has put a time limit of 30 days no public offer of a securitized debt instrument shall remainopen beyond thirty days;

The draft offer document shall be filed with SEBI at least 15 days before opening of the issue; In case of public issues, listing will be mandatory; The instruments issued on a private placement basis may also be listed subject to the compliance of

simplified provisions of the regulations;

The securitized debt instruments issued to the public or listed on a recognized stock exchange inaccordance with the regulations shall be freely transferable;

The terms of issue of the securitized debt instrument shall not be varied adversely without theconsent of the investor;

Defaults by a trustee who fails to comply with the terms of the certificate, SEBI Act as well as SCRAmay lead to cancellation or suspension of the registration.

B. SEBI Listing of Debt Securities Regulations

In order to facilitate development of a vibrant primary market for corporate bonds in India theseregulations aim to provide a simplified regulatory framework for issuance and listing of non-convertible debtsecurities issued by any entity, a public-sector undertaking or private corporate bodies. It excludes bondsissued by Governments.

The main features are:

Issuers have flexibility to structure their instruments and decide on the mode of offering, withoutdiluting the areas of regulatory concern;

There is no need to file the draft offer documents with SEBI for comments; The instrument-related disclosures have to follow Schedule II of the Companies Act, Schedule I of

the regulations, and additional disclosures prescribed by SEBI;

For public issues, in addition to the disclosures specified under Schedule II of the Companies Act,the regulations require additional disclosures about the issuer and the instrument such as nature ofinstruments, rating rationale, face value, issue size, etc.;

1 Section 2(1)(m) of the SEBI Securitised Debt Instruments Regulations provide that originator means the assignor of debt oreceivables to a special purpose distinct entity for the purpose of securitization.


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The three cornerstones of transparency are emphasis is on due diligence, adequate disclosures andcredit rating;

Non-Banking Financial Companies and Public Financial Institutions are exempt from mandatorylisting; however, they may list their privately placed debt securities subject to compliance with the

simplified requirements and Listing Agreement; Facilitating electronic disclosures, the focus is on the role and obligations of the debenture trustees,

execution of trust deed, creation of security and creation of debenture redemption reserve inaccordance with the Companies Act;

The draft offer document must be filed with the designated stock exchange through a registeredmerchant banker who shall be responsible for the due diligence;

The draft offer document shall be placed on the websites of the stock exchanges for a period ofseven working days for comments;

While listing of securities issued to the public is mandatory, the issuers may also list their debtsecurities issued on private placement basis subject to credit rating, and compliance with thesimplified regulatory requirements provided in the regulations;

The regulations place significant obligations on the intermediaries and issuers; Redemption must be in terms of the offer documents; A roll-over of the debt securities requires passing of a special resolution i.e. consent of at least 75%

of the holders of the securities with a prior minimum notice period of 21 days;

SEBI may, suo moto or based upon information received, appoint people to review and inspect booksof accounts and other documents belonging to the issuer, merchant banker or other intermediariesin order to verify non-compliance with various matters including listing conditions, legislations suchas the SEBI Act, SCRA and others;

The provisions of SEBI (Disclosure and Investor Protection) Guidelines relating to issue and listingof debt securities stand rescinded.

According to SEBI, the lack of an active secondary market and limited success of corporate bindofferings are, among others reasons for re-evaluating its policies. The Board also feels that simplifyingraising money will assist in meeting the demands of the infrastructure sector. It is premature to speculateabout the efficacy of these two regulations. Time will determine that or identify loopholes, and possiblyhighlight need for amendments in several over-lapping legislations relating to securities and corporatelaw.

Contact

Priti SuriE-mail: [email protected]: +91 11 4350 0501

Capital Markets Bulletin-Issue Vii

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