The corporate bond market is a stated strategic focus area for financial sector regulation in India. When the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“Debt Regulations”) were notified about a year ago, the intention was to kickstart the corporate bond market. However, avoidable ambiguity prevails, with bad interpretation by merchant bankers and the media being left undisturbed by the Securities and Exchange Board of India (“SEBI”).
The Debt Regulations purport to provide a regulatory framework for corporates to raise debt and list such debt on stock exchanges. The debt instruments could either be issued in the form of a “public issue” i.e. inviting the public to subscribe to debt instruments or by way of “private placements”, where only select invitees numbering less than 50 could initially subscribe. In either approach, the debt issued would get to be listed on the stock exchanges, giving the bondholders liquidity in their holding and thereby getting the issuing corporate cheaper cost of debt.
One significant area of ambiguity that has arisen is the issue of whether every bond that is sought to be listed has to necessarily be secured to the extent of 100 per cent. Recently, stock exchanges have notified a special listing agreement for bond listings, which too has compounded the issue. SEBI ought to proactively clarify its position – either by amending the Debt Regulations to make them state its real intention, or by clarifying to the market that the widely held belief is not its regulatory intent.
Regulation 17 of the Debt Regulations provides that “the proposal to create a charge or security, if any, shall be disclosed…” Schedule 1 of the Debt Regulations, which prescribes the contents of an offer document for a public issue of debt instruments, requires the offer document to contain a summary term sheet that includes “brief information pertaining to the “secured / unsecured” debt securities.
A normal common sense interpretation of these two provisions can only mean that debt instruments issued under the Debt Regulations could either be secured or unsecured. However, many merchant bankers, timid in their interpretation of SEBI regulations because of the fear of differing with SEBI, believe that every debt instrument ought to be secured. The basis of their fear is Regulation 26(6) of the Debt Regulations, which require the issuer and merchant banker to “ensure that the security created to secure the debt securities is adequate to ensure 100 per cent asset cover for the debt securities.”
From a plain reading of the law, Regulation 26(6) could only mean that if the debt instruments issued under the Debt Regulations are proposed to be secured, they ought to have a 100per cent asset cover. Such a framework could only mean that if one were to issue secured debt, the secured instruments ought to be fully secured and not secured by anything short of a 100per cent security cover, but one could indeed issue debt securities that are wholly unsecured.
The recently issued listing agreement merely repeats the contents of Regulation 26(6) of the Debt Regulations. The media, however, widely reported that SEBI requires all debt instruments that would be listed, to only be fully secured. None of these reports have been denied by SEBI. While it could clearly be
SEBI’s view that an issuer ought not to give a false impression to the investors (of issuing a secured instrument when the instrument is not fully secured), it surely cannot mean that that Debt Regulations, in their current shape, prohibit any issuance of listed unsecured debt.
Should SEBI indeed beli-eve that no unsecured debt instrument ought to be iss-ued, surely the Debt Regulations would need to be ame-nded so that market players clearly know SEBI’s unstated mind and can organize themselves accordingly. From a policy perspective, there is no basis for any regulator placing a prohibition on listing of unsecured debt.
If the corporate bond market is to thrive, corporates ought to be permitted to raise debt without such artificial fetters, and to list such debt on stock exchanges. Rules governing acceptance of deposits prescribed by the Government of India under the Companies Act, 1956 for all companies and by the Reserve Bank of India for non-banking financial companies, pose their own challenges to issuance of unsecured debt – unsecured debt can come very close to being “public deposits” but such challenges are not entirely insurmountable. However, the focus of policymaking ought to shift to addressing such challenges rather than posing newer challenges.
Worse, SEBI ought not to remain a spectator when the well-intended and reasonably well-drafted Debt Regulations lend themselves to an adverse interpretation. There is no case to wait for someone to seek a no-action letter under the Informal Guidance Scheme, if SEBI indeed believes that debt market is important for development of the capital markets. While one could argue that misinterpretation of law by market intermediaries should not blemish SEBI’s position, it is indeed true that the regulator ought to proactively dispel wrong notions, or change the stated law, if the law has been wrongly articulated, particularly in segments that are declared to be a strategic focus area. (The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)