The debt markets in the Indian jurisdiction broadly consist of the government securities markets, ie, the G-Sec markets, and the corporate securities markets. The G-Sec markets comprise, amongst others, sovereign bonds and treasury bills issued by the Government of India and bonds issued by state governments and local municipal corporations. The corporate securities markets include bonds, debentures, commercial papers and certificates of deposit issued by banks, financial institutions and corporate entities.
BSE Limited (“BSE”) and National Stock Exchange of India Limited (“NSE”), which are nation-wide stock exchanges in India, have classified the debt securities in the secondary markets under two distinct segments, namely, the wholesale debt market segment, which is primarily driven by institutional demand, and the retail debt market segment, which involves participation from individual investors in addition to the institutional investors. These segments provide a trading platform for a wide range of fixed income securities such as government securities, treasury bills by the Government of India, bonds by state governments and local municipal corporations and commercial papers and certificates of deposit by corporate entities. Each of these stock exchanges regulate these segments in accordance with their respective operative guidelines and circulars, though the macro-functioning of these segments are broadly similar.
BSE and NSE offer several indices for fixed income securities. These indices are formulated based on certain characteristics of a debt security. The criteria for inclusion are based on the nature of the debt security. For instance, NSE offers independent and comprehensive benchmarks for fixed income securities based on duration, money market and maturity. Similarly, BSE debt markets indices are broadly classified under government, corporate and composite indices. The inclusion criteria for indices are formulated by the stock exchanges based on the methodology adopted by them.
The Securities and Exchange Board of India (“SEBI”), BSE and NSE primarily govern various aspects in relation to issuance, public offer and listing of debt securities in India by an Indian company.
SEBI, the regulator of securities markets in India, was established by the Government and functions as an autonomous body conferred with quasi-legislative and quasi-judicial powers in relation to functioning of the securities markets in India. The protection of the interests of the general public and the development of securities markets in India are the foremost functions of SEBI. In addition, SEBI also regulates market intermediaries, such as stock exchanges, stockbrokers, merchant bankers and other intermediaries involved in the securities market, and acts as a watchdog for fraudulent and unfair trade practices in the securities markets. BSE and NSE, which are nation-wide stock exchanges, stipulate certain additional requirements in relation to listing of debt securities in India.
For a standalone debt offering to the public, an Indian issuer is required to prepare and file a draft prospectus with the designated stock exchange and SEBI through a lead merchant banker registered with SEBI. The issuer company is also required to make an application to the stock exchanges for obtaining in-principle approval to list the debt securities. The final prospectus is subsequently filed with the stock exchanges, SEBI and the jurisdictional registrar of companies, the administrative arm of the Ministry of Corporate Affairs, Government of India (“RoC”).
For issuance of a debt offering to the public under a debt issuance programme, an Indian issuer is required to prepare and file a draft shelf prospectus with the designated stock exchange and SEBI through a lead merchant banker registered with SEBI, followed by the relevant tranche issue documents on supplemental filings. The issuer company is also required to make an application to the stock exchanges for obtaining in-principle approval to list the debt securities. The final prospectus is subsequently filed with the stock exchanges, SEBI and RoC.
The issuance and listing of debt securities in India are primarily governed by the Companies Act, 2013 (the “Companies Act”), the Securities Contracts (Regulation) Act, 1956 and the rules framed thereunder, SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (the “SEBI Debt Regulations”), the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the “SEBI Listing Regulations”) and the Depositories Act, 1996.
Eligibility requirements for public issue and listing of debt securities are: (i) that the issuer or the person in control of the issuer or its promoter or its director is not restrained or prohibited or debarred by SEBI from accessing the securities market or dealing in securities as on the date of filing the draft offer document or final offer document; and (ii) that the issuer or any of its promoters or directors is not a wilful defaulter or it is not in default of payment of interest or repayment of principal amount in respect of debt securities issued by it to the public, if any, for a period of more than six months as on the date of filing the draft offer document or final offer document.
There are no specific eligibility requirements for listing of debt securities on a private placement basis.
The SEBI Debt Regulations and the SEBI Listing Regulations, however, prescribe certain additional conditions to be complied with prior to issuance and listing of debt securities either issued to public or on private placement basis.
An issuer proposing to list its debt securities on the stock exchanges in India can either be an Indian company, a public sector undertaking, a statutory corporation in India or a real estate investment trust/infrastructure investment trust having its units listed on a stock exchange in India.
There is no minimum rating requirement for listing of debt securities on Indian stock exchanges. However, in order to offer debt securities to the public through a shelf prospectus by non-banking financial institutions registered with the Reserve Bank of India, housing finance companies registered with the National Housing Bank or entities listed on Indian stock exchanges, the credit rating of debt securities offered under the shelf prospectus must have a minimum rating of “AA-” category or equivalent by a SEBI-registered credit rating agency.
For a public issuance of debt securities, the issuer company is required to disclose audited financial information for the last five years immediately preceding the financial year of the issue of the prospectus along with the auditors’ report both on a standalone and consolidated basis (if applicable). The issuer company (which is a frequent issuer of debt securities) is also required to disclose the three months limited reviewed financials along with the limited review report (if equity listed issuer) and six months' limited reviewed financials along with the limited review report (if debt listed issuer). In the case of an issuer company with respect to which a period of five years has not elapsed, the issuer company is required to disclose the audited financial information along with the report from the date of its incorporation.
In the case of a private placement and listing of debt securities, the issuer entity is required to disclose in the private placement offer letter an abridged version of the audited consolidated (wherever available) and standalone financial information along with auditors qualifications for the last three years and latest half-yearly consolidated (wherever available) and standalone financial information along with auditors qualifications.
The debt securities proposed to be listed in India are typically issued in Indian rupees. However, an issuer is permitted to issue foreign currency-denominated debt securities under the extant external commercial borrowings framework of the Reserve Bank of India (“RBI”) if the debt securities are proposed to be listed in a foreign jurisdiction.
Eligibility requirements for certain class of issuers (non-banking financial companies other than infrastructure debt funds, housing finance companies and listed entities whose publicly issued equity or debt securities are listed for a period of three years immediately preceding the issue) formulating a debt issuance programme to the public under a shelf prospectus include (i) net worth of INR5,000 million, as per the audited balance sheet of the preceding financial year; (ii) consistent track record of distributable profit for the last three years; (iii) securities proposed to be issued under the shelf prospectus have been assigned a rating of not less than “AA-” category or equivalent by a credit rating agency registered with SEBI; (iv) no regulatory action is pending against the issuer or its promoters or directors before SEBI, RBI or the National Housing Bank; and (v) the issuer has not defaulted in the repayment of deposits or interest payable thereon, redemption of debentures or preference shares or payment of dividends to any shareholder, or repayment of any term loan or interest thereon to any public financial institution or banking company, in the last three financial years.
There are no specific eligibility requirements for formulating a privately placed debt issuance programme through a shelf disclosure document.
The main steps for undertaking a public issuance and listing of debt securities are:
The main steps for undertaking a private placement and listing of debt securities are:
Presently, SEBI does not permit companies incorporated in a foreign jurisdiction to list their debt securities on a stock exchange in India.
In the case of a public issuance of debt securities for a debut issuer, the audited accounts included in the offer document cannot be older than 180 days from the date of issue of prospectus.
In India, corporate bonds are primarily issued on a private placement mode to domestic institutional investors, financial institutions, foreign institutional investors and foreign portfolio investors. In situations where the corporate bonds are proposed to be issued to foreign institutional investors or foreign portfolio investors, these bonds are structured in such a way that the residual maturity will be for a minimum period of one year. The issuer will have to appoint a debenture trustee for the issuance and listing of corporate bonds whether on a private-placement basis or by way of a public issuance as stipulated under the SEBI Debt Regulations.
The manner and procedure for listing of convertible debt securities on the stock exchanges in India are different from that of non-convertible debt securities, and are governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
In the case of a programme for issuance of debt securities to the public, in addition to the steps to be considered for a standalone public issuance, the issuer should be mindful of: (i) eligibility to file the shelf prospectus; (ii) filing of the information memorandum with the stock exchanges and SEBI immediately on filing with the RoC; (iii) the information memorandum must contain disclosures as specified under the Companies Act and the SEBI Debt Regulations, including a summary term sheet, material updates and rating revisions, etc; and (iv) not more than four issuances shall be made through a single shelf prospectus.
In the case of a programme for issuance of debt securities on a private placement basis, in addition to the steps to be considered for a standalone private placement, the issuer should be mindful that: (i) the shelf disclosure document is only valid for a period of 180 days from the date of filing of the shelf disclosure document; and (ii) the information memorandum must contain disclosures as specified under the Companies Act and the SEBI Debt Regulations, including a summary term sheet, material updates and rating revisions, etc.
Public issue and listing of debt securities in India typically involve appointment of SEBI registered merchant bankers, lawyers and auditors as advisers. The other intermediaries involved in the public issuance of debt securities are a debenture trustee, a registrar and transfer agent, credit rating agency, underwriters (if applicable) and escrow banks.
Merchant Bankers: Merchant bankers are financial institutions registered with SEBI and governed by the SEBI (Merchant Bankers) Regulations, 1992. Merchant bankers are required to verify and to confirm that the disclosures made in the offer document are true, fair and adequate and ensure that the issuer is in compliance with SEBI Debt Regulations and the Companies Act. The merchant bankers are also responsible for the due diligence in relation to the issue, offer and distribution of securities to the public. Underwriters may also be appointed to underwrite the debt issuance depending on the contractual commitment.
Adviseors: To assist the merchant bankers in due diligence in relation to the debt issuance and to prepare and draft the offering document, however such appointment is not mandatory.
Auditors: To certify the financial information and tax benefit statements proposed to be included in the offering documents.
Debenture Trustee: A debenture trustee acts as a trustee to protect and secure the interest of the debenture holders. The debenture trustee supervises the implementation of the conditions regarding creation of security for the debt securities and debenture redemption reserve.
Registrar and transfer agent: The registrar and transfer agent assist the issuer in the allotment and listing process by scrutinising the applications received from investors and finalising the valid bids.
Credit Rating Agency: A credit rating agency provides ratings for the debt security issued along with the rationale.
Escrow Banks: Escrow accounts are opened with escrow banks where the issue proceeds are kept until the security creation documents for the issuance are executed.
The roles played by the advisers do not change depending on these circumstances. However, as mentioned earlier, foreign companies are not permitted to list their debt securities in India.
Public issuance of debt securities in India mandates the requirement of preparing and filing a prospectus with the relevant authorities. The SEBI Debt Regulations mandates an issuer proposing to invite subscription to debt securities from the public to file a draft prospectus with the designated stock exchange through a lead merchant banker. Unlike a draft red herring prospectus filed with SEBI for its review, a draft prospectus for listing of debt securities is not reviewed by any Indian regulator; however, a copy of this draft prospectus must be filed with SEBI for its records. Thereafter, on receipt of any comments from the public or stock exchanges, the prospectus is required to be filed with the RoC, SEBI and the stock exchanges.
A prospectus must include all information that would enable a subscriber to make an informed investment decision in relation to the subscription of the debt securities. Such information includes disclosure in relation to the issuer, the intermediaries associated with the issuance, business and history of the issuer (in particular the changes with respect to its shareholders, directors and auditors), credit rating and rationale, capital structure and borrowings, financial statements, material events or developments which may have implications on the financials or credit quality of the issuer and issuance related information. The SEBI Debt Regulations and the Companies Act lay down the disclosure parameters for a prospectus.
The main categories of information and disclosure included in a prospectus are general information on the issuer, risk factors, capital structure, objects of the issue, tax benefits, industry, business, management, financial indebtedness, promoters, litigation, key regulations and policies, issue-related information and issue procedure.
Under the SEBI Debt Regulations, the issuer and the merchant bankers are responsible to ensure that the disclosures made in the offer documents are true, fair and adequate. The Companies Act stipulates criminal liability on every person who authorises the issue of a prospectus for any misstatement made in the prospectus. Such person will be liable to be punished for fraud under the provisions of the Companies Act which include imprisonment for a term not less than six months but which may exceed ten years along with a minimum fine of the value of the fraud committed. In addition, in the event where a subscriber has sustained any loss or damage as a consequence of any misstatement or omission, the issuer, its directors, its promoter, experts (as defined under the Companies Act) and other persons authorising the prospectus will not only be liable to compensate every subscriber sustaining such loss or damage, but also criminally liable to be punished for fraudulently inducing a person to invest money.
The content or disclosure requirements for offering documents will remain the same irrespective of the stock exchanges on which the debt securities are listed.
The content or disclosure requirements for offering documents will remain the same irrespective of whether the debt securities are listed on the wholesale debt market or retail debt market segments of the stock exchanges.
The draft prospectus is to be filed with the designated stock exchange through the lead merchant banker and is published on the website of the stock exchange inviting public comments for a period of seven working days from the date of filing with such stock exchange. The final prospectus is to be filed with the designated stock exchange, SEBI and the RoC, after inclusion of comments received from the public or the stock exchange, if any. A copy of the draft prospectus and prospectus is also required to be submitted to SEBI for its records.
An issuer intending to list its debt securities issued on a private placement basis is not required to file a prospectus, however, a disclosure document in the form of an information memorandum disclosing certain mandated disclosures is required to be submitted to the stock exchange and the RoC in accordance with the Companies Act and the SEBI Debt Regulations.
The SEBI Debt Regulations specifically prescribe certain restrictions in relation to advertisements. Advertisements must not be misleading, nor should they contain any information in a distorted manner or which is manipulative or deceptive. Further, advertisements should be truthful, fair and clear and must not contain a statement, promise or forecast which is untrue or misleading. Any matters extraneous to the contents of the offer document must be refrained from being advertised or disclosed to selective persons. Product or corporate advertisements issued by the issuer during the subscription period must not make any reference to the issue of debt securities or be used for solicitation. For all other publicity activity, the market practice is to follow similar publicity restrictions as are applicable to an equity public issuance.
While the debt public offerings in India are typically fixed price issuances, private placement of non-convertible debt securities or non-convertible redeemable preference shares in India, above a specified threshold (as mentioned below), are required to be made through the electronic book mechanism established by the stock exchanges. This mechanism is applicable in case of: (a) a single issuance of INR 2,000 million or more; (b) a shelf issuance, consisting of several tranches, aggregating to INR 2,000 million or more; or (c) any subsequent issuance, where the aggregate of all previous issuances in a financial year equals or exceeds INR 2,000 million or more. However, offering of commercial papers, certificates of deposit or debt securities under the SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015 can also be made under the electronic book mechanism, irrespective of the size of the issue.
Underwriting of an offering of debt securities is not very common in India. More often, there may be an arranger or placement agent engaged on a best efforts basis.
Unlike foreign bond issuance, the corporate bond issuances in India do not involve a subscription or dealer agreement. The merchant bankers enter into an issue agreement with the issuer entity that cover customary representations and warranties with regard to eligibility for the issuance and disclosures to be made in the offering documents. This is, however, more relevant in public issuances vis-à-vis private placements of debt securities.
There are no stabilisation or market manipulation rules governing corporate bonds issuances in India other than the measures on price manipulation and unfair practices in securities markets prescribed by SEBI under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 and the SEBI (Prohibition of Insider Trading) Regulations, 2015.
Public issuances of debt securities by an Indian issuer and consequent listing in India are governed by the SEBI Debt Regulations and SEBI Listing Regulations, and also involve participation by domestic retail investors in India. Accordingly, SEBI will not permit use of foreign governing law and/or jurisdiction for issue of debt securities in India.
SEBI does not permit choice of a foreign governing law and/or jurisdiction for debt issuances in India.
The Code of Civil Procedure, 1908 (the “Civil Procedure Code”) provides that where a foreign judgment has been rendered by a superior court in any country or territory outside of India which the Government of India has declared to be a reciprocating territory, such foreign judgment may be enforced in India by proceedings in execution as if the judgment had been rendered by an appropriate court in India. However, the enforceability of such judgments is subject to certain exceptions set forth in the Civil Procedure Code.
Section 44A of the Civil Procedure Code is applicable only to decrees or judgments under which a sum of money is payable, not being in the nature of amounts payable in respect of taxes or other charges of a similar nature, or in respect of fines or other penalties, and does not include arbitration awards, even if such awards are enforceable as a decree or judgment. It is unlikely that a court in India would award damages on the same basis as a foreign court if an action were brought in India. Furthermore, it is unlikely that an Indian court would enforce a foreign judgment if it viewed the amount of damages awarded as excessive or inconsistent with public policy or practice in India.
The Civil Procedure Code only permits the enforcement of monetary decrees and does not include arbitration awards. Under the Civil Procedure Code, a court in India would, upon the production of any document purporting to be a certified copy of a foreign judgment, presume that the judgment was pronounced by a court of competent jurisdiction, unless the contrary appears on record. Such a suit must be brought in India within three years from the date of the judgment in the same manner as any other suit filed to enforce a civil liability in India.
Further, a party seeking to enforce a foreign judgment in India is required to obtain prior approval from the RBI under the extant foreign exchange legal regime to execute such a judgment and repatriate any amount recovered pursuant to such enforcement, and such amount may be subject to income tax in accordance with applicable laws.
Where security is created over certain assets of the issuer, such security is required to be perfected by filing certain statutory forms with the RoC. On execution of the security creation agreements pertaining to the assets of the issuer and subject to contractual conditions stipulated therein, the security created must be perfected by filing Form CHG-9 along with the security creation agreements and certain mandated information thereto, and payment of statutory fees with the RoC. Accordingly, the RoC issues a certificate of registration of charge creating a unique charge identification in favour of the debenture trustee who holds the security on behalf of the bondholders. Bondholders and the trustee may have to make additional filings regarding securities created in relation to debt securities under the Insolvency & Bankruptcy Code, 2016 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.
The enforceability of the transaction documents related to an issuance of debt securities will not be affected by a bondholder being domiciled in a foreign jurisdiction.
While foreign investors are eligible to invest in the debt securities issued by an Indian issuer, offering and listing of debt securities issued by foreign entities on Indian stock exchanges is presently not permitted.
The timeframe for a debut standalone debt public issuance typically ranges from 60 to 75 days. The key milestones will include: (i) receipt of corporate authorisation and contractual and other approvals for the issuance; (ii) appointment of advisers and intermediaries for the transaction; (iii) receipt of credit rating and rationale for the debt issuance; (iv) due diligence and drafting of the draft prospectus; (v) execution of transaction agreements; (vi) filing of the draft prospectus with the stock exchanges and SEBI; (vii) draft prospectus is made open for public comments for a period of seven working days from the date of filing the draft prospectus with the designated stock exchange; (vii) receipt of in-principle approval from stock exchanges for listing of debt securities; (ix) filing of prospectus with the stock exchanges, SEBI and the RoC; (x) issue period; (xi) allotment of debt securities; (xii) execution of security documents; and (xiii) listing and trading of the debt securities.
The timeframe for a repeat standalone debt public issuance typically ranges from 45 to 60 days. The key milestones will remain the same as that of a debut standalone public issuance.
The timeframe for a public issuance of debt securities under a debt issuance programme will be the same as that of a debut standalone debt public issuance. However, a subsequent issuance can happen at short notice by filing a tranche information memorandum (which will contain material updates to the shelf prospectus and the issue specific information).
There is no difference in timeline for offering and listing of debt securities in the wholesale debt market and retail debt market segments. Government securities are primarily issued and listed on the retail debt segment.
Debt securities in India are settled on stock exchanges on a rolling basis. Each order has a unique settlement date specified at the time of the order entry and used as a matching parameter. It is mandatory that trades are settled on the predetermined settlement date. On BSE, debt securities are required to settle on T+2 settlement cycle where the final settlement of transactions, ie, the exchange of monies and securities between buyers and sellers, takes place on the second business day (excluding Saturdays, Sundays and bank and exchange holidays). All securities are required to be routed through clearing houses. NSE currently permits settlements ranging from T+0 to T+2 settlement cycles for non-government securities. Government securities are required to be settled on a T+1 basis, unless one of the parties is a foreign portfolio investor for which the settlement cycle is on a T+2 basis.
Presently, SEBI permits only trading, clearing and settlement of debt securities denominated in Indian rupees.
The main tax issues to be considered while issuing and listing debt securities are the levy of (i) capital gains tax (on transfer of such debt securities when they are treated as capital assets), (ii) tax on business income (when income is derived from the trade of such debt securities and such securities are not treated as capital assets), and (iii) securities transaction tax (a transaction based tax that is levied when the transaction takes place on the stock exchanges). In addition, issuance of debt securities requires payment of stamp duty at a rate of 0.005% on its market value, while transfer of debt securities is stamped at a rate of 0.0001% of the consideration amount. The taxation of the premium on redemption of such debt securities is not free from doubt. It may be taxed as interest income or capital gains.
Payments of interest or principal are subject to WHT. One could consider the applicable tax rate under the relevant tax treaty between India and the seller’s country of residence/place of residence for the offshore SPV structure. If the tax treaty has a lower tax rate than the WHT prevailing under domestic law, the non-resident seller/offshore SPV structure may take the benefit of the more advantageous rate mentioned in the tax treaty. Apart from this, interest payments on certain bonds (eg, long-term bonds, long-term infrastructure bonds, rupee denominated bonds, etc) are subject to a WHT of 5%, subject to the conditions specified under domestic tax law.
Typically, other than the stamp duty payable in relation to issuance of debt securities (as mentioned above), no tax is applicable on the issue of debt securities (listed/unlisted). The transfer of debt securities triggers capital gains tax, if the aforementioned securities are held as capital assets. If the aforementioned securities are held as trading assets, then the profits arising from trade of these assets is taxed as business income.
Capital gains on disposal of listed or unlisted debt securities by non-residents are taxable in India. Typically, the buyer of these listed or unlisted debt securities withholds and deposits taxes with the Indian government while paying the consideration to the non-resident seller.
Reporting (financial or otherwise) obligations
Financial reporting: A non-convertible debt listed entity should submit un-audited or audited financial results on a half-yearly basis in the form as specified by SEBI within 45 days from the end of the half year to the stock exchanges. This is in addition to the requirement for the submission of annual audited financial results along with the relevant reports of the auditors.
A non-convertible debt listed entity should submit to the stock exchange on a half-yearly basis along with the half-yearly financial results, a statement indicating material deviations, if any, in the use of proceeds of issue of non-convertible debentures from the objects stated in the offer document.
Other reporting obligations: A non-convertible debt listed entity should disclose to the stock exchange in quarterly, half-yearly, year-to-date and annual financial statements, as applicable, the extent and nature of security created and maintained with respect to its secured listed non-convertible debentures.
A non-convertible debt listed entity should give prior intimation to stock exchanges (at least 11 working days) before the date on and from which the interest on debentures and bonds, and redemption amount of redeemable shares, or of debentures and bonds should be payable. Further, it should intimate to the stock exchanges its intention to raise funds through new non-convertible debentures that it proposes to list either through a public issue or on a private placement basis prior to issuance of such securities. It should also intimate the exchanges at least two working days in advance of the board meeting to discuss any matter affecting the rights or interests of holders of non-convertible debentures that is proposed.
Disclosure requirements in respect of information regarding the issuer
A non-convertible debt listed entity should promptly inform the stock exchange(s) of all information having a bearing on the performance/operation of the listed entity, price sensitive information or any action that affects payment of interest or redemption of non-convertible debentures.
Corporate governance requirements
There are no additional corporate governance requirements other than what needs to be complied in India under the Companies Act and the SEBI Listing Regulations.
Specific rules applying to transactions post-listing
Other than disclosure requirements, there are no specific rules regarding related party transactions applicable for a non-convertible debt listed issuer.
The continuing disclosure requirements are the same for non-convertible debt securities issued and listed on wholesale debt markets and retail debt market segments of the stock exchanges.
Presently, SEBI does not permit companies incorporated in a foreign jurisdiction to list their debt securities on a stock exchange in India.
SEBI and the stock exchanges have been vested with powers to impose penalties on the issuer, its promoters, its directors and other connected persons for non-compliance with continuing obligations in relation to issuance and listing of debt securities in India. For instance, failure to furnish any information or document within stipulated timelines would attract a minimum fine of INR100,000 which may increase to INR100,000 per day until the failure is rectified, subject to a maximum of INR30 million. Further, SEBI also has conferred powers upon stock exchanges to impose fines and suspend trading of securities in relation to non-compliance with SEBI Listing Regulations.
As mentioned earlier, mis-statements in a prospectus for public issuance of securities attracts civil liability and in certain cases, criminal charges under the Companies Act.
Indian Debt Capital Markets
Debt capital markets provide an additional source for capital and are key for meeting the funding requirements in most developed economies. However, growth of the Indian debt capital market has not kept pace with the equity markets that have had exponential growth in the past few decades. Development of a strong debt market has been one of the key tasks for the Indian government, since it provides an alternate platform for fund-raising as against banks holding a monopoly in the lending market.
A Transformational Phase
The debt capital market in India has been in a transformational phase since bank financing for new projects has reduced substantially in the recent past. The financial year 2016-17 proved to be a defining year as capital raised from corporate debt markets touched a high of INR6.7 trillion (CRISIL’s 5th Annual Seminar on “Expanding India’s Corporate Bond Market: Bonds of Growth – Assessing the Supply Demand Matrix) (equivalent to USD950.50 million as on 31 March 2017). In particular, real estate financing and acquisition financing continue to remain sectors which often turn to the debt market, mostly due to restrictions on bank financing in these sectors.
Debt Securities in India
Debt securities in India comprise mainly of rupee non-convertible debentures (listed and unlisted), foreign currency bonds, rupee-denominated bonds (also known as “Masala Bonds”) and certain structured-debt instruments, such as debt securities issued by Real Estate Investment Trusts (“REITs”), Infrastructure Investment Trusts (“InVITs”) and security receipts (“SRs”) issued by special-purpose vehicles set up by asset reconstruction companies (“ARCs”). India’s central bank, the Reserve Bank of India (“RBI”) and the securities market regulator, the Securities and Exchange Board of India (“SEBI”), have taken several significant steps in the recent past for the growth and strengthening of the debt capital market. There has been a steady push towards liberalising and promoting capital-raising by the issuances of debt securities.
We have in this note, discussed certain specific instruments and entry routes for investments into India and recent regulatory developments in respect thereof.
Bond Issuance to Offshore Investors
Offshore bond issuances by Indian companies to residents outside India are regulated primarily by the RBI. The Foreign Exchange Management Act, 1999, the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 and the rules and regulations issued by the RBI in relation to external commercial borrowings govern the framework for offshore borrowings by entities in India. The RBI issued the External Commercial Borrowings (ECB) Policy – New Framework on 16 January 2019 (“New ECB Policy”), which has come into immediate effect.
The New ECB Policy
The New ECB Policy has expanded the class of borrowers eligible to avail ECBs to include any entity which is eligible to accept foreign direct investment. This means that apart from a list of prohibited sectors (including inter alia lottery business, gambling and betting, and entities in real estate business), entities from almost every other sector can raise debt by issuing bonds to offshore investors. The New ECB Policy has also expanded the pool of investors to include any resident of a Financial Action Task Force or International Organisation of Securities Commission compliant country.
Under the New ECB Policy all ECBs are divided into two buckets, ie, foreign currency denominated ECB and Indian rupee denominated ECB. The New ECB Policy provides for a common three-year maturity requirement across all ECBs - except when ECBs are raised from a foreign equity-holder where the maturity requirement will be for five years. The New ECB Policy does not stipulate any requirement for a prior approval from the RBI for issuance of Masala Bonds. It also does not restrict ‘related parties’ from investing in Masala Bonds. These are significant steps and are likely to bring in a renewed interest of companies considering to raise Masala Bonds from offshore investors.
The proceeds from ECBs cannot be utilised for working-capital purposes, general corporate purposes, equity investment, repayment of rupee loans or on lending for any such purpose unless ECBs are availed from a foreign equity-holder of the borrower. This was allowed under the previous ECB framework (for long-term ECBs) and is seen as a dampener in the otherwise positive outlook of the New ECB Policy. The RBI has, however, clarified that ECB proceeds can be used for repayment of rupee loans by applicants undergoing a resolution process under the Insolvency and Bankruptcy Code, 2016 (“IBC”). This is intended to enable distressed companies to access capital from offshore investors to repay their rupee debt.
Issuance to Retail Investors
Offerings to retail investors has not been a very popular means of fund-raising for corporates in India in the past. However, due to tightening lending norms by the banks, Indian companies have increasingly been turning to retail investors. A major class of issuers tapping into retail investments have been non-banking finance companies (“NBFCs”) and housing finance companies (“HFCs”).
While standalone issuance of debt securities has been ongoing, due to the timelines involved for such issuances, there has been a preference to have debt securities issued by setting-up of debt issuance programmes by certain eligible issuers (fulfilling requirements under the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 (“SEBI ILDS”)), as it enables them to have issuances in multiple tranches. Since this is helpful for meeting the cash-flow requirements in a timely manner, several NBFCs and HFCs have established debt issuance programmes and several others are in the pipeline.
Private Placement of Debt Securities
An entity may issue debt securities by way of a private placement either in the form of listed instruments or unlisted instruments. For a listed instrument, in addition to the requirements of the Companies Act, 2013 (“the Companies Act”), applicable regulations of SEBI also come into play. Over the past few years, private placement of debt securities have become increasingly popular.
In 2018, the Companies Act and corresponding rules applicable to a private placement of securities were amended with an objective to simplify the issuance of debt securities on a private placement basis. Consequently, an Indian company proposing to issue securities on a private-placement basis no longer requires a shareholder's approval authorising issuance of debt securities by way of a private placement if it has an existing approved borrowing limit from its shareholders. This is helpful as it no longer requires issuers to go back to their shareholders on a yearly basis for issuance of debt securities on a private placement.
SEBI recently introduced the electronic book mechanism (“EBM”) for issuance of debt securities with an objective to streamline procedures and enhance transparency in price discovery while raising corporate debt. Pursuant to the EBM, SEBI has mandated that private placement of debt securities above an issue size of INR200 crores (approximately USD30 million) be made only by means of the EBM process. Recent amendments have introduced a closed bidding process (vis à vis an open bidding process) under the EBM under which competing bidders involved in a particular issuance need not be aware of the bid made by another participant. These amendments allow an issuer to choose the mode of bidding they would prefer for a particular issuance.
A key change due to the EBM has been in the process of pay-in of the funds of an issue. This process now allows the issuer to obtain the proceeds from the issuance as early as within one or two days from the issue day. This is a significant change considering that issuers are able to obtain funds faster than the time it took prior to the implementation of EBM. The EBM mechanism is hosted by Electronic Book Providers (“EBPs”), and under the current framework, only recognised stock exchanges and depositories can act as EBPs after obtaining prior approval of SEBI.
Fund-Raising by Issuance of Debt Securities by Large Corporates
Large Corporates Framework
The SEBI recently released a framework for issuance of debt securities by large entities (“the Large Corporates Framework”). This framework is a major development in the debt capital market in India and is applicable to all listed entities whose debt securities are listed on a recognised stock exchange. As a part of the Large Corporates Framework, listed entities (i) which have specified securities or debt securities or non-convertible redeemable preference shares listed on a recognised stock exchange, and (ii) have an outstanding long-term borrowing of INR100 crores (approximately USD15 million) with original maturity of more than one year (which excludes offshore borrowings and inter-corporate borrowings between a parent and a subsidiary), are mandated to raise at least 25% of their incremental borrowing during a financial year by way of issuance of debt securities under the SEBI ILDS. If a listed entity does not or is unable to comply with the Large Companies Framework, and there is a shortfall in the requisite borrowing by issuance of debt securities, the Large Corporates Framework prescribes a penalty of 0.2% of the shortfall in the borrowed amount that will need to be paid by such company to the stock exchange. This framework is expected to be in effect from 1 January 2020.
Large Exposures Framework
RBI’s Large Exposures Framework (“LEF”) scheduled to come into force from 1 April 2019, stipulates that the sum of all the exposure values of a bank in respect of a single counterparty, must not exceed 20% of the bank’s available eligible capital base (which may be extended by an additional of 5% in exceptional situations, in accordance with a board-approved policy). The LEF also stipulates that in respect of a group of connected counterparties, such exposure must not exceed 25% of the bank’s available eligible capital base. It is believed that as a consequence of compliance with the LEF, a large number of companies may be unable to access bank credit and may have to consider domestic and offshore debt markets to raise capital.
Foreign Portfolio Investments in Corporate Bonds
Foreign portfolio investments in corporate bonds, and particularly into privately placed non-convertible debentures issued by Indian companies, have been very popular and more so for issuers in the real estate sector (typically for construction finance), since other sources for funding are limited on account of regulatory restrictions in India. The key reason that the foreign investor base prefers this route over other forms of debt investments into India (for instance, through the external commercial borrowing route) is that currently there are no restrictions on pricing, and other than concentration norms (which were recently introduced) and maturity requirements, issuance of non-convertible bonds is not as heavily regulated.
Such issuances are also less time-consuming and can be completed in a short timeframe. The regulatory framework for investment in debt securities issued by foreign portfolio investors (“FPIs”) has evolved over the years. While there have been several steps taken by the RBI and SEBI to facilitate FPI investment in debt markets, such as permitting foreign investments in the primary market, opening up investments into un-listed bonds (which was initially permitted only in the case of bonds issued by an infrastructure company), the RBI and SEBI in 2018, have revised the norms that govern investments by FPIs in debt securities. The key provisions are briefly set out below.
Minimum residual maturity
In February 2015, the RBI introduced a minimum residual maturity for foreign portfolio investment in non-convertible bonds issued by Indian companies to promote long-term investment into the local bond market. The RBI further clarified that any optionality clauses could only be invoked in compliance with the three-year minimum residual maturity stipulation.
The recent amendment brought on 27 April 2018 has now reduced the minimum maturity from three years to one year. It is believed that this relaxation will help in reviving the interest in the bond market in India as it reduces the risk involved in the long term.
The RBI, in April and May 2018 and subsequently in June 2018, brought about certain concentration norms with respect to FPI investments in corporate bonds. The new restrictions on FPIs restrict their investment to no more than a 50% investment in a single corporate bond issuance.
RBI has provided some degree of operational flexibility for the implementation of the revised norms and has allowed an exemption period for all new investments made by FPIs until 31 March 2019. To facilitate newly registered FPIs in building up a diversified portfolio, FPIs that have registered after 27 April 2018 are permitted to comply with this requirement by 31 March 2019, or six months from the date of registration, whichever is later. It appears that the intent of RBI in imposing the single group concentration norms is to encourage FPIs to diversify their investments and invest in multiple issuing entities in India.
The requirements of single and group investor-wise limits in corporate bonds, however, are not applicable to investments by multilateral financial institutions and investments by FPIs in SRs. SRs are securities issued by special-purpose vehicles set up by ARCs to qualified buyers evidencing the purchase of a financial asset involved in a securitisation of non-performing debts of banks and NBFCs. It may be noted that, with respect to FPI investment in SRs, the RBI in June 2018, while implementing concentration norms for corporate bonds, exempted SRs from meeting the minimum residual maturity criteria and the single/group investor-wise concentration norms which are otherwise applicable to corporate bonds. Such changes, together with the implementation of the IBC, have helped to bring in an increased interest amongst the FPIs to invest in SRs.
Voluntary Retention Route for investment by FPIs
Aimed at reducing volatility of debt flows and attracting long-term FPI investments, the RBI has, pursuant to its discussion paper on voluntary retention route (“VRR”) for investment by FPIs, to introduced a voluntary retention scheme for investments by FPIs in the corporate debt market. Investment through this route will be in addition to the permitted foreign investment limit. Broadly, under the VRR, FPIs will have more operational flexibility in terms of the choice of instrument as well as exemptions from the macro-prudential and other regulatory prescriptions applicable to FPI investments in debt instruments.
To qualify for the eligibility criteria under this route, FPIs will have to commit voluntarily to retain in India a minimum required percentage of their investments for a period of their choice. The criterion for allocation of investment amount to a FPI (called the “Committed Portfolio Size”) will be the retention period proposed by that FPI. The minimum retention period shall be three years, or as decided by RBI for each auction. On successful allocation, the FPI shall invest the allocated Committed Portfolio Size in debt instruments and remain invested throughout the voluntary retention period (subject to a minimum investment of 75% of the Committed Portfolio Size during the retention period to be adhered to on an end-of-day basis).
The relaxations are proposed to bring greater flexibility for structuring investments in debt instruments by FPIs and will perhaps facilitate broad-based participation. It will, however, be interesting to observe the reactions of the market participants specifically at a time when the Indian currency is under pressure.
High-yield issuances from India are restricted due to the limitations on pricing and other conditions under the ECB Master Directions. However, a number of Indian entities have raised capital through their offshore vehicles from offshore investors at interest rates which would otherwise be over the limits prescribed under the ECB Master Directions.
In 2017, Greenko issued USD1 billion of international bonds through an offshore subsidiary, Greenko Dutch B.V. The issue of bonds was recorded as one of the biggest high-yield green bonds issued globally, the proceeds of which were invested in Indian rupee bonds issued by the group’s onshore Indian subsidiaries, which provided the bondholders with an indirect claim over the Indian assets in the event the issuing entity defaults. Indian entities such as Azure Power Global Limited have also issued high-yield bonds following similar structures.
Debt issuance by REITs and InVITs
REITs and InVITs were, until recently, unable to tap into corporate debt markets in India, or raise any capital by means of external commercial borrowings. In 2018, SEBI amended the SEBI ILDS specifically to include REITs and InVITs as eligible issuers, permitting REITs and InVITs to raise capital by means of non-convertible debentures. Additionally, REITs and InVITs have also been categorised as “eligible borrowers” under the ECB Master Directions enabling them to access offshore capital markets by issuing foreign bonds or rupee-denominated bonds overseas under the ECB Master Directions. Although REITs and InVITs have been permitted to access the corporate debt markets in India and abroad, there still remain significant roadblocks to REITs and InVITs issuing debt securities, such as the end use restriction under the ECB Master Direction which do not permit a REIT from using the ECB proceeds for investment in real estate, purchase of land or equity investments.
International stock exchanges set up in the Gujarat International Finance Tec-City
In 2017, the India International Exchange Limited (“India INX”), India’s first international stock exchange, was set up by BSE Limited (“BSE”) at the Gujarat International Finance Tec (“GIFT”) city in Gandhinagar, Gujarat. Subsequently, NSE IFSC Limited (“NSE IFSC”) was set up by the National Stock Exchange of India Limited, which is also located in the GIFT city. India INX and the NSE IFSC aim to assist eligible issuers (which include residents of a Financial Action Task Force (“FATF”) member country or a member of a FATF-style regional body) to be able to raise capital and trade in foreign currency by issuing foreign currency-dominated bonds. NSE IFSC and India INX currently permit the trading of debt securities, including, inter alia, foreign currency bonds, Masala Bonds, green, social and sustainable bonds and high-yield bonds. It is expected that India INX and NSE IFSC will trade in all products similar to the securities traded in exchanges such as Singapore, Hong Kong, London and New York. Currently, in accordance with the existing foreign exchange laws of India, resident Indians are not allowed to invest in debt securities listed on India INX and NSE IFSC.
There has been significant growth in the domestic corporate debt capital markets in the past few years, fuelled by higher demand for funding and favourable supply conditions on account of the increase in NPAs with the banks. Successful implementation of IBC will be instrumental and should lead to more diverse issuers, which will facilitate a deeper market. The development of the corporate debt capital market is necessary for the ever-growing credit appetite of Indian corporates. While regulators have played a key role in recent times, there seems to be a certain amount of reluctance to provide more access and flexibility to offshore investors in the Indian debt market. Further liberalisation and consistency in the norms for offshore investors to invest in the Indian debt market, together with harmonisation of multiple regulations applicable for issuing debt securities, would go a long way in the growth of debt capital markets in India.