SEBI to loosen the noose for Ease of Doing Business

(Harsh Tiwari is a 3^rd year BBA.LL. B student from GNLU)

It isn’t often feasible for a business to be able to generate revenue and profits from its operations every time to keep itself afloat and to focus on expansion to get a competitive edge over their competitors. and this pursuit of expansion comes with a hefty price tag, which directs the business to take route of fund raising.

At times it has been observed that SEBI through its regulations has made it difficult for the corporates to raise funds even through the medium of Non-Convertible Securities, this saw a directional shift with the changing approach of SEBI in this regard.

In December, 2023 SEBI came out with a consultation paper on the review of provisions of NCS regulations and LODR regulations for ease of doing business (EODB) and introduction of fast-track public issuance of debt securities. This paper was formulated in light of announcement made by the government during the Union Budget of FY 2023-24.

The objective of this article is to explain the key proposals with respect to the proposed relaxations of NCS and LODR regulations, to analyze the implications and potential challenges that may arise.

Key Proposals in the consultation Paper.

The paper is divided in two segments and the first was in relation to EODB and it put forth the idea of relaxations from provisions of NCS and LODR regulations,

Change in denomination for NCDs and NCRPS.

This proposal pushed for a reduction in the face value of the privately placed debt securities (NCDs) and non-convertible redeemable preference shares (NCRPS) issued under the NCS regulations to face value of Rs. 10,000/- from face value of 1 lakh, for issues with appointment of merchant banker in case of issuance of SDIs at a face value of Rs 10,000, and this was done with respect to the public comment wherein the high-ticket prices were considered to be a deterrent for non-institutional investors

Insertion of web-link or QR code for accessing the audited financials in the offer document.

Schedule I of the NCS regulations states that audited financial statements on a standalone and consolidated basis for the period of 3 financial years needed to be attached and the inclusion of this increases the size of offer document and the same leads to technical difficulties as a result of which Multiple Service Request Numbers need to be generated which lengthens the process, hence the SEBI has proposed that the issuer that have listed outstanding NCDs as on date may insert a QR code, the scanning for which opens web-link for the audited financials and the user shall be directed to the Stock Exchange’s website which would contain the data.

Specification of information like that of related party transaction, etc. to be specified as required up to the latest quarter:

There were provisions in schedule 1 of the NCS regulations which mandated the corporates to submit information for preceding three financial years, but through public comments it was noted that it also includes some ancillary information such as Related Party Transactions, Borrowings etc., which in turn increases the burden in preparation of disclosure for an issuer, in the light of same SEBI proposed that the information with respect to the clauses falling in point 2.3.1 of the paper needs to be provided only for the latest quarter and not last financial year.

Standardization of shut period or the Record Date.

It has been observed that the number of days between record date and interest payment date have varied from 1 to 45 days across issuers and on average it was found to be around 15 days and hence, the consultation paper calls for a standardization of record dates at 15 days before the due date of payment of interest redemption in order to call for a uniformity and standardization in terms of market practice.

Harmonization of format of Due Diligence certificate by the Debenture trustees.

In general practice, it has been observed that as per the regulation 40 of NCS regulations, the issuer needs to obtain a due diligence certificate and format of the same is specified by NCS regulations, along with that it is also observed that the Chapter II of Master Circular Debenture Trustee also specifies a format of due diligence certificate to be submitted by Debenture Trustee. The Consultation paper seeks to propose a modification in the due diligence certificate under Regulation 40 and 44 of the NCS regulations.

Publishing of Financial results in newspaper as per the LODR regulations.

Regulation 52(8) of LODR regulations specifies that listed entity shall within two working days of the conclusion of board meeting need to publish financial results in atleast one English National Daily. But clause 16, Part B, Schedule III of LODR regulations, mandates the publication of financial results on website of the entity and also on that of the stock exchange, hence publishing the results in newspaper only increases cost and does not create any value addition, hence SEBI through the consultation paper aims to provide discretion to the entity to publish the financial results within a given time period.

Analysis of the proposals

The NCS and LODR regulations is a great step towards loosening the noose of regulations over corporates or for sake of better words deregulating some aspects of market, which in turn infuses the idea of EODB, SEBI by the means of this consultation paper has tried to take strides towards digitalization in true sense and is trying to distance itself from the red-tapism for which it is infamous for.

Though there are points which needs to be considered.

With respect to proposal which discusses the reduction in the face value of NCDs and NCRPs from Rs. 1 Lakh to Rs. 10,000. This step is taken in light of the public comments which specifically delineate the high face value as a deterrent for non-institutional investor. SEBI in second part of the consultation paper under clause 3.1.3.1 mentions that approximately 98% of the funds raised through the issuance of debt securities are on private placement basis, which in turn shows that the reduction in denomination is only going to play a role in 2% of activities where there are going to be listings, and that this regulation is not going to create any major tides in the debt securities markets, but SEBI being the regulator has the fundamental task of providing equal opportunity to the investors irrespective of their financial status, so this change might provide some easy to the small investors who are willing to invest their stake in debt securities market.

Step of insertion of weblink and QR-code, it can act as a double-edged sword, as it makes the job easier by reducing the size of offer document, reduces the numbers of SRNs being generated and increases the legibility of the document, but on contrary the presence of financials in the offer document makes it handy for the investors to refer to it but insertion of links and QR codes can lead to complacency in the investors which might lead to them being misguided by information asymmetry. One critical modification proposed by SEBI was the link/QR would direct them to the website of the stock exchange, which acts as a more reliable source than the website of the issuer.

The step of restricting the requirement of details like RPTs, Remuneration of Directors etc. from the past year to the latest quarter, is a positive step towards the end of red tapism which the regulator is infamous for, but doing away with them would also restrict the investors’ ability to spot financial patterns.

The step of standardization of record date is proposed to be 15 days, the paper mentions it to be varying from 1 to 45 days, and the average being around 15 days, this is a positive step as it would help the investor as well the company to maintain the record for the payout date.

Standardization of due diligence certificate by the DTs is a positive step and it would make the process of documentation more lucid.

Providing discretion to publish the financial results in a National daily within a stipulated time is a positive step in doing away with unnecessary formalities as the results are already being published on the website of stock exchange immediately after the approval of the board thus the same is accessible to the debenture holder.

Conclusively, we can understand that the modification in NCS and LODR regulations can be very beneficial for the companies and would provide them a huge benefit with respect of EODB, but this ease should not come at a cost of investor being exposed to some major risks and that there can be modifications which can be done, and as it is in a nascent proposal stage it is very much possible to inculcate the aspects which makes it better for both the investors and the company.