REVISION IN THE FRAMEWORK FOR FUND RAISING BY ISSUANCE OF DEBT SECURITIES BY LARGE CORPORATES (‘LC’s’) - MMJC

Regulation 50B of SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’) read with Chapter XII of the NCS Master Circular dt: July 7, 2023 [‘NCS Master Circular’] on ‘Fundraising by issuance of debt securities by large corporates’ (‘LC Chapter’), inter-alia, mandates LCs to raise a minimum 25% of their incremental borrowings in a financial year through issuance of debt securities which were to be met over a contiguous block of three years. After Considering prevailing market conditions and representations from market participants, the framework for fundraising by issuance of debt securities by LCs is revised by the Securities Exchange Board of India (“SEBI”) through circular SEBI/HO/DDHS/DDHS-RACPOD1/P/CIR/2023/172 dated 19^th October 2023.

The summary of the said revised framework is as follows:

A. Applicability

This framework is applicable with effect from April 01, 2024, for LCs following April-March as their financial year and with effect from January 01, 2024, for LCs that follow January-December as their financial year.

The framework shall be applicable for all listed entities (except for Scheduled Commercial Banks), which as on the last day of the FY (i.e., March 31 or December 31) and listed entities fulfilling the following criteria shall be considered as Large Corporate’s:

1. have their specified securities or debt securities or non-convertible redeemable preference shares listed on a recognized Stock Exchange(s) in terms of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) AND
2. have a credit rating of “AA”/ “AA+”/AAA “, where the credit rating relates to the unsupported bank borrowing or plain vanilla bonds of an entity, which have no structuring/ support built-in AND
3. have outstanding long-term borrowings of Rs.1000 crore or above.

Explanation: ’Outstanding long-term borrowings’ for the purpose of this framework shall mean any outstanding borrowing with an original maturity of more than one year but shall exclude the following:

• External Commercial Borrowings.
• Inter-corporate borrowings involving the holding company and/ or subsidiary and/ or associate companies.
• Grants, deposits or any other funds received as per the guidelines or directions of the Government of India.
• Borrowings arising on account of interest capitalization; and
• Borrowings for the purpose of schemes of arrangement involving mergers, acquisitions, and takeovers.

Explanation: In case a listed entity has multiple ratings from multiple rating agencies, the highest of such ratings shall be considered for the purpose of this framework.

B. Fundraising by LC:

An LC shall raise not less than 25% of its qualified borrowings by way of issuance of debt securities in the financial year after the financial year in which it is identified as an LC.

 Explanation: For this framework, the expression “qualified borrowings” shall mean incremental borrowing between two balance sheet dates having original maturity of more than one year but shall exclude the following:

• External Commercial Borrowing.
• Inter-corporate borrowings involving its holding company and/ or subsidiary and/ or associate companies.
• Grants, deposits or any other funds received as per the guidelines or directions of the Government of India.
• Borrowings arising on account of interest capitalization; and
• Borrowings for the purpose of schemes of arrangement involving mergers, acquisitions, and takeovers.

It is also clarified that the qualified borrowings for a FY shall be determined as per the audited accounts for the year filed with the Stock Exchanges.

Compliance Framework for LC with effect from FY 2025 onwards

• For entities identified as LC’s following shall be applicable:
• From FY 2025 onwards, the requirement of mandatory qualified borrowing by an LC in a FY   shall be met over a contiguous block of three years.
• If at the end of three years, there is a surplus in the requisite borrowings (i.e., the actual borrowings through debt securities are more than 25% of the qualified borrowings for FY), the following incentives shall be available to the LC:
• Reduction in the annual listing fees of FY “T+2” pertaining to debt securities or non- convertible redeemable preference shares as specified in Table I of Annex-I to this circular; and
• Credit in the form of reduction in contribution to the Core Settlement Guarantee Fund (SGF) of LPCC as specified.
• If at the end of three years, there is a shortfall in the requisite borrowings (i.e., the actual borrowings through debt securities are less than 25% of the qualified borrowings for FY), a dis-incentive in the form of additional contribution to the core SGF shall apply as specified.

Explanation: The actual borrowing done through the issuance of debt securities by a LC in FY “T”, shall first get adjusted with the deficit of the FY “T-2” if any, and further, against the deficit of FY “T-1” if any. The remaining amount shall get adjusted against the mandatory borrowings for FY “T.” This will also help to minimize the disincentive, if any, that may accrue due to a shortfall in the borrowings.

Responsibilities of Stock Exchanges

1. Stock Exchange to identify LC: Pursuant to submission of financial results by listed entities as per regulations 33 and 52 of LODR Regulations, the Stock Exchanges shall,

• by June 30, for LCs following April-March as their financial year or
• by March 31, for LCs following January-December as their financial year, as applicable.

determine the list of LCs for the financial year. The Stock Exchanges shall co-ordinate and release a uniform list of LCs for the financial year and place the same on their websites. They shall also notify listed entities so identified as LCs by email, to enable them to comply with the requirements.

2. Stock Exchange shall calculate incentive or dis-incentive: Based on the financial results submitted by LCs, the Stock Exchanges shall, in co-ordination with each other, calculate the incentive or dis-incentive as on the last day of third financial year. The Stock Exchanges shall intimate the same to the LCs as follows:

a.  by May 31st for LCs following April-March as their financial year or

b. by February 28th/29th for LCs following January-December as their financial year, as applicable.

As regards the incentive/ dis-incentive with respect to the contribution to the core SGF, the Stock Exchanges shall share relevant information with the Limited Purpose Clearing Corporation by May 31st for LCs following April-March as their financial year or by February 28th/29th for LCs following January-December as their financial year, as applicable.

Relaxations to LC identified till date:

1. Disclosure relating to identification of listed entity as LC: SEBI has relaxed the requirements of listed entities intimating stock exchanges on being identified as LC as per Chapter XII of NCS Master Circular. Now the same will be done by a common list by stock exchanges on their website and individually to LC with effect from FY 2025.
2. Disclosure relating to incremental borrowing for FY 2024: Further LCs that were identified based on erstwhile criteria as on December 31, 2020/ March 31, 2021, December 31, 2021 / March 31, 2022, and December 31, 2022 / March 31, 2023 need not disclose the details of incremental borrowing done during the financial year within 45 days after the end of the financial year [clause 3.1(b) of NCS Master Circular]
3. LCs that were identified based on erstwhile criteria as on December 31, 2020/ March 31, 2021, December 31, 2021 / March 31, 2022 and December 31, 2022 / March 31, 2023 shall endeavour to comply with requirement of raising 25% of their incremental borrowings done during FY 2022, FY 2023, and FY 2024 respectively by way of issuance of debt securities till March 31, 2024, failing which such LCs shall provide a one-time explanation in their annual report.

The article is written by

Ms. Bhairavi Kulkarni – Senior Manager – bhairavikulkarni@mmjc.in

Mr. Vallabh Joshi – Senior Manager – vallabhjoshi@mmjc.in