Mastering Debt Issuance and Private Placements: Part 5

This final installment of the Chapter 3 notes from the NISM Securities Markets Foundation Workbook explores the regulatory landscape for debt securities, the unique auction process for Government Securities, and the specialized mechanisms of Private Placements and Electronic Book Building.

3.15 Regulatory Requirements for a Public Issue of Debt Securities

Public issues of debt (such as debentures) are governed by the Companies Act, 2013 and the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

1. Eligibility and Issuers

• Eligible Entities: Public limited companies, Public Sector Undertakings (PSUs), statutory corporations, and SEBI-registered REITs or InvITs.
• Unlisted Companies: A company does not need to have made an IPO of its shares to issue and list debentures.

2. The Offer Document and Shelf Prospectus

• Draft and Final Offer: A draft is filed with stock exchanges for public comment; the final version is filed with the Registrar of Companies (RoC).
• Shelf Prospectus: Eligible entities (like banks and PFIs) can file a single "shelf prospectus" to make multiple issues over time using a shorter "tranche prospectus" for each specific offer.

3. Key Protections and Rules

• Mandatory Listing: All debt securities issued under a public offer must be listed on a recognized stock exchange.
• Credit Rating: Issuers must obtain at least one credit rating from a SEBI-registered agency. If multiple ratings are obtained, all must be disclosed in the offer document.
• Minimum Subscription: The issue must receive at least 75 percent of the base issue size. If it fails, all blocked funds must be unreleased within a specified timeframe.
• Debenture Trustees: Registered banks or FIs must be appointed as trustees to safeguard investor interests and ensure assets are sufficient to cover claims.
• Creation of Security: For secured debt, issuers must provide an undertaking that assets are free of encumbrances or have obtained consent for a second charge.

3.16 Public Issue Process: Corporate Debt and G-Secs

While corporate debt follows a process similar to equity IPOs, the issuance of Government Securities (G-Secs) relies on a distinct auction-based mechanism managed by the central bank.

Corporate Debt Process Steps

1. Resolution: Board and shareholder authorization.
2. Filing: Submission of draft and final prospectuses to SEBI/Exchanges/RoC.
3. Trust Deed: Execution of a Debenture Trust Deed.
4. Allotment: Finalizing the basis of allotment and listing on exchanges.

3.16.1 Government Securities (G-Secs) Issuance

G-Secs are issued by the Reserve Bank of India (RBI) through periodic auctions based on a six-month calendar.

• Retail Access: Individual investors can participate in G-Sec and T-Bill auctions through stock exchanges, which aggregate orders and submit a single consolidated bid to the RBI.

3.17 Private Placements and QIPs

Private placement is the primary method used in India for raising debt because it is faster and more cost-effective than public issues.

1. General Private Placement

• Definition: An offer to subscribe to securities made to not more than 50 persons (under the Companies Act).
• Restrictions: No public advertising or marketing is allowed. Payment must be made via banking channels, not cash.
• Preferential Allotment: Private placements of convertible securities by listed companies. They require a shareholder resolution and may have lock-in periods for promoters.

2. Qualified Institutions Placement (QIP)

A specialized private placement for listed companies to raise funds from Qualified Institutional Buyers (QIBs).

• Purpose: Often used to meet the mandatory 25 percent minimum public shareholding requirement.
• Mutual Fund Reservation: At least 10 percent of the QIP must be allotted to mutual funds.
• Resale Restriction: Allottees can only sell these shares on a recognized stock exchange within one year of allotment.

3.17.2 Electronic Book Provider (EBP) Platform

To increase transparency in the private placement of debt, SEBI introduced the EBP platform provided by stock exchanges.

• Mandatory Usage: Required for private placements of debt totaling Rs. 50 crore or more in a financial year, issues by companies less than 3 years old, or regulatory capital issues for banks/NBFCs.
• Transparency Rules: Issuers must upload documents at least 2 working days prior (5 days for first-timers). All participants must enroll before bidding.
• Bidding Limits: An individual participant cannot bid for more than Rs. 100 crore or 5 percent of the base issue size, whichever is lower, through an arranger.
• Allotment Priority: Successful bids are determined based on price-time priority (if the coupon is fixed) or yield-time priority (if the coupon is discovered during bidding).

Key Terms to Remember

• Shelf Prospectus: A single document for multiple future issues of debt.
• Macaulay Duration: A measure used to categorize debt funds based on the time it takes to recover the investment.
• SGL Account: Subsidiary General Ledger account maintained with the RBI for government security transactions.
• In-the-money: An option status where the strike price is favorable relative to the market price.
• Willful Defaulter: An entity barred from accessing the capital market for public debt issues.