The Securities and Exchange Board of India operates as the regulatory authority overseeing and supervising the Indian capital and securities market, fundamentally aimed at protecting the interests of investors. This objective is met through the formulation and enforcement of guidelines and regulations to ensure adherence and integrity within the market. SEBI has meticulously crafted a framework of rules and guidelines pertaining to the issuance of debentures. In this blog, we shall see the SEBI guidelines for issue of debentures in India.
Understanding the Role of SEBI
Before diving into the SEBI guidelines for issue of debentures in India, let us understand its role first. The Securities and Exchange Board of India, is the central organisation for regulating the securities market. It has the very important responsibility of monitoring and regulating securities trading as well as investments in the country.
Functions of SEBI
Let us now see the crucial functions of SEBI in the Indian financial sector before discussing the SEBI guidelines for issue of debentures in India. These functions include:
1. Protection of Investor Interests
SEBI was established with the fundamental goal of safeguarding the interests of investors in the securities market.
2. Development of Securities Market
SEBI actively promotes the development of the securities market by creating a conducive environment for its growth. This involves setting policies and regulations that encourage participation and investment in the market.
3. Oversight of Credit Rating Agencies and Foreign Portfolio Investors
SEBI takes charge of regulating the operations of credit rating agencies, ensuring they maintain transparency and accuracy in their assessments. It also oversees foreign portfolio investors to ensure they adhere to Indian market regulations.
4. Combatting Fraudulent and Unfair Trade Practices
SEBI plays a pivotal role in prohibiting fraudulent and unfair trade practices within the securities market. It monitors and takes action against any activities that compromise market integrity.
5. Investor Education and Awareness
To empower investors, SEBI undertakes initiatives to educate and inform them about the various aspects of the securities market. This includes disseminating information about market intermediaries and investment opportunities.
6. Efficient Market Regulation
SEBI focuses on the research and development of strategies and mechanisms to ensure the securities market operates efficiently. It continually updates regulations to adapt to changing market dynamics.
7. Monitoring Substantial Acquisitions and Takeovers
SEBI closely monitors and regulates substantial acquisitions of shares and corporate takeovers.
Understanding Debentures
Before finally getting into the SEBI guidelines for issue of debentures in India, let us understand the concept of debentures. Debentures are financial instruments commonly used by corporations as a means of raising capital for their long-term financial needs. This borrowing is structured into units of smaller denominations, which can be sold to interested investors.
Characteristics of Debentures
1. Documentary Evidence: A debenture is issued in the form of a document, often under the company’s official seal, which serves as legal proof of the debt owed by the company to the debenture holders.
2. Versatility: Debentures can take various forms, including debenture stock, bonds, or other securities. These instruments may or may not be secured by the company’s assets.
What Are the SEBI Guidelines for Issue of Debentures in India?
The key SEBI guidelines for issue of debentures in India are as follows:
1. Credit Rating Requirement:
- Debt instruments must be rated by a Credit Rating Agency, and this rating must be disclosed in the offer document.
- For issues equal to or greater than 100 crores, two ratings from two different credit rating agencies are required.
- Recognised credit rating agencies in India include CRISIL, ICRA, and CARE.
2. Debt-Equity Ratio:
The debt-equity ratio for debenture issuance must not exceed 2:1, except for capital-intensive projects, where this condition can be relaxed.
3. Purposes for Debenture Issuance:
Debentures may be issued for various purposes, including starting new undertakings, expansion, diversification, modernisation, amalgamation, asset acquisition, capital restructuring, and long-term finance resource enhancement.
4. Limitation on Debenture Issue:
The issue of debentures should not exceed 20% of the gross current assets, including loans and advances.
5. Redemption Period:
Redemption of debentures cannot commence before 7 years from the commencement of the company.
6. Payment in Instalments:
Small investors with debentures valued at Rs. 5,000 or less can receive payments in one instalment.
7. Conversion of Non-Convertible Debentures:
Non-Convertible Debentures can be converted into equity with the consent of SEBI.
8. Premium on NCDs:
A premium of 5% on the face value is allowed for non-convertible debentures during redemption.
9. Secured Debentures for Public Subscription:
Secured debentures are permitted for public subscription.
10. Face Value and Listing:
The face value of debentures must be Rs. 100, and they should be listed on one or more stock exchanges in India.
11. Appointment of Debenture Trustees:
Debenture trustees must be appointed for debentures with a maturity period exceeding 18 months, and their names should be mentioned in the offer document.
12. Debenture Redemption Reserve:
Companies issuing debentures must create a Debenture Redemption Reserve to protect the interests of investors against the risk of default. If a reserve is not created within 12 months of issuing the debentures, the company is liable to pay a 2% interest penalty to debenture holders.
13. Listing of Debt Instruments Before Equity:
SEBI allows the listing of debt instruments before equity if the rating of the instrument is not below a minimum rating of ‘A’ or its equivalent.
14. Fully Convertible Debentures (FCDs):
FCDs with a conversion period of more than 36 months are not allowed unless conversion is made optional, providing the right to buy or sell the stock at a certain price or the obligation to buy or sell the stock at a certain price.
These SEBI guidelines for issue of debentures in India aim to ensure transparency as well as efficient regulation of debenture issuances in India’s financial markets. Companies must adhere to these set of SEBI guidelines for issue of debentures in India when raising funds through debentures to maintain the integrity and stability of the financial system.
Final Thoughts
SEBI guidelines for issue of debentures in India play a crucial role in maintaining the integrity and transparency of the financial markets. These regulations, applicable to both public sector and public limited companies, aim to protect investor interests, promote responsible corporate financing, and ensure the availability of vital information to market participants. By enforcing credit rating requirements, limiting debt-equity ratios, and stipulating redemption periods, SEBI fosters a secure environment for investors while facilitating companies’ access to long-term capital.
Furthermore, the SEBI guidelines for issue of debentures in India emphasise the importance of financial prudence, accountability, and investor protection. With provisions for debenture redemption reserves and oversight of secured debentures, SEBI ensures that companies meet their financial obligations to investors.
