Sebi prescribes minimum subscription limit for debt issues

The Securities and Exchange Board of India (Sebi) has prescribed a minimum subscription requirement for public issues of debt securities of 75 per cent of the offer, below which no allotment of debt securities should be made.

The issuer of equity share capital is at present required to make a declaration about the refund of the issue, if the minimum subscription of 90 per cent of the issue size is not received. However, for public issue of non-convertible debentures (NCDs), no such requirement is specified under Companies Act, 1956.

Further, existing SEBI ILDS Regulations (Regulation 12 of SEBI Issue and Listing of Debt Securities Regulations, 2008), allows the issuer to decide the amount of minimum subscription, which it seeks to raise from public through issue of NCDs and disclose the same in the offer document.

Companies Act, 2013 and (draft) Rules made under it also do not specify the quantum of minimum subscription needed in case of public issues (both for equity and debt), but only requires disclosure of the same in the offer document.

In view of this, SEBI has now decided to prescribe a minimum subscription for public issue of debt securities of 75 per cent of the base issue size for both NBFCs and Non-NBFC issuers.

Further, if the issuer does not receive minimum subscription of its base issue size (75 per cent), then the entire application monies should be refunded within 12 days from the date of the closure of the issue.

In the event, there is a delay by the issuer in making the refund, then the issuer should refund the subscription amount along with interest at the rate of 15 per cent per annum for the delayed period, SEBI said.

However, the issuers issuing tax-free bonds, as specified by CBDT, will be exempted from the above proposed minimum subscription limit.

Base issue size
Sebi said the base minimum issue size in the case of any public issue of debt securities shall be Rs100 crore.

Current regulations in respect of public issue of NCDs do not specify any maximum cap on the retention of over-subscription.

Sebi said issuers will in general be allowed to retain over-subscription money up to the maximum of 100 per cent of the base issue size or any lower limit as specified in the offer document. However, issuers filing a shelf prospectus are allowed to retain oversubscription up to the rated size, as specified in their shelf prospectus.

For issuers of tax-free bonds, who have not filed shelf prospectus, the limit for retaining the oversubscription shall be the amount, which they are authorised by CBDT to raise in a year or any lower limit, subject to the same being specified in the offer document.

Further, as per Schedule I of SEBI ILDS Regulations, companies making public issue of NCDs need to specify the ''Object of the issue'' in the offer document. However, detailed disclosure requirements, as required in case of equity issues are not specified under the SEBI ILDS Regulations.

SEBI said documents filed by the issuers for public issue of NCDs at present do not provide concrete objectives for the issue. Most of the objectives stated are in the form of a blanket statement encompassing a lot of avenues for utilising the monies raised through the issue.

In this regard, SEBI said the entities coming out with public issue of NCDs should provide granular disclosures in their offer document, with regard to the "Object of the Issue" including the percentage of the issue proceeds earmarked for each of the ''object of the issue''. Further, the amount earmarked for "General Corporate Purposes", shall not exceed 25 per cent of the amount raised by the issuer in the proposed issue.

SEBI noted that NBFCs are the most frequent users of the debt channel and most of the NBFCs utilise the issue proceeds for onward lending. In view of this, NBFCs will have to disclose in their offer document, the details with regard to the lending done by them, out of the issue proceeds of previous public issues, including details regarding the lending policy; Classification of loans/advances given to associates, entities / person related to the board, senior management, promoters, others, etc; Classification of loans/advances given to according to type of loans, sectors, maturity profile (less than one year, 1-3 yrs, 3-5 yrs, 5-10 years, etc.), denomination (loans of value below Rs50 lakh, Rs50 lakhs to Rs1 crore; Rs1 crore to Rs5 crore, Rs5 crore to Rs25 crore, Rs25 crore to Rs100 crore etc), geographical classification of borrowers; details of top ten borrowers, including their name, address, exposure etc; Details of top ten loans, overdue and classified as non-performing in accordance with RBI Guidelines, in terms of exposure to those entities.

Disclosures in offer document
Issuers coming out with public issues of NCDs need to make disclosure in accordance with the disclosure requirements specified in the Companies Act and SEBI ILDS Regulations. SEBI has now decided that the following additional disclosures have to be made in the offer document, by the issuers.

Offer documents must contain the following disclaimer clause in bold capital letters:

"It is to be distinctly understood that submission of offer document to the Securities and Exchange Board of India (SEBI) should not in any way be deemed or construed that the same has been cleared or approved by SEBI. SEBI does not take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to

be made or for the correctness of the statements made or opinions expressed in the offer document. The lead merchant banker,

______________ has certified that the disclosures made in the offer document are generally adequate and are in conformity with the SEBI (Issue and listing of Debt Securities) Regulations, 2008 in force for the time being. This requirement is to facilitate investors to take an informed decision for making investment in the proposed issue.

It should also be clearly understood that while the Issuer is primarily

responsible for the correctness, adequacy and disclosure of all relevant information in the offer document, the lead merchant banker is expected to exercise due diligence to ensure that the issuer discharges its responsibility adequately in this behalf and towards this purpose, the lead merchant banker _______________ has furnished to SEBI a due diligence certificate dated ______________ which reads as follows:

• Due diligence certificate submitted to SEBI, as per Schedule II of SEBI ILDS Regulations;
• Provisions relating to fictitious applications;
  Declaration by board of directors that the underwriters, if any, have sufficient resources to discharge their respective obligations;
• Reservation in the Issue, if any;
• Utilisation details regarding the previous issues of the issuer as well as group companies;
• Benefit / interest accruing to promoters/directors out of the object of the issue; and
• Details regarding material contracts other than the contracts entered in the ordinary course of business and the material contracts entered within the previous 2 years.

SEBI said the new provisions will apply to the draft offer document for issuance of debt securities filed with the designated stock exchange on or after 16 July 2014.