[Analysis] Compliance for Non-Convertible Securities (NCS) – Key Proposals by SEBI
- Blog|Advisory|Company Law|
- 5 Min Read
- By Taxmann
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- Last Updated on 27 August, 2024
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Non-convertible Securities (NCS) are financial instruments, typically debt instruments like bonds or debentures, that cannot be converted into equity shares of the issuing company. They offer fixed returns in the form of interest or dividends over a specified period. NCS are primarily used by companies to raise capital while keeping ownership and control intact since investors do not have the option to convert these securities into equity. They are a popular choice among investors seeking stable returns without the equity-related risks associated with stock investments.
Table of Contents
- Introduction
- Rationale Behind the Proposals
- SEBI’s Key Proposals for Non-Convertible Securities
- Conclusion
1. Introduction
On August 16, 2024, SEBI unveiled a Consultation Paper focused on enhancing the ease of doing business and streamlining compliance requirements for Non-Convertible Securities (NCS). This initiative is a part of SEBI’s ongoing efforts to align the regulatory framework for non-convertible securities with that of equity-listed entities, aiming to simplify procedures, reduce administrative burdens and promote greater efficiency in financial market operations. The key proposals include aligning the provisions for approval and authentication of financial results, standardising fraud and default disclosure requirements, reducing the timeline for record date intimations, mandating the use of the XBRL format for filings and providing flexibility concerning ISIN restrictions for certain securities. Comments may be submitted by September 6, 2024.
2. Rationale Behind the Proposals
In the budget announcements for FY 2023-24, the Hon’ble Finance Minister emphasised simplifying, easing and reducing the cost of compliance for participants in the financial sector through a consultative approach. In order to align the process of review with the budget announcement, SEBI established several Working Groups to propose measures for simplifying and easing compliance under various SEBI Regulations.
Accordingly, a Working Group for reviewing compliance requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, recommended certain measures to promote the ease of doing business for entities with listed non-convertible securities. The key proposals are detailed below:
3. SEBI’s Key Proposals for Non-Convertible Securities
3.1 Alignment of provisions regarding approval and authentication of financial results for equity and debt-listed entities
To ensure parity between the provisions under the LODR Regulations for equity and debt-listed entities, SEBI has proposed a modification to Regulation 52(2)(b) of the LODR Regulations. This modification mandates that the quarterly financial results must be approved by the board of directors.
Additionally, the financial results submitted to the stock exchange must be signed by the chairperson, managing director, or a whole-time director, or, in their absence, by any other director of the listed entity who has been duly authorised by the board of directors to sign the financial results.
| Comments |
| Currently, Regulation 33(2)(b) of the LODR Regulations, 2015, for entities with listed specified securities, requires financial results submitted to the stock exchange to be signed by the chairperson, managing director, or a whole-time director, or in their absence, by any other director authorised by the board. Conversely, Regulation 52(2)(b) for entities with listed non-convertible securities mandates that quarterly results be recorded by the board and signed by the managing director or executive director.
The proposed modification aims to create consistency between the requirements for equity and debt-listed entities by aligning the signing authority for financial results. This change simplifies the compliance process, ensures uniform governance practices across different types of listed entities and enhances the transparency and reliability of financial disclosures. |
3.2 Alignment of provisions regarding Fraud/Default disclosure for Equity and Debt-Listed Entities
In the absence of a specific definition of fraud and default for debt-listed entities, SEBI has proposed to align Clause A.17 of Part B of Schedule III with Clause A.6 of Part A of Schedule III of the LODR Regulations.
| Comments |
| Schedule III of the LODR Regulations outlines disclosure requirements for events affecting the price of securities. Part A of Schedule III, read with Regulation 30, applies to specified securities. Clause A.6 of Part A of Schedule III, mandates disclosure of frauds or defaults by the listed entity, its promoters, directors, KMPs, senior management, or subsidiaries, including arrests, whether in India or abroad. This clause is specified for equity-listed entities, with defined terms for ‘Fraud’ and ‘Default’.
On the other hand, Part B of Schedule III, read with Regulation 51(2), pertains to listed non-convertible securities. Clause A.17 of Part B requires disclosure of similar issues involving promoters, KMPs, directors, employees, or the entity itself or the arrest of a KMP or promoter. This clause applies to debt-listed entities. This alignment ensures that definitions and reporting obligations for price-sensitive information are consistent, enhancing clarity and reducing ambiguity. This change is expected to streamline compliance, facilitate better regulatory oversight, and ensure that all listed entities adhere to uniform standards for reporting significant events affecting security prices. |
3.3 Reduction in the timeline for record date intimation to stock exchanges to ‘at least three working days’
The SEBI has proposed reducing the timeline for intimating the record date to stock exchanges by an entity having listed non-convertible securities from at least seven working days to at least three working days.
| Comments |
| Regulation 60(2) of the LODR Regulations requires entities with listed non-convertible securities to notify stock exchanges of the record date at least seven working days in advance, excluding the intimation and record dates. Similarly, Regulation 42 mandates equity-listed entities to do the same. However, for rights issues, the proviso to Regulation 42(2) reduces this notice period to at least three working days.
The proposed reduction in the timeline for intimation of record date from 7 to 3 working days aims to streamline the process and provide greater flexibility for entities having listed non-convertible securities. This change is expected to improve operational efficiency, enabling companies to respond quickly to market conditions while ensuring timely investor notifications and regulatory compliance. |
3.4 Filing of all disclosures by a listed entity having NCS with stock exchanges to be in XBRL format
The SEBI has proposed a similar provision regarding disclosures to be filed in XBRL format for debt-listed entities as specified for equity-listed entities.
| Comments |
| Presently, in the absence of any specific provision in the LODR Regulations and the Master Circular for listing obligations and disclosure requirements for non-convertible securities, securitised debt instruments and/or commercial paper dated May 21, 2024, regarding the filing of information under XBRL or PDF format, entities are submitting disclosures to the stock exchanges in both XBRL and PDF formats.
The shift to XBRL-only filings will streamline the disclosure process, enhance data accuracy, and improve regulatory oversight. This alignment between debt-listed and equity-listed entities will also ensure consistency in reporting standards. |
3.5 Relaxation from ISIN restriction limit for unlisted ISINs converted to listed ISINs
The SEBI has proposed that unlisted ISINs outstanding as on December 31, 2023, converted to listed ISINs, subsequent to the introduction of Regulation 62A, may be exempted from the limit of 14 ISINs.
| Comments |
| Regulation 60(2) of the LODR Regulations requires entities with listed non-convertible securities to notify stock exchanges of the record date at least seven working days in advance, excluding the intimation and record dates. Similarly, Regulation 42 mandates equity-listed entities to do the same. However, for rights issues, the proviso to Regulation 42(2) reduces this notice period to at least three working days.
The proposed reduction in the timeline for intimation of record date from 7 to 3 working days aims to streamline the process and provide greater flexibility for entities having listed non-convertible securities. This change is expected to improve operational efficiency, enabling companies to respond quickly to market conditions while ensuring timely investor notifications and regulatory compliance. |
4. Conclusion
SEBI’s proposed reforms for non-convertible securities represent a significant step toward harmonising compliance and reporting requirements with those for equity-listed entities. These reforms are designed to simplify regulatory requirements, reduce compliance costs, and promote transparency, ultimately fostering a more efficient and investor-friendly market environment.
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