[Analysis] SEBI’s Consultation Paper on Non-Convertible Securities

Non-Convertible Securities are financial instruments that cannot be converted into another form of security, such as equity shares, at a predetermined price or time. Unlike convertible securities, which can be exchanged for shares of stock, non-convertible securities remain in their original form until maturity or redemption. These securities typically include bonds, debentures, and other fixed-income instruments issued by corporations or governments to raise capital. Investors in non-convertible securities typically receive periodic interest payments until the security matures, at which point they receive the principal amount invested.

Table of Contents

Introduction

1. Removal of promoters’ PAN and personal address disclosure from Offer Documents under SEBI NCS Regulations
2. Disclosure of Key Operational and Financial Metrics in Offer Documents as per SEBI NCS Regulations
3. QR Code and Web-Link Disclosure of Issuer’s Branches in SEBI NCS Offer Documents
4. Standardisation of Disclosure of Project Costs and Financing in Offer Documents as per SEBI NCS Regulations
5. Relaxation in Providing Detailed Disclosure w.r.t. Property Acquisitions in SEBI NCS Offer Documents
6. Flexibility in Attestation Signatories for SEBI NCS Offer Documents
7. Revised Timeline for Reporting Payment Obligations on Listed Commercial Paper under SEBI NCS Regulations

Introduction

SEBI has released a Consultation Paper dated May 9, 2024, on the Ease of Doing Business for Non-Convertible securities. The Consultation paper solicits public suggestions to eliminate the inconsistency among various provisions and reduce compliance costs and the burden of issuing non-convertible securities under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘SEBI NCS Regulations’). SEBI has addressed vital aspects such as an individual’s privacy, QR codes, and web links to provide detailed information and only necessary information that enables investors to make better decisions.

Proposals Highlighted by the Working Group

1. Removal of promoters’ PAN and personal address disclosure from Offer Documents under SEBI NCS Regulations

1.1 Existing Norms

1.1.1 The offer document must contain a comprehensive promoter profile

The offer document must mention a complete promoter’s profile, including name, date of birth, age, personal address, photograph, permanent accountant number, educational qualifications, experience in the business or employment, positions/posts held in the past, directorships held, other ventures of each promoter, notable achievements, and their business and financial activities.

1.1.2 Requirement of submission of declaration by promoter and director

A declaration confirming that the PAN, Aadhaar number, driving license number, bank account number(s) and passport number of the promoters and permanent account number of directors have been submitted to the stock exchanges on which the non-convertible securities are proposed to be listed, at the time of filing the draft issue document.

1.2 Observations by the Working Group

The EODB working group has recommended deleting the terms’ personal address’, ‘their business and financial activities’, and ‘permanent account number’ from the above clause to ease doing business and prevent the misuse of an individual’s personal information.

The working group highlighted that most of this information is linked to the Aadhaar number, which must be submitted for the KYC process and is available on the stock exchange.

Further, the working group recommended that disclosure of promoters’ business and financial activities in the offer document is necessary since this is vital information for investors to make informed decisions. Thus, the same may be retained.

1.3 Proposed Norms

The working group has proposed to remove the terms’ personal address’ and ‘permanent account number’ from the disclosures specified under clause 3.3.2(a) of Schedule I of the Non-Convertible Securities Regulations. Further, the term’ personal address’ may be added under clause 3.3.2 (b) of the said Schedule.

2. Disclosure of Key Operational and Financial Metrics in Offer Documents as per SEBI Non-Convertible Securities Regulations

2.1 Existing Norms

2.1.1 Requirement for Audited Financial Statements

The Companies are required to disclose the audited financial statements (i.e., profit and loss statement, balance sheet, and cash flow statement) on a standalone and consolidated basis for a period of three completed years, which shall not be more than six months old from the date of the issue document or issue opening date, as applicable.

2.1.2 Certification of Financial Statements by Statutory Auditors

Such financial statements must be audited and certified by the statutory auditor(s) who holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India (“ICAI”).

However, if the issuer, being a listed REIT/listed InvIT, has existed for less than three completed years and historical financial statements of such REIT/InvIT are not available for some portion or the entire portion of the reporting period of three years and the interim period, the combined financial statements shall be disclosed for the periods for which such historical financial statements are not available.

2.1.3 Disclosure of Unaudited Financial Information by Listed Issuers

Listed issuers (whose debt securities or specified securities are listed on the recognised stock exchange in compliance with the listing regulations, may disclose unaudited financial information with limited review report in the issue document instead of audited financial statements for the interim period subject to making necessary disclosures in this regard in issue document including risk factors.

2.1.4 Key operational and financial parameters are consolidated and standalone

The issuer is required to provide financial highlights, such as revenue, net income, profit before and after tax, etc., on a consolidated and standalone basis.

2.2 Observations by the Working Group

The working group has observed that the current paragraph does not specify the period for which information related to operational and financial parameters needs to be disclosed.

2.3 Proposed Norms

The working group has proposed aligning the period for disclosing critical operational and financial parameters with the period for disclosing financial information in the offer document.

3. QR Code and Web-Link Disclosure of Issuer’s Branches in SEBI Non-Convertible Securities Offer Documents

3.1 Existing Norms

3.1.1 Disclosure of Business Branches/Units in Offer Document

The issuer of Non-convertible securities must disclose in the offer document the Details of branches or units where the issuer carries on its business activities.

3.2 Observations by the working group

The working group stated that the issuer may have a wide range of operations and a vast number of branches across countries. To simplify business, the working group recommended removing the requirement to provide details of all branches and units.

3.3 Proposed Norms

Highlighting the importance of disclosure of information for investors to understand the size and scope of the business operation, the working group recommended that this information be provided through the web-link or QR code.

Further, the details of the branches/units may be provided to the debenture trustee

and also kept available for inspection and debenture. The trustee may confirm receipt of such information in this regard.

4. Standardisation of Disclosure of Project Costs and Financing in Offer Documents as per SEBI NCS Regulations

4.1 Existing Norms

4.1.1 Disclosure of Project Cost and Financing for New Projects

The issuer of Non-convertible securities must disclose in the offer document the project cost and means of financing when funding new projects.

4.2 Observations by the Working Group

The working group observed that the disclosure of “project cost and means of finance” in case of funding the new projects must be aligned with the provisions of Para 7 of Schedule VII (Disclosure in a placement document) of the ICDR Regulations as the same information is also required to be disclosed under ICDR Regulations.

4.3 Proposed Norms

Highlighting the provisions of Para 7 of Schedule VII (Disclosure in a placement document) of the ICDR Regulations, the working group stated that the disclosure of “Project cost and means of financing, in case of funding of new projects” in the offer document is restrictive. It is recommended that the ‘proposed use of proceeds’ be specified to align with the ICDR Regulations.

5. Relaxation in Providing Detailed Disclosure w.r.t. Property Acquisitions in SEBI NCS Offer Documents

5.1 Existing Norms

5.1.1 Disclosure of Immovable Property Acquisitions

Listed entities must disclose the purchase or acquisition of any immovable property for which advance has been paid to purchase or acquisition of any immovable property for which advance has been paid to a third party. This also requires disclosing the details of the vendor, amount paid and payable, title or interest in such property proposed to be acquired, etc.

5.2 Observations by the Working Group

The working group highlighted that the issuers are required to provide a certificate that proceeds have been utilised for the purpose it is intended, providing minute business and commercial details in addition to the certificate on utilisation of proceeds. Thus, the disclosure pertaining to details of the vendor, amount paid and payable, and title or interest in the property must be removed.

5.3 Proposed Norms

The working group recommended providing the details of the top five vendors determined on the basis of sale consideration payable to them. Details of the remaining vendors may be provided by way of a QR code and weblink in the offer document confirmation of information provided to the debenture trustee.

6. Flexibility in Attestation Signatories for SEBI NCS Offer Documents

6.1 Existing Norms

Compliance Declaration by Issuer’s Directors/Authorized Personnel

Directors or authorised persons of the issuer are required to provide the declaration that the issuer is in compliance with the provisions of SCRR, SEBI Act, Companies Act, etc.

6.2 Observations by the Working Group

The working group submitted that obtaining the declaration from all directors at one time is not feasible and time-consuming. For this reason, the working group suggested that the power of attestation should be delegated to a committee, KMP, or any other person deemed fit.

6.3 Proposed Norms

The working group has recommended delegating the power of attestation to ensure that compliance may be provided to any of the following with the disclosure of the same in the offer document:

• The executive Chairperson and compliance officer, or
• MD & CEO and compliance officer or
• The CFO and compliance officer or
• Whole-time director and compliance officer,
• Jointly by any two key managerial personnel

7. Revised Timeline for Reporting Payment Obligations on Listed Commercial Paper under SEBI NCS Regulations

7.1 Existing Norms

7.1.1 Timely Disclosure Requirements for Listed Securities

The listed entity is required to submit a certificate to the stock exchange regarding the status of payment of interest or dividend or repayment or redemption of the principal of non-convertible securities within one working day of it becoming due while under Para 8.4 of Chapter XVII (Listing of Commercial Paper) of the NCS Master Circular required to disclose the material events as soon as possible but not later than 24 hours from the occurrence of event (or) information.

7.2 Observations by the Working Group

The working group observed the inconsistency between LODR and NCS Master Circular regarding intimation to Stock Exchanges updating the status of payment of interest/repayment of principal for listed commercial paper.

7.3 Proposed Norms

Highlighting the provisions of SEBI LODR, the working group has recommended that the timeline for intimating Stock Exchanges regarding the status of payment of interest/repayment of principal for listed commercial paper be aligned to ensure consistency, i.e., within one working day of the payment being due.