[Analysis] SEBI’s Corporate Governance for High-Value Debt-Listed Entities (HVDLEs)

High-Value Debt Listed Entities (HVDLEs) are listed entities with an outstanding value of non-convertible debt securities of ₹500 crore or more. SEBI classifies these entities based on their debt holdings to apply specific corporate governance norms that ensure transparency and accountability. The designation of HVDLEs helps streamline regulatory focus on significant debt issuers, aligning their compliance requirements with their impact on the debt market and investor protection.

Table of Contents

1. Introduction
2. Introduction of a Separate Chapter for Corporate Governance Norms in LODR Regulations for ‘High-Value Debt Listed Entities’
3. Relaxation in the Threshold for Identification of ‘HVDLEs’ for Applicability of Governance Norms
4. Introduction of Corporate Governance Compliance Report in XBRL Format
5. Introduction of Sunset Clause for Applicability of Corporate Governance Norms
6. Introduction of Business Responsibility and Sustainability Report for HVDLEs voluntarily
7. Relaxation for HVDLEs Which are Not Companies as per Companies Act, 2013
8. Relaxation with Regard to the Constitution of the Nomination and Remuneration Committee
9. Relaxation with Regard to the Constitution of the Risk Management Committee and Stakeholders Relationship Committee
10. Upfront Disclosure of the RPT Amount in Offer Documents by the Issuer at Time of Issuance of NCS
11. Inclusion of HVDLE Directorships in Overall Board Limit for Listed Entities
12. Proposal to Consider HVDLEs for Computing Maximum Limit of Committees a Director Can Act as a Member or Chairperson
13. Conclusion

1. Introduction

SEBI has released a consultation paper dated October 31, 2024, on reviewing the provisions of LODR Regulations relating to corporate governance norms for ‘High-Value Debt Listed Entities’. The objective of the consultation paper is to seek public comments on the proposals related to the review of provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, pertaining to corporate governance norms for High-Value Debt Listed Entities (HVDLEs). The comments on the same may be submitted by September 6, 2024. The key proposals in detail are as follows:

2. Introduction of a Separate Chapter for Corporate Governance Norms in LODR Regulations for ‘High-Value Debt Listed Entities’

Presently, Regulations 15 to 27 of the LODR Regulations contain corporate governance norms that have been approached from an equity perspective and may not be fully relevant from the perspective of debt-listed entities. Out of 812 debt-listed entities as of March 31, 2024, 264 (33%) entities are both equity and debt-listed, whereas 538 (66%) entities are only debt-listed.

SEBI has proposed introducing a separate chapter for HVDLEs comprising all provisions relating to corporate governance norms and carving out only those that differ from equity-listed entities in a separate chapter. This facilitates ease of reference for HVDLEs to adhere to corporate governance norms.

2.1 Meaning of ‘High-Value Debt Listed Entities’

Listed entities having an outstanding value of listed non-convertible debt securities of Rs 500 crores and above are referred to as ‘High-Value Debt Listed Entities’ (HVDLEs).

3. Relaxation in the Threshold for Identification of ‘HVDLEs’ for Applicability of Governance Norms

Currently, corporate governance norms are applicable based on the outstanding value of listed non-convertible debt securities, and an entity is identified as HVDLE as and when it hits the threshold of Rs 500 crore.

SEBI has proposed increasing the listed outstanding non-convertible securities threshold for identifying a debt-listed entity as HVDLE from Rs 500 crore to Rs 1000 crore.

4. Introduction of Corporate Governance Compliance Report in XBRL Format

SEBI observed from the filings made by HVDLEs on the websites of stock exchanges that the filings are made in uniform formats. In most cases, they are made in PDF format, which hampers readability and monitoring of clause-wise compliance by stock exchanges. Hence, it is proposed to specify that quarterly compliance reports, as specified in Regulation 27(2) of the LODR Regulations, must be in XBRL format.

Further, in the case of reporting for corporate governance compliance, SEBI has proposed harmonizing the format for HVDLEs with the format specified for equity-listed entities.

5. Introduction of Sunset Clause for Applicability of Corporate Governance Norms

Currently, Regulation 3(3) of the LODR Regulations provides that the corporate governance norms shall continue to apply to an HVDLE even when the outstanding amount of listed non-convertible debt securities falls below the specified threshold of Rs. 500 crores.

However, there is no specified period for which an HVDLE shall continue to comply with such provisions once the outstanding amount of listed non-convertible debt securities falls below the specified threshold of Rs. 500 crores.

To address the issue for HVDLEs, SEBI has proposed the following –

• Once the corporate governance norms become applicable to an HVDLE, they must remain applicable until the value of outstanding listed debt securities reduces and remains below the specified threshold for three consecutive financial years.
• Suppose the value of outstanding listed debt securities of the entity increases in the subsequent years and the listed entity hits the specified threshold. In that case, it has to ensure compliance with the provisions within two quarters, i.e. 6, months and disclosures of such compliance may be made in the corporate governance compliance report.

6. Introduction of Business Responsibility and Sustainability Report for HVDLEs voluntarily

Regulation 34(2)(f) of the LODR Regulations mandates that the top 1000 listed companies (by market capitalization) provide disclosures as per the Business Responsibility and Sustainability Report (BRSR).

To inculcate the practice of good governance at par with equity listed, HVDLEs may voluntarily comply with the requirements of publishing BRSR.

7. Relaxation for HVDLEs Which are Not Companies as per Companies Act, 2013

Certain entities such as NABARD, SIDBI, NHB, and EXIM Bank raise funds from the bond market through the issuance of debt securities. These institutions are governed by the specific Acts passed by Parliament and not governed by the Companies Act 2013.

These Acts lay down the governance structure, including the composition of the Board, appointment, removal, and other terms and conditions. Thus, these entities specifically need approvals from the Government or Regulatory bodies concerning the appointment of directors and other related aspects.

SEBI has proposed specifying a similar carve-out for HVDLEs that are not companies, similar to what is provided for equity-listed entities.

8. Relaxation with Regard to the Constitution of the Nomination and Remuneration Committee

Regulation 19 of the LODR Regulations mandates the constitution of the Nomination and Remuneration Committee (NRC) as part of corporate governance norms.

To avoid the constitution of multiple committees by HVDLEs, SEBI has proposed that the board of directors of an HVDLE may either choose to constitute NRC or may ensure that the functions of NRC as specified in Regulation 19(4) of the LODR Regulations are delegated and discharged by the Audit Committee.

9. Relaxation with Regard to the Constitution of the Risk Management Committee and Stakeholders Relationship Committee

Regulation 21 of the LODR Regulations specifies that the Board of Directors must constitute a Risk Management Committee (RMC). In contrast, Regulation 20 of the LODR Regulations mandates the listed entity to constitute a Stakeholders Relationship Committee.

To avoid the constitution of multiple committees by HVDLEs, SEBI has proposed that the board of directors of an HVDLE may either choose to constitute RMC/SRC or may ensure that the functions of RMC/SRC as specified in Regulation 21(4) and Regulation 20(4) of the LODR Regulations are delegated and discharged by the Audit Committee.

10. Upfront Disclosure of the RPT Amount in Offer Documents by the Issuer at Time of Issuance of NCS

Regulation 23 of the LODR Regulations specifies the regulatory requirements pertaining to related party transactions (RPTs), including forming a policy on the materiality of RPTs, prior approval of the audit committee for all RPTs, and prior approval of shareholders for material RPTs.

SEBI has proposed that the issuer, at the time of issuance of non-convertible securities (proposed to be listed), may provide a declaration upfront in the offer document regarding the amount (percentage of issue size) of RPT the issuer proposes to undertake over the tenor of the proposed non-convertible securities (NCS).

Further, the issuer must declare upfront in the offer document the debt-equity ratio, debt service coverage ratio, internet service coverage ratio, and such other financial/non-financial covenants that will be maintained by the issuer over the tenor of non-convertible securities. The debenture trustee must monitor such ratios, including covenants.

11. Inclusion of HVDLE Directorships in Overall Board Limit for Listed Entities

Regulation 17A of the LODR Regulations specifies that a person must not be a director in more than seven listed entities. Further, a person must not serve as an independent director in more than seven listed entities.

However, extant regulations exclude HVDLEs while counting the number of directorships held by a person. As a consequence, a person may hold directorships in many HVDLEs, which would not be counted for the purpose of the limits.

SEBI has proposed including directorships in HVDLEs along with directorships in equity-listed entities when counting the number of directorships held by a person in listed entities. Further, to give sufficient time to all the listed entities to ensure compliance with the provision, a period of six months or a period of time till the next AGM is held may be provided.

12. Proposal to Consider HVDLEs for Computing Maximum Limit of Committees a Director Can Act as a Member or Chairperson

Regulation 26 of the LODR Regulations provides a maximum cap on the number of committees a director can act as a member or chairperson across all listed entities. While determining the number of such listed entities, HVDLEs are excluded.

To ensure that directors devote adequate time to listed entities, including HVDLEs and in the interest of investor protection, SEBI has proposed that HVDLEs (along with equity-listed companies) must be considered for computing the maximum limit of committees, a director can act as a member or chairperson.

13. Conclusion

The proposed norms aim to strengthen corporate for High-Value Debt Listed Entities by introducing specific provisions that enhance transparency, accountability and compliance. Through measures such as creating a separate governance chapter, raising the threshold for HVDLE identification, aligning reporting standards, and ensuring balanced board commitments, SEBI seeks to simplify governance practices and promote consistent oversight. These initiatives collectively enhance investor protection and strengthen the stability of the debt market.