[Analysis] SEBI’s Move Enhances Transparency in Private Placement of Non-Convertible Securities

Table of Content

1. Introduction
2. Definitions of “Key Managerial Personnel” and “Senior Management” newly inserted
3. SEBI merges disclosure requirements for public issue and private placement
4. Mandatory filing of general information document for issuers making private placement of Non-Convertible Securities
5. SEBI notifies the requirements for ‘Large Corporates’
6. Obligation of Issuers intending to issue Commercial Paper [Regulation 51]
7. SEBI prescribes separate formats for disclosure of financials on standalone and consolidated basis for Financial and Non-Financial Sector Entities

1. Introduction

The SEBI vide Notification No. SEBI/LAD-NRO/GN/2023/135; Dated July 3, 2023 has notified the SEBI (Issue and Listing of Non-Convertible Securities) (Second Amendment) Regulations, 2023, bringing significant changes to the existing regulations. These amendments aim to enhance transparency, accountability and investor protection in the securities market. The amendments shall be effective from 03.07.2023.

The key highlights of the amendment include the insertion of definitions of “Key Managerial Personnel” and “Senior Management”, streamlining the roles and responsibilities within companies. Additionally, SEBI has merged disclosure requirements for public issues and private placements, simplifying the process for issuers.

To ensure comprehensive disclosures, a new chapter has been introduced for issuers making private placements of non-convertible securities, emphasizing the filing of general information documents and subsequent key information documents. This promotes transparency and provides investors with timely information. The key highlights of the amendment are as follows:

2. Definitions of “Key Managerial Personnel” and “Senior Management” newly inserted

The SEBI has inserted definitions of “Key managerial personnel” and “Senior Management” under Regulation 2 of the existing regulations. The term “key managerial personnel” refers to key managerial personnel as defined u/s 2(51) of the Companies Act, 2013.

The term “Senior Management” shall mean the officers and personnel of the issuer who are members of its core management team, excluding the BODs. It also includes all members of the management one level below the Chief Executive Officer, Managing Director, Whole Time Director, or Manager (including Chief Executive Officer and Manager, in case they are not part of the Board of Directors) and shall specifically include the functional heads and the Company Secretary and the Chief Financial Officer.

2.1 Comments

Earlier, there were no such definitions in the existing norms. The insertion of definitions of Key Managerial Personnel and Senior Management by SEBI brings clarity and accountability to roles within companies, streamlining governance and enhancing compliance with reporting requirements.

3. SEBI merges disclosure requirements for public issue and private placement

Earlier, Schedule I of the Regulations specifies the disclosures for the public issue of debt securities and non-convertible redeemable preference shares, while Schedule II of the Regulations specifies the disclosures for the private placement of non-convertible securities.

Now SEBI has notified a new Schedule I, merging both the existing schedules (i.e. Schedule I and II). Further, the existing Schedule II has been deleted. As a result, an issuer making a public issue of debt securities, non-convertible redeemable preference shares and private placement of non-convertible securities is required to make disclosures as specified in Schedule I of the Regulations.

3.1 Comments

The merging of Schedules I and II by SEBI and the deletion of the existing Schedule II simplifies the disclosure process and provides a unified framework for issuers in these categories.

4. Mandatory filing of general information document for issuers making private placement of Non-Convertible Securities

SEBI has introduced a new Chapter VA for the issuance and listing of non-convertible securities issued on a private placement basis. Under this new chapter, an issuer making a private placement of non-convertible securities and seeking listing on stock exchanges must file a general information document with the stock exchanges containing disclosures specified in Schedule I.

The general information document shall be valid for a period of one year from the date of opening of the first offer of non-convertible securities made under that document. Also, the document may indicate the size of the issue i.e. the amount of money which the issuer proposes to raise during the period of validity of general information document.

4.1 Issuer to file key information document with stock exchange while making private placement of second offer of non-convertible securities

An issuer making a private placement of a second or subsequent offer of non-convertible securities, during the validity of the general information document or a shelf prospectus or a shelf placement memorandum, is required to file a key information document for each second or subsequent offer of non-convertible securities with the stock exchanges.

4.2 Mandatory information to be included in Key Information Document

The key information document shall include the following information –

• details of the offer of non-convertible securities in respect of which the key information document is being issued;
• financial information, if such information provided in the general information document is more than six months old;
• material changes, if any, in the information provided in the general information document;
• any material developments not disclosed in the general information document, since the issue of the general information document relevant to the offer of non-convertible securities in respect of which the key information document is being issued;

4.3 Key information disclosures to be made on stock exchanges’ website

The key information disclosures are required to be made on the websites of stock exchanges where such securities are proposed to be listed and shall be made available for download in PDF or any other format as may be specified by the Board.

4.4 Requirement for timely Disclosure of Audited Financial Statements

The issuer must ensure that the audited financial statements disclosed are not more than 6 months old from the date of filing the draft placement memorandum or the issue opening date.

However, issuers whose non-convertible securities or specified securities are listed on a recognised stock exchange or issuers who are subsidiaries of entities that have listed their specified securities can disclose unaudited financial information for the interim period in the specified format along with a limited review report.

4.5 Comments

The introduction of Chapter VA by SEBI for the issuance and listing of non-convertible securities on a private placement basis aims to enhance transparency and investor protection. It requires issuers to provide comprehensive disclosures through a general information document and subsequent key information documents, ensuring timely and relevant information for investors.

Also, the requirement for timely disclosure of audited financial statements promotes accountability and enables informed investment decisions.

5. SEBI notifies the requirements for ‘Large Corporates’

SEBI has introduced chapter VB specifying the requirements for ‘Large Corporates’. A listed entity, fulfilling the criteria as may be specified by the Board, shall be considered as a ‘Large Corporate’.

Currently, listed entities that meet the following criteria are considered large corporates¹

• Listed entities that have their specified securities or debt securities or non-convertible redeemable preference shares, listed on a recognised stock exchange in terms of SEBI LODR Regulations, 2015
• Listed entities that have outstanding long-term borrowings of Rs 100 crore or above, where outstanding long-term borrowings shall mean any outstanding borrowing with an original maturity of more than 1 year and shall exclude external commercial borrowings and inter-corporate borrowings between a parent and subsidiary.
• Have a credit rating of “AA and above”, where credit rating shall be of the unsupported bank borrowing or plain vanilla bonds of an entity, which have no structuring/support built-in and in case, where an issuer has multiple ratings from multiple rating agencies, the highest of such ratings shall be considered.

6. Obligation of Issuers intending to issue Commercial Paper [Regulation 51]

As per Regulation 51(1), issuers desirous of listing commercial paper must comply with the conditions as specified by the Board. A new sub-regulation has been inserted in regulation 51 which states that an issuer that has filed a general information document and subsequently intends to issue commercial paper and seeks listing, is required to file a key information document with disclosures as specified by the Board.

Further, an issuer that has filed a shelf prospectus and subsequently intends to issue commercial paper and seeks listing, is not required to file a general information document as long as the key information document is filed.

7. SEBI prescribes separate formats for disclosure of financials on standalone and consolidated basis for Financial and Non-Financial Sector Entities

Earlier Schedules I and II of the Regulations require that the financial and non-financial sector entities shall disclose their financials on a standalone and consolidated basis. However, they have not prescribed any separate formats for standalone and consolidated basis. Now, SEBI has prescribed separate formats for standalone financials and consolidated financials both for financial and non-financial entities Further, the formats have been changed in order to align them with Schedule III of the Companies Act, 2013.

7.1 Comments

The changes made by SEBI in prescribing separate formats on a standalone and consolidated basis for financial and non-financial entities are twofold. Firstly, it provides clarity and standardised reporting for these entities. Secondly, aligning the formats with Schedule III of the Companies Act, 2013 ensures consistency and compliance with regulatory requirements.

1. Circular no. SEBI/HO/DDHS/P/CIR/2021/613’ dated 10.08.2021