Analysis of SEBI’s recent regulation framework which aims to incentivize Large Corporates for strengthening its debt market

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Analysis of SEBI’s recent regulation framework which aims to incentivize Large Corporates for strengthening its debt market

December 12, 2023

In the dynamic landscape of financial regulations, the Securities Exchange Board of India (“SEBI”) has recently undertaken a revision in its framework governing the fund-raising endeavors of large corporates through the issuance of debt securities. This pivotal adjustment, outlined in a recent notification, seeks to impose regulatory oversight on listed entities categorized as ‘Large Corporates’ (“LC”), refining the guidelines set forth in a 2018 circular. The altered framework not only introduces amendments to the incremental borrowing requirements for LCs but also incentivizes compliance in the corporate debt market.

Brief on the earlier mandate

The earlier mandate on this subject was via a circular released in 2018 (“2018 Framework”) by SEBI. Under this 2018 Framework, LCs were defined as the entities which met the following criteria:[1]

  • To have their specified securities or debt securities or non-convertible redeemable preference share listed on a recognised stock exchange(s) in terms of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015;
  • To have an outstanding long-term borrowing of Rs 100 crores or above; and
  • To 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.

Under the terms of the 2018 Framework, wherein if a listed company qualifies as an LC, it is required to raise a minimum of 25% of any new funds it borrows (known as “Incremental Borrowings”) by way of issuance of debt securities during the subsequent financial year (other than through external commercial borrowings and inter-corporate borrowings between a parent and subsidiaries).[2] Incremental Borrowings shall encompass any new loans obtained during a particular financial year, with an original maturity of over 1 year, regardless of whether the borrowed funds are intended for refinancing existing debt or other purposes.[3]

With respect to the FYs 2020 and 2021, meeting Incremental Borrowing requirements was an annual obligation. Wherein if in case the requirement was not met then, under the 2018 Framework, an explanation was required to be provided to the concerned stock exchange.[4] Further, starting from FY 2022 onwards, the mandatory Incremental Borrowing for an LC in a fiscal year was mandated to be fulfilled over a continuous period of 2 years. Whereas if, at the end of the said 2 years, there remains a shortfall in the requisite borrowing, a monetary penalty / fine of 0.2% of the shortfall in the borrowed amount was liable to be imposed and payable to the Stock Exchange.[5]

Brief on the new mandate

In July 2023, an amendment to the SEBI (Issue and Listing of Non-Convertible Debt Securities) Regulations was enacted which introduced the Chapter VB & Reg 50B. The said amendment empowered SEBI to make conditions or requirements listed entities identified as ‘Large Cortporates’. Accordingly, a circular was released in October 2023, specifiying & revising the framework for fund raising by issuance of debt securities by LC, (“2023 Framework”). As per the 2023 Framework, LCs include those listed entities (other than Scheduled Commercial Banks), which as on the last day of the FY (i.e. March 31 or December 31):[6]

  • have their specified securities or debt securities or non-convertible redeemable preference shares listed on a recognised stock exchange(s) in terms of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015;
  • have outstanding long-term borrowings of Rs. 1000 crore or above; and
  • have a credit rating of “AA”/ “AA+”/ “AAA”, where the credit rating relates to the unsupported bank borrowing or plain vanilla bonds of an entity, which have no structuring/ support built in.

LCs are now required to raise a minimum of 25% of their Qualified Borrowings (as defined below) through the issuance of debt securities in the years following their identification as LCs. “Qualified Borrowings” has been defined as incremental borrowings with an original maturity of over 1 year and exclude certain types of borrowings, such as external commercial borrowings and inter-corporate borrowings involving holding or subsidiary companies.[7]

The 2023 Framework mandate that, from the fiscal year 2025, LCs must meet this borrowing obligation over a contiguous block of 3 years.[8] At the end of this period, if actual borrowings through debt securities surpass the 25% requirement, LCs will enjoy certain incentives, including a reduction in annual listing fees and credit towards the Core Settlement Guarantee Fund (SGF)[9] of Limited Purpose Cleaning Corporation (LPCC).[10] Conversely, if there is a shortfall, a disincentive in the form of an additional contribution to the core SGF will be mandated towards the respective LCs. The quantum of the additional contribution shall depend on the shortfall.[11]

The 2023 Framework aims to provide flexibility and incentivize compliance in the borrowing practices of LCs. The aforesaid framework firstly increased the threshold to meet qualify as an LC from INR 100 to INR 1000 crores for outstanding long-term borrowing. Secondly, it also included more exclusions from the ‘qualified borrowings’ like grants, deposits or any other funds received as per the guidelines or directions of Government of India, borrowings arising on account of interest capitalization, and borrowings for the purpose of schemes of arrangement involving mergers, acquisitions and takeovers.

Comparative analysis of the earlier mandate with the new mandate

The changes in the framework are summarized in the following table:

Subject matter2018 Framework2023 Framework
Large Corporates definitionLong-term borrowing of more than INR 100 croresLong-term borrowing of more than INR 1000 crores
Exclusions from Incremental Borrowings / Qualified Borrowings (as may be applicable)      External commercial borrowings and inter-corporate borrowings between a parent and subsidiary(ies).              Grants, deposits or any other funds received as per the guidelines or directions of Government of India; Borrowings arising on account of interest capitalization; andBorrowings for the purpose of schemes of arrangement involving mergers, acquisitions and takeovers
IncentivesNo incentivesi. Reduction in annual listing fees ii. Reduction in contribution to SGF
Penalty0.2% of the shortfall in the borrowed amountNo penalty/fine. However, disincentive in form of additional contribution to SGF has been made applicable.

Author: Dippyaman Bhattacharya, Senior Associate (assisted by Garima Bothra)

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at info@samistilegal.in


[1] 2018 Framework, 2.2

[2] 2018 Framework, 3.1

[3] 2018 Framework, 3.1 – Explanation

[4] 2018 Framework, 3.2 (i)

[5] 2018 Framework, 3.2 (ii)

[6] 2023 Framework, 3.2

[7] 2023 Framework, 4.2

[8] 2023 Framework, 4.3 (a)

[9] SGF is a corpus used for settlement of trades during defaults. LPCC is the entity established to undertake the settlement and clearing of repurchase transactions. For more information, please refer to SEBI Circular No. SEBI/HO/MRD2/DCAP/CIR/P/2020/245 available at <https://www.sebi.gov.in/legal/circulars/dec-2020/core-settlement-guarantee-fund-default-waterfall-and-stress-test-for-limited-purpose-clearing-corporation-lpcc-_48496.html>

[10] 2023 Framework, 4.3 (b)

[11] 2023 Framework, 4.3 (c)

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