Debt Funding – Indian Fund Based (Corporate Debt) – Corporate Funding and Listings in Stock Exchanges Important Questions
Question 1.
Write note on the following: “Fixed Income Products”.
Answer:
“Fixed Income Products”:
- These are investment vehicles which provide for fixed income returns on investments.
- Fixed income securities can be issued by any legal entity like Central and State Governments, public bodies, statutory corporations, banks and institutions and corporate bodies.
- Fixed Income Products includes Bank Fixed Deposits, Corporate Fixed deposits, Public Provident Fund, Kisan Vikas Patra, National Savings Certificate’ etc.
- A bank basically has three types of deposits, ie. time deposit, savings deposit and current account. NBFCs also accept various types of deposits.
Question 2.
Write notes on the following: “Debt Securities”.
Answer:
“Debt securities” means non-convertible debt securities which create or acknowledge indebtedness and includes debentures, bonds and such other securities of a body corporate or a Trust registered with SEBI as a Real Estate Investment Trust or an Infrastructure Investment Trust, or any statutory body constituted by virtue of a legislation, whether constituting a charge on the assets of the body corporate or not, but excludes bonds issued by Government or such other bodies as may be specified by SEBI, security receipts and securitized debt instruments.
Question 3.
Write notes on the following: “Investor in debt market.”
Answer:
Investors in debt markets are the entities who invest in fixed income instruments. Following are investors in debt market
Banks: They invest in all instruments ranging from T- bills, CPs and CDs to GOISECs, private sector debentures etc. Banks lend to corpo-rate sector directly by way of loans and advances and also invest in debentures issued by the private corporate sector and in PSU bonds.
Insurance Companies: The second largest category of investors in the debt market are the insurance companies.
Provident funds: Provident funds are estimated to be the third largest investors in the debt market. Investment guidelines for provident funds are being progressively liberalized and investment in private sector debentures is one step in this direction.
Mutual Funds: Mutual funds represent an extremely important category of investors in debt market. World over, they have almost surpassed banks as the largest direct collector of primary savings from retail investors and therefore as investors in the wholesale debt market. The investors in debt markets are generally Banks, Financial Institutions, Mutual Funds, Insurance Companies, Provident Funds etc.
Question 4.
Briefly explain the following terms related to debt market:
- Inflation linked bond.
- Floating interest rate
Answer:
Inflation linked bond: A bond is considered indexed for inflation if the payment on the instrument is indexed by reference to the change in the value of a general price index over the term of the instrument.
Floating interest rate: Floating interest rate simply means that the rate of interest is variable. The interest rate payable for the next period is set with reference to a benchmark market rate agreed upon by both the lender and the borrower.
Question 5.
What constitutes debt market in India? Describe the various investors in debt market.
Answer:
Components of Debt Market: The debt market in India comprises mainly of two segments viz,, the Government securities market consisting of Central and State Government securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T – Bills and the corporate securities market consisting of FI bonds, PSU bonds, and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.
Following are Investors in Debt Market:
Banks: They invest in all instruments ranging from T-Bills, CPs and CDs to GOISECs, private sector debentures etc. Banks lend to corporate sector directly by way of loans and advances and also invest in debentures issued by the private corporate sector and in PSU bonds.
Insurance Companies: The second largest category of investors in the debt market are the insurance companies.
Provident Funds: Provident funds are estimated to be the third largest investors in the debt market. Investment guidelines for provident funds are being progressively liberalized and investment in private sector debentures is one step in this direction.
Mutual Funds: Mutual funds represent an extremely important category of investors. World over, they have almost surpassed banks as the largest direct collectors of primary saving from retail investors and therefore as investors in the wholesale debt market.
Trusts: Trusts include religious and charitable trusts as well as statutory trusts formed by the government and quasi government bodies. Most of the trusts invest in CDs banks and bonds of financial institutions and units of Unit Trust of India.
Note: The investors in such instruments are generally Banks, Financial Institutions, Mutual Funds, Insurance Companies Provident Funds etc.
Question 6.
Briefly explain the following statement: “Debt market in India com-prises of two segments.”
Answer:
The debt market in India comprises mainly two segments:
1. Government securities markets consisting of Central Government and State Government securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs) and the corporate securities market consisting of FI Bonds, PSU Bonds and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.
2. Corporate debentures & bonds issued by Private Sector Companies.
Question 7.
What is ‘debt security’? Describe the different debt market participants.
Answer:
A tradable form of a loan/debt is termed as Debt instrument/securities. It pertains to obligations of issuer with regards to certain future cash flows representing payment of interest and principal by the issuer to the holder (legal owner) of the instrument. There are various types of fixed income’ instruments, which cater to the needs of both investors and issues. Classification of these instruments done on the basis of Interest, time duration etc.
Debt Market Participants:
- Primary Dealer: Primary dealers are important intermediaries in the government securities market. They act as underwriters in the primary market and market makers in the secondary market.
- Brokers: Brokers plays an important role in secondary debt market by bringing together counter parties and negotiating terms of the trade.
Question 8.
Discuss how the debt market and its instruments help the companies in raising funds.
Answer:
→ Debt markets are markets for the issuance, trading and settlement of various types and features of fixed income securities. Fixed income securities can be issued by any legal entity like Central and State Governments, public bodies, statutory corporations, banks and institutions and corporate bodies.
→ The debt market in India comprises mainly of two segments viz., the Government securities market consisting of Central and State Governments securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills and the corporate securities market consisting of FI bonds, PSU bonds, and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.
→ The trading of government securities on the Stock exchanges is currently through Negotiated Dealing System using members of Bombay Stock Exchange (BSE)/National Stock Exchange (NSE) and these trades are required to be reported to the exchange. Two Depositories National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) maintain records of holding of securities in a dematerialized form. Records in case of holding of government securities for wholesale dealers like banks/Primary Dealers (PDs) and other financial institutions are maintained by the RBI.
Thus, debt markets helps the companies to raise funds like Corporate Debentures and Fixed Income Products etc.
Question 9.
Discuss briefly the rules and regulations relating to redemption and roll-over of debt securities.
Answer:
The redemption and roll-over of the debt securities whether issued to the public or privately placed are required to be made in accordance with the provisions of SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
Redemption and roll-over of debt securities that are convertible either partially or fully or optionally into listed or unlisted equity shall be guided by the disclosure norms applicable to equity or other instruments offered on conversion in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
The redemption and roll-over of the debt securities are required to fulfil certain conditions which are as follows:
- The issuer shall redeem the debt securities whether non-convertible or convertible in terms of the offer document.
- Roll-over of non-convertible debt securities requires passing of a special resolution of holders of such securities and give twenty one days notice of the proposed roll-over.
- Disclosure has been made in respect of the credit rating obtained for the debt securities.
Question 10.
The debt market in India comprises mainly of two segments, i.e., the government securities market and corporate securities market. Discuss in brief.
Answer:
The debt market in India comprises mainly of two segments viz, the Government securities market consisting of Central and State Governments securities ie. Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills etc. and the corporate securities market consisting of fixed interest (FI) bonds, PSU bonds, and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.
The trading of government securities on the Stock exchanges is currently through Negotiated Dealing System using members of BSE Ltd. /NSE Ltd. and these trades are required to be reported to the exchange. The bulk of the corporate bonds privately placed were not listed on the stock exchanges. Two Depositories, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) maintain records of holding of securities in a dematerialized form. Records of holding of government securities for wholesale dealers like banks/Primary Dealers (PDs) and other financial institutions are maintained by the RBI.
Question 11.
Comment on the followings: XYZ Limited a listed company has issued partly convertible debentures in the past. Now it is planning for roll-over of non-convertible portion of these debentures. As a Company Secretary advise the conditions to be fulfilled in this regard.
Answer:
Regulation 21 of SEBI (ICDR) Regulations, 2009 stipulates that the non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds fifty lakh rupees can be rolled over without change in the interest rate, subject to compliance with the provisions of Companies Act, 2013, and the following conditions:
- Through postal ballot approved the roll-over.
- The issuer has undertaken to redeem the non-convertible portion of the partly convertible debt instruments of all the holders of the convertible debt instruments who have not agreed to the resolution.
- 75% of the holders of the convertible debt instruments of the issuer have through a resolution issuer has along with the notice for passing the resolution, sent to all holders of the convertible debt instruments, an auditors’ certificate on the cash flow of the issuer and with comments on the liquidity position of the issuer.
- credit rating has been obtained from at least one credit rating agency registered with the SEBI within a period of six months prior to the due date of redemption and has been communicated to the holders of the convertible debt instruments, before the roll-over.
Nevertheless the creation of fresh security and execution of fresh trust deed is not mandatory if the existing trust deed or the security documents provide for continuance of the security till redemption of secured convertible debt instruments Further, the decision whether the issuer is required to create fresh security and to execute fresh trust deed or not is to be taken by the debenture trustee.
Question 12.
Explain roll-over of non-convertible portion of partly convertible debentures under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. [(June 2013) (5 Marks)]
Answer:
The non-convertible portion of partly convertible debt instruments issued by a listed issuer exceeding INR 10 crores can be rolled over without change in the interest rate subject to the compliance with the following conditions with respect to SEBI (ICDR) Regulation, 2018:
- 75% of the holders of the convertible debt instruments of the issuer have, through a resolution, approved the roll-over through postal ballot.
- The issuer has:
- along with the notice for passing the resolution sent to all holders of the convertible debt instruments an auditor’s certificate on the cash flow of the issuer and with comments on the liquidity position of the issuer.
- undertaken to redeem the non-convertible portion of the partly convertible debt instruments of all holders of the convertible debt instrument who have not agreed to the resolution.
- Credit rating has been obtained from at least one credit rating agency registered with the Board within a period of one month prior to the due date of redemption and has communicated to the holders of the convertible debt instruments before the roll-over.
Question 13.
An issuer may list its debt securities issued on private placement basis on a recognized stock exchange subject to specified conditions as per SEBI (Issue and Listing of Debt Securities) Regulations, 2008. Explain those conditions.
Answer:
As per Regulation 20 of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 provides the conditions for listing of debt securities on a recognized stock exchange, issued on private placement basis which are as below:
- An issuer is required to fulfil the following conditions:
- The issue is in compliance with the provisions of the Companies Act, 2013, rules prescribed thereunder and other applicable laws.
- Credit rating has been obtained from at least one credit rating agency registered with SEBI.
- The securities should be in dematerialized form.
- The disclosures as provided for this purpose have been made.
- Where application is made to more than one recognised stock exchange, the issuer shall choose one of them as the designated stock exchange.
- Issuer shall comply with conditions of listing of such debt securities as specified in the Listing Regulations with the stock exchange where such debt securities are sought to be listed.
- The designated stock exchange shall collect a regulatory fee from the issuer at the time of listing of debt securities issued on private placement basis.
- The issuer shall make disclosures in a disclosure document as specified in Schedule I of these regulations accompanied by the latest Annual Report of the issuer and the same shall be made on the website of the stock exchange where such securities are proposed to be listed.
Question 14.
Explain with a suitable example, day count convention for Debt Securities issued under the SEBI (Issued and Listing of Debt Securities) Regulations, 2008.
Answer:
SEBI has provided certain clarifications on aspects related to day count convention for debt securities issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
If the interest payment date falls on a holiday, the payment may be made on the following working day however the dates of the future coupon payments would be as per the schedule originally stipulated at the time of issuing the security.
Example:
| Date of Issue of Corporate bonds | 01 January, 2016 |
| Date of Maturity | 31st December, 2018 |
| Date of coupon payments | 1st July and 1st January |
| Coupon payable | Semi – annually |
In this case, January 01, 2017 is a Sunday, thus the coupon would be payable on January 02, 2017 Le. the next working day. However the calculation for payment of interest will be only till December 31, 2016, which would have been the case if January 01, 2017 were not a holiday. Also, the remaining dates of payment would remain July 01, 2017; January 01, 2018 and 1st January, 2019 although one of the interest payment was made on January 02, 2017.
In order to ensure consistency for interest calculation, a uniform methodology shall be followed for calculation of interest payments in the case of leap year, which shall be as follows:
In case of a leap year, if February 29 falls during the tenor of a security, then the number of days shall be reckoned as 366 days (Actual/ Actual day count convention) for a whole one year period, irrespective of whether the interest is payable annually, half yearly, quarterly or monthly etc.
Example:
| Date of Issue of Corporate bonds | 1st January, 2016 |
| Date of coupon payments | 1st July and 1st January |
| Coupon payable | Semiannually |
In this case, the leap year (i.e. 2016) containing 366 days would be reckoned as the denominator (Actual/Actual) for payment of interest in both the half year periods Le. Jan 01, 2016 to Jul 01, 2016 and Jul 01, 2016 to Jan 01, 2017.
Question 15.
A company is planning to place privately 10 years 11.5% debentures. Most of such debentures would be issued to a venture capitalist who is looking for an exit route. Writing a brief note advising the company as to how it can proceed for listing of such debentures on recognized stock exchange.
Answer:
To
Board of Directors XYZ Limited
Note: Listing of Debt Securities
The issuer company should consider following points:
- Debt securities issued by a company on private placement basis on a recognized stock exchange subject to the following conditions:
- In compliance with the provisions of the Companies Act, Rules prescribed thereunder and other applicable laws.
- Credit rating has been obtained from one or more registered credit rating agencies.
- Securities in dematerialized form
- Disclosures provided in SEBI (Issue and Listing of Debt Securities) Regulations, 2008 have been complied with.
- The company shall comply with conditions of listing specified in the SEBI (LODR) Regulations, 2015 with the stock exchange where its debt securities are to be listed.
- The issuer shall make disclosures as, specified in Schedule I of these regulations accompanied by the latest Annual Report of the issuer.
Furthermore, Chapter V of SEBI (LODR) Regulations provides for following obligations of issuer – company which has issued debt securities (Non- convertible):
| Regulation 50 | Intimation of interest on and redemption of debt- instruments to Stock-Exchange at least 11 working days before the due-date. |
| Regulation 51 | Disclosure of information having bearing on performance of the listed entity. |
| Regulation 52 | Preparation and submission of un-audited or audited financial result. |
| Regulation 53 | Disclosure in Annual – Report |
| Regulation 54 | Asset Cover |
| Regulation 55 | Credit Rating |
| Regulation 56 | Documents and intimation to debenture trustees |
Mr. XY
Company Secretary
ABC Ltd.
Question 16.
Explain the following: “Securitized Debt Instrument”.
Answer:
- “Securitized Debt Instruments” are regulated by the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 for listing on stock exchanges and Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003.
- “Securitized Debt Instrument” means any certificate or instrument, by whatever name called issued to an investor by any issuer who is a special purpose distinct entity possessing any debt or receivable including mortgage debt assigned to such entity and acknowledging the beneficial interest of the investor in such debt or receivable including mortgage debt, as the case may be.
Question 17.
Discuss the measures taken by Government and Regulators to develop a vibrant Corporate Bond Market in India.
Answer:
A vibrant capital market, both equity and bond, has to play an increasingly pivotal role to facilitate fund mobilization for sustaining India’s projected economic growth momentum. The role of corporate bond market becomes even more important now given the stress on Ki the banking sector. Several policy measures have been taken by the x Government and the Regulators to develop a vibrant corporate bond market.
Some important measures taken includes following:
- Framework for allowing banks to provide Partial Credit Enhancement for enhancing creditworthiness of corporate bonds.
- Information Repositories developed by Exchanges and Depositories to provide consolidated information on primary issuance and secondary market trades in corporate bonds.
- Electronic Book Building mechanism for providing enhanced transparency in issuance of debt securities on private placement basis.
- Enhanced standards for Credit Rating Agencies for timely monitoring of credit quality of bonds.
- Specifications related to International Securities Identification Number (ISINs) for debt securities to encourage liquidity and reduce fragmentation of issues.
- Tri-Party Repo trading on Exchanges to enhance liquidity and price discovery in corporate bonds.
- Time taken for listing of public issue of bonds reduced from 12 days to 6 days.
- Doing away with the requirement of 1 % security deposit for public issue of debt securities.
Question 18.
The partly convertible debt instruments of ABC Ltd. are listed on BSE and NSE. ABC Ltd. is contemplating the roll-over of the non-convertible portion of the partly convertible debt instruments. As a company secretary of ABC Ltd. prepare a board note highlighting the conditions to be complied with by ABC Ltd. in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Answer:
To
The Board of Directors
XYZ Ltd.
Note: Conditions for roll-over of the non-convertible portion of partly convertible debt instruments issued by XYZ Ltd.
XYZ Ltd. can roll-over the non-convertible portion of partly convertible debt instruments, the value of which exceeds 50 lakh rupees, without change in the interest rate, subject to the following conditions:
- 75% of the holders of the convertible debt instruments of the issuer have, through a resolution through postal ballot, approved the roll-over.
- Fresh trust deed shall be executed at the time of such roll-over or the existing trust deed can be continued if the trust deed provides for such continuation.
- Adequate security shall be created or maintained in respect of such debt securities to be rolled-over.
The issuer shall redeem the debt securities of all the debt securities holders, who have not given their positive consent to the roll-over.
- Credit rating has been obtained from at least one credit rating agency registered with the SEBI within a period of six months prior to the due date of redemption and has been communicated to the holders of the convertible debt instruments before the roll-over.
Mr. AB
Company Secretary
XYZ Ltd.
Question 19.
Attempt the following and support your answer with necessary reasons: XYZ Ltd. issued 12.5% debentures amounting to ₹ 150 crores on private placement basis during the financial year 2013. Later on, it was found that these debentures were issued to 73 persons. A Sessions Court or Tribunal in Mumbai took cognizance of the same and suo motu initiated the proceedings against XYZ Ltd. The company pleaded that the Court/ Tribunal has no locus standi in this regard and therefore, it cannot initiate any proceedings against it.
As per the Securities and Exchange Board of India Act, 1992 and other relevant laws, discuss whether the company’s pleading is tenable and whether the court or tribunal should drop the proceedings against the Company.
Answer:
- In the given case, XYZ Ltd. issued 12.5% debentures amounting to ₹ 150 crores on private placement basis during the financial year 2013. Later on, it was found that these debentures were issued to 73 persons.
- XYZ Ltd. has violated the requirement of “Private Placement”. The company has issued debentures to 73 persons which is clear violation of Regulations of SEBI (ICDR) Regulations, 2018 because in this case securities are offered to a selected group of persons not exceeding 49.
- The action of Mumbai Session Court of taking suo motu cognizance is not valid due to reasons given in Section 26 of Securities and Exchange Board of India Act, 1992.
- As per Section 26 of SEBI Act, 1992: “No Court/Tribunal shall take cognizance of any offence punishable under this Act or any rules or regulations made thereunder, except on compliant made by SEBI.”
Thus, the issuer company’s pleading that the Court/Tribunal shall not initiate any proceeding against it, is valid. The Court/Tribunal shall drop the proceeding against the company.
QUestion 20.
What do you mean by “Green Debt Securities”?
Answer:
A Debt Security shall be considered as “Green or Green Debt Securities”, if the funds raised through issuance of the debt securities are to be utilised for project(s) and/or asset(s) falling under any of the following:
- Renewable and sustainable energy including wind, solar, bio energy, other sources of energy which use clean technology etc.
- Clean transportation including mass/public transportation etc.
- Sustainable water management including clean and/or drinking water, water recycling etc.
- Climate change adaptation.
- Energy efficiency including efficient and green buildings etc.
- Sustainable waste management including recycling, waste to energy, efficient disposal of wastage etc.
- Sustainable Land use including sustainable forestry and agriculture, afforestation etc.
- Biodiversity conservation.
- Any other category as may be specified by SEBI from time to time.
Question 21.
Write detailed Note on: “Electronic Book Provider”.
Answer:
“Electronic Book Provider”:
“Electronic Book Provider” or “EBP” means a recognized stock exchange(s), which pursuant to obtaining approval from SEBI, provides an electronic platform for private placement of securities.
Explanation: “Eligible participant” means following:
- Qualified Institutional Buyers (QIBs), as defined under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
- Any non-QIB investor including arranger(s), who/which has been authorized by the issuer, to participate in a particular issue on EBP Platform.
Electronic Book Provider (EBP) and its Obligations:
The recognized stock exchange and depository are identified to act as an EBP. An EBP:
- shall provide an online platform for placing bids;
- shall have necessary infrastructure like adequate office space, equipments, risk management capabilities, manpower and other information technology infrastructure to effectively discharge the activities of an EBP;
- shall ensure that the private placement memorandum/in-formation memorandum, term sheet and other issue related information is available to the eligible participants on its platform immediately on receipt of the same from issuer;
- has adequate backup, disaster management and recovery plans are maintained for the EBP;
- shall ensure safety, secrecy, integrity and retrievability of data.
The EBP platform so provided by the EBP shall be subject to periodic audit by Certified Information Systems Auditor (CISA).
EBP shall make information related to the issue available on its website.
Question 22.
Write short note on: “Fund raised by Issuance of Debt Securities by large entities”.
Answer:
“Fund raised by Issuance of Debt Securities by large entities”:
Applicability:
- For the entities following April-March as their financial year, the framework shall come into effect from April 01,2019 and for the entities which follow calendar year as their financial year, the framework shall become applicable from January 01, 2020.
- The framework shall be applicable for all listed entities (except for Scheduled Commercial Banks) which are Large Corporate.
SEBI has been working on operationalizing the 2018-19 Budget announcement which mandates large corporate to raise 2596 of their financing needs from the corporate bond market. Naturally, given the nascent stage of development of corporate bond market, such framework has to be relatively soft touch.
SEBI came out with a discussion paper on July 20, 2018. Based on feedback received on the discussion paper and wider consultation with market participants including entities, the detailed guidelines for operationalising the above budget announcement.