On 31st October, 2024, SEBI issued a Consultation Paper, seeking to review the provisions of SEBI(Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) pertaining to corporate governance norms for High Value Debt Listed Entities (“HVDLEs”). Currently, Chapter IV of the LODR Regulations apply to debt listed entities with outstanding non-convertible debt securities of ₹500 crore or more. The broad objectives of this paper is to reduce the compliance burden and to balance the interests of debenture holders of such HVDLEs. The main proposals are summarized below.
· Separate Chapter for HVDLEs
SEBI proposes to introduce a dedicated chapter in the LODR Regulations for corporate governance norms applicable only to HVDLEs. This will segregate the provisions relevant for debt-only listed entities from those meant for equity listed companies.
· Revised Threshold for HVDLEs
Currently, the HVDLE threshold is set at ₹500 crore of outstanding non-convertible debt securities in accordance with Regulation 15(1)(a) of LODR Regulations. SEBI now proposes to increase this threshold to ₹1000 crore, aligned with the recent increase in the threshold for identifying 'Large Corporates'. This will reduce the number of entities required to comply with the enhanced corporate governance framework, providing relief to smaller debt-focused issuers.
· Sunset Clause for Applicability
Currently, the corporate governance norms for HVDLEs continue to apply even once their outstanding debt falls below the specified threshold. In the CP, SEBI has proposed a 'sunset clause', wherein the corporate governance norms would continue to apply to an entity for 3 consecutive years after its outstanding debt falls below the HVDLE threshold of ₹1000 crore. Further, if the value of outstanding listed debt securities increases in the subsequent years to the specified threshold, then the entity would have to comply with the norms within two quarters and disclose the same in its Corporate Governance compliance report on and from the third quarter following such applicability.
· Flexibility for ‘non-Company’ HVDLEs
Similar to an erstwhile carve-out for certain equity-listed entities, SEBI has proposed that HVDLEs which are not companies but body corporates or are subject to regulations under other statutes would be subject to corporate governance provisions as specified in Regulations 17 to 27 of the LODR Regulations only to the extent that they do not violate their respective statutes and guidelines or directives issued by the relevant authorities. These include, notably, provisions on board of directors, committees of the board, and related party transactions (“RPTs”).
· Relaxations in Board Committees
HVDLEs are currently required to constitute the Audit Committee, the Nomination & Remuneration Committee, the Risk Management Committee, and the Stakeholders Relationship Committee. SEBI has proposed to permit HVDLEs to delegate the functions of the Risk Management Committee and the Nomination & Remuneration Committee to the Audit Committee, and the functions of the Stakeholders Relationship Committee to the Board of Directors, rather than setting these committees separately.
· Harmonized Reporting and Voluntary BRSR
SEBI has proposed that the quarterly compliance report for HVDLEs be in the XBRL format and harmonized with the format applicable to equity listed entities. Further, SEBI has proposed to permit HVDLEs to publish the Business Responsibility and Sustainability Report (“BRSR”) on a voluntary basis.
· Membership and Chairpersonship Limits
Currently, a person may not serve as a director in more than seven equity-listed entities, and may not serve as an independent director in more than three equity-listed entities if he serves as a whole-time director or managing director in any listed entity. SEBI has proposed to include directorships in HVDLEs along with directorships in equity-listed entities while reckoning whether the number of directorships held by a person falls within the permissible limits. Further, currently, a director is not permitted to be a member in more than ten committees or act as a chairperson in more than five committees across all equity-listed entities where he is a director, considering only membership/chairpersonship of the audit committees and stakeholders’ relationship committees. SEBI has proposed to include chairpersonships/memberships in committees in HVDLEs along with directorships in equity-listed entities while reckoning whether the number of memberships/chairpersonships held by a person falls within the permissible limits.
· Related Party Transactions
SEBI has proposed that an issuer may at the time of issuance of non-convertible securities (proposed to be listed) provide a declaration upfront in the offer document regarding the amount (as a percentage of the issue size) of RPTs that it proposes to undertake over the tenor of the proposed non-convertible securities. The monitoring of the utilization of proceeds of the issue would be conducted by credit rating agency. In cases where the issuer has not made the aforesaid declarations upfront in the offer document, the issuer or listed entity would be required to obtain No-Objection Certificate (“NOC”) from the Debenture Trustee who in turn would obtain such NOC from the debenture holders(determined by a majority of the debenture holders not related with the issuer) for all the material RPTs.
Further, the issuer would be required to upfront declare in the offer document the debt-equity ratio, debt service coverage ratio, interest service coverage ratio and such other financial or non-financial covenants that would be maintained by the issue rover the tenor of the non-convertible securities. The monitoring of such ratios including covenants shall be conducted by the Debenture Trustee.
· Our View
We are of the view that the proposed reforms for corporate governance in HVDLEs are in most cases appropriate to serve the interests of debenture-holders and HVDLEs alike. Further, the segregation of corporate governance requirements applicable to HVDLEs from those applicable to equity-listed entities is needed to ensure that HVDLEs are not burdened more than necessary given the relatively lower risk attached to debt instruments. SEBI may additionally be requested to consider specifying a mechanism for approval of deviation from declared debt-equity ratio, debt service coverage ratio, interest service coverage ratio, and covenants.
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