Qualified entities will be able to raise money through debt securities for four times via a single shelf prospectus within a year. Only question is, does the capital market have sufficient appetite to invite new players for raising funds?

The Securities & Exchange Board of India (SEBI) came out with a notification on 31 January 2014, making insertions in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 to meet the requirements as per the Companies Act, 2013. The amendments will be effective from the date on which it gets published in the official gazette of India and will be known as SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2014.
 

Do these amendments call for good times for non-banking financial companies (NBFCs) at raising funds? In this article, we are exploring the impact that the amendments will have in the times to come for NBFCs and corporates to access funds from the markets. The amendments provides flexibility to certain class of NBFCs and listed companies to file shelf prospectus with the Registrar and with SEBI and stock exchange after the filing is done with the Registrar at the time of first offer of the securities in question. In this article we intend to bring down the need of this amendment and to cover the amendments in brief.
 

What is the need of this amendment?

Under the Companies Act, 1956, only public financial institutions, public sector banks and scheduled commercial banks allowed to raise funds by way of filing a shelf prospectus, but the ministry has liberalised the policy through the Companies Act, 2013.  Section 31(1) of the Companies Act, 2013 says –
 

“Any class or classes of companies, as the Securities and Exchange Board may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein which shall indicate a period not exceeding one year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required.”
 

Only those companies, which are provided by the SEBI through regulations will be required to file the shelf prospectus to the Registrar at the stage of first offer of the securities in question. So this section points out the need of this amendment.
 

What does the amendment say?

The SEBI through this amendment has made several insertions in the existing Debt Regulations and they have been listed down below –

1. The definitions of the terms “net worth” and “shelf prospectus” have been inserted; however both of them are to be derived from the Companies Act, 2013. The definitions of both the terms have been mentioned below –

Section 2(57) – “net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.
 

Explanation to Section 31 – “shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

2. As per the regulations, the following companies will have to comply with the provisions of Section 31 of the Companies Act, 2013 –
   1. Public Financial Institutions as defined under section 2(72) and scheduled banks as defined under section 2(e) of the Reserve Bank of India Act, 1934.
   2. Issuers as authorised by the Central Board of Direct Taxes to issue tax free bonds secured bonds, with respect to the issuance of such bonds.
   3. Infrastructure Debt Funds – Non-Banking Financial Company.
   4. NBFCs registered with RBI and HFCs registered with the NHB complying with all of the following conditions:
      1. Net worth of Rs500 crore, as per the audited balance sheet of the previous year.
      2. Consistent track record of distributable profit for the last three years.
      3. Securities to be issued under the shelf prospectus should have been assigned a rating not less than “AA” rating or its equivalent by a credit rating agency registered with SEBI.
      4. No regulatory action is pending against the company, its promoters or directors before the SEBI, RBI or NHB.
      5. There is no default on the part of the issuer with regards to the repayment of deposits or interest thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any public financial institution or banking company, in the last three financial years.
          
   5. Listed companies complying with the all of the following conditions:
      1. The issuer must have their equity or debt securities listed on recognised stock exchanges for at least three years preceding the issue of the securities as per the shelf prospectus.
      2. Must have a net-worth of at least Rs500 crore, as per the audited balance sheet of the preceding financial year.
      3. Must have a consistent track record of distributable profit for the last three years.
      4. Securities to be issued under the shelf prospectus should have been assigned a rating not less than “AA” rating or its equivalent by a credit rating agency registered with SEBI.
      5. No regulatory action is pending against the company, its promoters or directors before the SEBI, RBI or NHB.
      6. There is no default on the part of the issuer with regards to the repayment of deposits or interest thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any public financial institution or banking company, in the last three financial years.
3. The shelf prospectus and a copy of the information memorandum are to be filed by the issuer with SEBI immediately after filing the same with the Registrar.
4. Contents of the information memorandum – Disclosures specified in Companies Act, 1956 or Companies Act, 2013, whichever is applicable and rules made there under, disclosures regarding summary term sheet, material updations including revision in ratings, if any along with the rating rationale and financial ratios specified in Schedule I, indicating the pre and post issue change.
5. Maximum number of issuances that can be made through one shelf prospectus is four.

Its impact

With this amended regulation in place, the capital market will become easily accessible for the entities covered under this regulation.  The qualified entity will be able to raise money by way of debt securities for four times through a single shelf prospectus within a year from the date of opening first offer of such securities instead of complying with the long drawn process of public issue each time.
 

Despite the new Pandora box that Companies Act, 2013 has opened up, this one might do some good to the corporates for raising funds. In the current financial year, the NBFCs have already raised around Rs9,500 crore  from the capital market by publicly issuing non-convertible debentures (NCDs), this inclusion in the list might act as a kindle to the fire and the volumes might even go up. After all these only one question remains left to be answered - Does the capital market has sufficient appetite to invite new players to raise funds? Well, to get the answer, we will have to wait and watch.

(Abhirup Ghosh works at Vinod Kothari & Company)