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Context: The Securities and Exchange Board of India (SEBI) proposes reducing the face value of non-convertible debentures (NCDs) and non-convertible redeemable preference shares (NCRPS) from Rs 1 lakh to Rs 10,000.

Details

• The Securities and Exchange Board of India (SEBI) has proposed significant changes to the issuance of non-convertible debentures (NCDs) and non-convertible redeemable preference shares (NCRPS) to enhance the participation of non-institutional investors in the corporate bond market and to manage associated risks.

Key points from the SEBI proposal

Reduced Face Value

• SEBI has suggested permitting companies to issue NCDs and NCRPS with a face value of Rs. 10,000, as opposed to the existing system of Rs. 1 lakh face value.
• The rationale behind this is to make the securities more accessible to non-institutional investors by reducing the entry barrier imposed by the high face value.

Risk Mitigation Measures

• To safeguard the interests of non-institutional investors, SEBI proposes that these NCDs and NCRPS should be "plain vanilla" instruments with a simple structure. They should not have complex features such as credit enhancements or structured obligations.
• The issuer must appoint a merchant banker to conduct due diligence for the issuance and disclosures should be made in the private placement memorandum.

Online Bond Platforms (OBPs)

• The proposal aligns with the introduction of a regulatory framework for online bond platforms. SEBI notes that a substantial portion of investors on these platforms comprises non-institutional investors.
• The reduction in face value is seen as a measure to further increase participation, especially among non-institutional investors.

Previous Face Value Reduction

• SEBI had already reduced the face value of debt securities and NCRPS from Rs. 10 lakh to Rs. 1 lakh in October 2022. This move was intended to encourage non-institutional investors to participate in the corporate bonds market.

Investor Participation

• The paper highlights that during the period from July to September 2023, non-institutional investors subscribed to 4% of the total amount raised, compared to the general average of less than 1%.
• SEBI attributes this increase in participation to the earlier reduction in face value and the mainstreaming of online bond platforms.

QR Code for Listed NCDs

• Issuers with listed outstanding NCDs are proposed to include a QR code in the offer document.
• Scanning the QR code would open a web link to the audited financials for the last three financial years and stub period financials on the stock exchange's website.

Non-Convertible Redeemable Preference Shares (NCRPS) ●NCRPS are a type of financial instrument that combines features of both equity and debt. ●Unlike convertible preference shares, NCRPS cannot be exchanged for equity shares (common stock) in the issuing company. ●They have a fixed redemption date, meaning the issuer must buy them back at a predetermined price. This offers a guaranteed return on investment, similar to a bond. ●The holders have priority over common shareholders in terms of dividend payments. This means they receive dividends before common shareholders receive any. However, remember that dividends are not guaranteed and depend on the company's profitability. ●NCRPS can be beneficial for investors seeking fixed income and some downside protection while offering companies a way to raise capital without diluting ownership.

Conclusion

• These proposed changes aim to make the corporate bond market more inclusive, especially for non-institutional investors, while also ensuring necessary risk mitigation measures are in place. The reduction in face value and the integration of online bond platforms are seen as key strategies to achieve these goals.

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Securities and Exchange Board of India (SEBI):  https://www.iasgyan.in/daily-current-affairs/securities-and-exchange-board-of-india-sebi 

PRACTICE QUESTION Q. What are the key regulatory functions of the Securities and Exchange Board of India (SEBI) in overseeing India's financial markets, and how does it contribute to ensuring investor protection and market stability?