SEBI REVAMPS ELECTRONIC BOOK MECHANISM FOR PRIVATE PLACEMENT OF LISTED DEBT SECURITIES 2016 CIRCULAR POSITION CURRENT POSITION

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1 UPDATE SEBI REVAMPS ELECTRONIC BOOK MECHANISM FOR PRIVATE PLACEMENT OF 24 January 2018 Background The Securities and Exchange Board of India (SEBI) has sought to streamline the framework for electronic book mechanism (EBM) for the private placement of debt securities vide a circular dated 5 January 2018 titled, Electronic book mechanism for issuance of securities on private placement basis (Circular). The Circular aims to incorporate feedback from market participants, as well as on the basis of the public comments received on the consultation paper issued by the SEBI for, review of circular on Electronic book mechanism for issuance of debt securities on private placement basis dated 22 May 2017 (Consultation Paper). 1 The Circular supersedes the circular dated 21 April (2016 Circular). The Circular and amended EBP framework are effective from 1 April Key Changes A snapshot of the key changes and new provisions that have been brought in by the Circular are as follows: 2016 CIRCULAR POSITION CURRENT POSITION Eligibility to Issue on the EBP Platform Under the 2016 Circular, usage of EBP platform was mandatory for all private placement of debt securities with an issue size of INR 500 crores and above, inclusive of green shoe option, if any. Listed and to be listed non-convertible debentures and redeemable preference shares are now mandatorily required to use the EBP Platform where: (i) a single issue with issue size of INR 200 crores or more (inclusive of a green 1 The Consultation Paper is available at 2 The earlier circular titled Electronic book mechanism for issuance of debt securities on private placement basis dated 21 April 2016 is available at We had analysed the aspects of this in our earlier publication titled Electronic Book Building introduced for listed privately placed non convertible debt securities dated 3 May 2016 available at 1

2 It was optional for those issues below the issue size of INR 500 crores, and for issues with a single investor and where coupon rate is fixed. reducing the mandatory limit from INR 500 crores to INR 50 crores. Single investors (and where the coupon rate was fixed) had an option to follow the electronic book mechanism. Issuances for the private placement of listed debt securities issued by municipalities, commercial paper and certificate of deposits were not stipulated. shoe option); or (ii) a shelf issue (that may consist of multiple tranches) that cumulatively amounts to INR 200 crores in a financial year; or (iii) any subsequent issue, whose aggregate is INR 200 crores. It may also be noted that the Circular has done away with the exemptions granted to issues with a single investor and fixed coupon rate. Accordingly, even issues with a single investors and fixed coupon rate will now be required to use the EBP platform. Further, the Circular stipulates that an issuer may choose to opt for EBP platform for the private placement of listed debt securities issued by municipalities, commercial paper, and certificate of deposits. Obligations of the Issuer The Issuer has to ensure compliance with all requisite rules and regulations, ensure disclosures under the relevant laws and regulations, disclose details with respect to the green shoe option, and enter into an agreement with the electronic book provider (EBP) for the terms and conditions of using the EBM. the disclosure of the break up of the bid, as it was observed that arrangers would sometimes bid on behalf of investors who were not earlier identified by the issuer. The obligations of the issuer have been broadened. Apart from a generic compliance (with laws and regulations) requirement, the issuer is required to ensure compliance with Section 42 of the Companies Act, The Circular stipulates that the issuer is required to consider the number of eligible participants on whose behalf the arranger is making a bid in a particular issue to ensure compliance with the Companies Act, 2013 requirements (of number of investors). Further, the issuer must provide the private placement memorandum (PPM) or the information memorandum (IM) to the EBP atleast two working days prior to the issue opening date. The Circular has also introduced additional disclosures such as issue size, bid opening and closing dates, and minimum bid lot to be incorporated in the term sheet. However, disclosure of estimated cut off yield is optional. The details of such issue are to be submitted in the prescribed form where the name, category and amount invested is to Withdrawal of an Offer There was no specific provision for withdrawal of offer in the 2016 Circular. The provision for withdrawal of an offer has been introduced. Issuers may, at their discretion, withdraw from the issue. 2

3 that a withdrawal of an issue shall not be allowed in case the base issue size has been fulfilled, the base issue size has been subscribed at a rate decided by the issuer, and when the issue has been accepted. However, post-withdrawal, issuers cannot access any EBP platform for 7 days (this is not applicable in the event the issuer has not received bids upto base issue size, default on payments by bidders or the cutoff yield is higher than the estimated cut-off yield as disclosed). Bidding Procedure Participants in EBM are required to enrol with an EBP prior to placing any bids. Qualified Institutional Buyers (QIP) qualify as eligible bidders, whose details shall be provided by the EBP to the issuers. NBFCs and housing finance companies could participate, provided that they were compliant with their respective RBI requirements. The bidding time window was to be specified by the issuer. All bids were to be made in INR and coupon, or yield was to be specified in basis points. The bidding time window of 9 am to 5 pm was recommended by the Consultation Paper. Once the bidding time window has closed, the EBP provides details of all bids received in that period to the issuer, who may accept or reject the bids. The EBP shall display details of all the bids received at the end of the bidding time window. The issuer provides details of the accepted bids to the depositories, and then proceeds to make allotment of the securities that all issuers should follow an open bidding mechanism. that the EBP must ensure that all bids must that the allotment of debt securities to be allotted on a yield priority basis (which should be mandatory in case of oversubscription). direct bidding by qualified institutional buyers (QIB) with bid amounts greater than INR 10 crores and non-qib investors whose bid amounts exceed INR 25 crores. In case of arrangers, the Consultation Paper recommended that an arranger may directly bid on behalf of a QIB investor All eligible participants are required to enrol with an EBP, which shall be one time exercise, the enrolment shall be valid until it is annulled or rescinded. The Circular has introduced a bidding time between 9 am and 5pm on any recognised stock exchange, while the bidding time window may be specified by the issuer. The Circular has also introduced the requirement of making a bidding announcement at least one working day prior to the initiation of the bid process. The bidding announcement must be accompanied with details of opening and closing times of the bid, and any change must be intimidated at least a day before the bidding date (such change cannot be made more than two times) The Circular specifies that the bidding process is an anonymous order driven system. The Circular has introduced modification or cancellation of bids, provided that they are made during the bidding period (no cancellation in the last 10 minutes of bidding). Multiple bids are not permitted, unless in the case of an arranger bidding on behalf of different investors. The Circular prescribes the format in which all bids made on the particular issue are to Further, the Circular mandates that the allotment shall be on a yield priority basis. All bids below the cut-off yield shall be accepted, and full allotments shall be made to such bidders. Further, direct bids on the EBP platform are allowed for participants bidding on a proprietary basis for an amount of INR 15 crores or more, or 5% of the base issue size, whichever is lower. Additional disclosures for arrangers have been introduced such as specifying the nature of the bid (proprietary or otherwise), disclosure of breakup (in case of a consolidated bid) between 3

4 provided it is less than INR 10 crores and INR 25 crores in case of a non QIB investor. proprietary bid and a bid made otherwise, along with the names of eligible participants, category, quantum of bids, etc. An arranger cannot bid on behalf of an eligible participant, if the bid exceeds INR 15 crores or 5% of the base issue size, whichever is lower. Obligations of EBP The 2016 Circular provided for the conditions to be met by eligible stock exchanges to be permitted to act as EBP by SEBI. The EBP was to lay down the operational procedure which included the uploading of offer documents such as the private placement offer letter and the information memorandum, list of eligible participants, etc. The EBP had a general duty to ensure secured bidding by participants, there were no specific data protection measures under the 2016 Circular. The Circular has broadened the scope of duties and obligations of EBPs. Apart from the eligibility conditions under the 2016 Circular, data protection measures backup requirements, recovery plans, safety, security, integrity and retrievability of data has been mandated for EBPs. The disclosures of such issuances are to be made in the prescribed form and must include name of the issuer, date of issue, amount raised, number of investors, category of investor, tenor, coupon and credit rating. Apart from KYC requirements, the EBP shall ensure that all eligible participants shall have access to the PPM, IM, term sheet, and all other issue-related information that is available with the EBP. Definitions The 2016 Circular did not define the terms securities, cut-off yield, estimated cutoff yield, Arranger, Term Sheet, Eligible Participant, Bidder, EBP Platform were not defined. The Circular has introduced a comprehensive set of definitions. In particular, securities have been defined to include debt securities as defined under the ILDS Regulations, 3 and ILDM Regulations, 4 non-convertible redeemable preference shares, 5 (NCRPS), and commercial paper and certificate of deposits; Cut-off yield has been defined to mean the final yield that is determined with respect to the issue, or the highest yield at which a bid is accepted; Estimated cut-off yield has been defined to mean the yield so estimated by the issuer, prior to the issue opening; 3 ILDS Regulations shall mean the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations 2008, as amended from time to time. 4 ILDM Regulations shall mean the Securities and Exchange Board of India (Issue and Listing of Debt Securities to Municipalities) Regulations 2015 as amended from time to time. 5 As defined under SEBI (Non-Convertible Preference Shares) Regulations,

5 In addition to the above definition, the definitions of Arranger, Term Sheet, Eligible Participant, Bidder, EBP Platform, etc. have been introduced. Comment The EBM has been well received by the stakeholders. As per SEBI s records, since the implementation of EBM i.e. July 2016 until 31 March 2017, 696 issuances worth over INR crores have been done through EBM. The underlying objective of the Circular is to enhance the scope of securities eligible to opt for EBM by broadening the definition of securities to include debt securities, as defined under the ILDS Regulations and the ILDM Regulations, the NCRPS, commercial paper and certificate of deposits. Further, the issue size for mandatory EBM has been brought down to INR 200 crores from INR 500 crores, seen as a move to popularise EBM for debt security issuances. It is expected that the revamp in operational procedures as described above are seen as enhancing transparency in the issuance of debt securities, thereby resulting in better price discovery. - Manisha Shroff (Partner), Rolwine Alva (Senior Associate) and Meenakshi Kurpad (Associate) For any queries please contact: editors@khaitanco.com For private circulation only The contents of this are for informational purposes only and for the reader s personal non-commercial use. The views expressed are not the professional views of Khaitan & Co and do not constitute legal advice. The contents are intended, but not guaranteed, to be correct, complete, or up to date. Khaitan & Co disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident or any other cause Khaitan & Co. All rights reserved. Mumbai New Delhi Bengaluru Kolkata One Indiabulls Centre, 13 th Floor Ashoka Estate, 12th Floor Simal, 2nd Floor Emerald House Tower 1 841, Senapati Bapat Marg 24 Barakhamba Road 7/1, Ulsoor Road 1 B Old Post Office Street Mumbai , India New Delhi , India Bengaluru , India Kolkata , India T: T: T: T: E: mumbai@khaitanco.com E: delhi@khaitanco.com E: bengaluru@khaitanco.com E: kolkata@khaitanco.com