Offer of unlimited ISINs ends, SEBI prescribes limit of 17 ISIN per financial year by CS Aman Nijhawan


SEBI vide circular  dated June 30, 2017[1] has put a limit on the maximum no. of ISINs that shall be allowed to the Company in any financial year in respect of private placement of debt securities. There are certain classes of companies exempted from adhering to the limit. The provisions of this circular shall be applicable for the debt securities issued in the Financial Year  2017-18 i.e. after the date of this circular and shall not be applicable to the ISINs maturing in respect of the debt securities issued prior to the FY 2017-18. However, post Financial Year 2017-18, whatever issuances are made by the issuer, the issues shall be grouped and consolidated under the ISIN maturing in the same FY.This article explains the background and compliancesin relation to the aforesaid circular to be ensured by companies in respect of private placement of debt securities.
 
  • Maximum limits of ISINs




  • Exemption from applicability of circular:

The following classes of debt securities issued for raising regulatory capital are exempted from the applicability of provisions of this circular:
 

Bonds (including Tier II Bonds) issued by NBFC-ND-SI find no place in exemption list. Similarly, Bonds other than Tier II Bonds issued by HFCs have also not been exempted. Majority of issuances are made by these entities.
 
  • Reporting to the Stock exchange
 
All issuers who have made private placement of debt securities under SEBI (Issue and Listing of Debt Securities) Regulations, 2008, shall submit the following statement to the stock exchange.



The reporting requirements as prescribed in the circular are summarized as under:
 
  • Background
In order to develop the corporate bond market, various efforts have been taken by the regulatory authorities from time to time resulting into a considerable increase in the primary market of corporate bonds. However, the secondary market liquidity continue to be very limited. One of the reasons behind lack of trading volume is non-availability of sufficient floating stock for each International Securities Identification Number (ISIN) as companies prefer issue of fresh bonds rather than going for re-issuance of bonds. Each new issuance from the same issuer receives a separate ISIN; hence older bonds in the same maturity become illiquid.
 
RBI formulated the working group on ‘Development of corporate bond market in India’ under the chairmanship of Shri. H R Khan recommended in the report[2] dated August 12, 2016 that the companies issuing debt securities frequently with the same tenure during a quarter should club them under the same umbrella ISIN in order to enhance the liquidity of bonds and therefore, the companies should be encouraged to re-issue existing bonds under the same ISIN code.
 
Earlier in February 02, 2017 SEBI had also issued a Consultation Paper [3] in relation to consolidation and reissuance of debt securities issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 for public comments.The Consultation Paper provided a detailed analysis of the current situation of corporate bond market and also discussed about the remarkable growth of the primary debt market and the relatively slower growth of the secondary debt market.

No. of ISINs issued to the top 10 issuer in the corporate debt market

Serial No.

Issuer Name

No of ISIN issued

1.

Issuer 1

447

2.

Issuer 2

331

3.

Issuer 3

305

4.

Issuer 4

281

5.

Issuer 5

251

6.

Issuer 6

222

7.

Issuer 7

222

8.

Issuer 8

216

9.

Issuer 9

212

10.

Issuer 10

203

 
 
Source:  NSDL Data as on November 30, 2016
 
On the basis of aforesaid table we can see that each of the top issuers of corporate bonds have more than 200 ISINs, which has resulted in large number of outstanding issuance at any point of time.
 
The trader would trade in those corporate bonds of a particular issuer, which have been freshly issued, thus rendering the old outstanding issues of that same issuer illiquid. This in turn affects the secondary market liquidity in corporate bonds.
 
The consultation paper suggested following two options:
 
 
Consolidation and re-issuance of debt securities
 
  • Authority in the Articles of Association –
Section 121 of the erstwhile Companies Act 1956 had provisions of consolidation and re-issuance. However, the recently notified Companies Act 2013 is silent regarding the company's power to reissue their bonds. In this regard, the Ministry of Corporate Affairs (MCA) has clarified that since Companies Act, 2013 is silent on the issue, it may be assumed that such re-issuance is possible if there is enabling provision in this behalf in the articles of the company. In view of the clarification provided by MCA, SEBI had provided an enabling framework for consolidation and re-issuance under Regulation 20 A of SEBI (ILDS) Regulations, 2008[4].
 
On the basis of the aforesaid framework, issuing companies within 6 months from the date of issue of this circular shall be required to make enabling provisions in its Articles of Association to carry out consolidation and re-issuance of debt securities.
 
The consultation paper identified structural issues in consolidation as provided hereunder:

  • Stamp Duty – the committee report suggested that re-issuances should not be treated as fresh  issuances for the purpose of stamp duty;
  • Bunching of liabilities - the maturities of debentures issued under consolidation will fall on same day which shallhave impact on their liquidity and rating;
  • Reduce demand and increase coupon rate -The issue amount is not predetermined rather the issuers bring out the corporate bond issuances in the market in accordance with the investor appetite. Consolidation and reissue would reduce the demand/appetite of the investors and also increase the coupon rate because of lower demand.
  • Re-issuances at a discount or premium - the interest rate frozen at the time of issue of ISIN may change and in such case subsequent issue of bonds have to be made at discount or premium depending on market conditions.
Conclusion
 
The  regulators  in  India  seems  to  be  serious as  they  continue  to  make  changes  to streamline the  regulatory  regime  surrounding  the  Indian  bond  market. The proposed capping in the number of ISIN’s is a welcome step and will encourage issuers to re-issue existing bonds under the same ISIN code which will further facilitate the liquidity and growth in the secondarybond market. However, the major issuers will have a tough time planning the issuances and manner of payment of redemption amounts given the aforesaid limit.
 
[2] http://www.pfrda.org.in/WriteReadData/Links/Corporate%20Bond%20Market984d464f-b7cb-4cd1-a193-a79b685bb115.pdf
[3] http://www.sebi.gov.in/sebi_data/attachdocs/1486034791614.pdf
[4] http://www.sebi.gov.in/sebi_data/commondocs/ildsmar2015.pdf


Author:

Name:- Aman Nijhawan
corplaw@vinodkothari.com

Associate
Vinod Kothari And Company

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