SEBI Guidelines for Issue of Debentures in India

Securities and Exchange Board of India (SEBI) is a regulatory body which performs the function of regulating and monitoring the Indian capital and securities which ensuring to protect the interests of the investors by formulating the guidelines and regulations to be followed. SEBI has provided various rules and guidelines for issue of debentures. Therefore, this article will discuss about the SEBI guidelines for issue of debentures in India.

What is SEBI?

SEBI is a regulatory body and regulator in the securities market which controls the securities in India. The purpose of SEBI is to protect the interest of the investors in securities and to regulate and promote the securities market. SEBI is operated by its board of members. The headquarters of SEBI is in Mumbai and its regional offices are located in Kolkata, Delhi, Chennai and Ahmedabad.

Functions of SEBI

Some of the functions of SEBI are as follows:

• SEBI was established to promote the interest of the investors and regulate the securities market.
• The purpose of SEBI is to promote the development of securities market.
• It provides a platform for bankers, stockbrokers, investment advisors, sub- brokers, merchant bankers, portfolio managers, share transfer agents, underwriters, registrars, trustees of trust deeds and other associated people to register and regulate the work.
• SEBI regulates the operations of credit rating agencies, foreign portfolio investors, depositors, participants and custodians of securities.
• SEBI regulates and prohibits the inner trades in securities that is, fraudulent and unfair trade practices in respect to the securities market.
• It ensures that the investors are aware and educated regarding the intermediaries of securities market.
• It regulates the research and development to ensure that the securities market is efficient.
• It monitors and regulates the substantial acquisition of shares and take- over of companies.

Also, Read: Procedure for Issue of Debentures: A Complete Guide

What are Debentures?

Share capital is the main source of the joint stock company and such capital is raised by issuing shares. The holder of the shares of the company is called the shareholder and is the owner of the company. However, the company may need additional amount of money for much longer period and shares cannot be issued every time. Therefore, it raises loan from the public. The amount of loan can be divided into units of small denominations and can be sold by the company to the public. Each such unit is called “debenture” and the holder of such unit is called the Debenture Holder and the amount that is raised is a loan for the company.

A debenture is a unit of loan amount. It is a document issued under the seal of the company. According to section 2(12) of the Companies Act, 1957 debenture includes debenture stock, bond and any other securities of the company whether or not constituting a charge on the company’s assets.

Issuing debentures means issue of a certificate under the seal of the company, which is an acknowledgment of debt taken by the company.

What are the SEBI Guidelines for Issue of Debentures in India?

The SEBI guidelines for issue of debentures shall be applicable for issue of convertible and non- convertible debentures by public sector companies as well as public limited company.

• Debt instruments are required to be rated by a Credit Rating Agency and the same shall be disclosed in the offer document. If such issue is equal to or greater than 100 crores, two ratings from two different credit rating agencies will be obtained.

The credit rating agencies in India are such as:

1. CRISIL – Credit Rating Information Services of India Ltd.
2. ICRA – Investment Information and Credit Rating Agency.
3. CARE- Credit Analysis and Research Ltd.

• Debt- equity ratio in issue of debentures must not exceed 2:1. However, this condition will be relaxed for capital intensive projects.
• The debentures may be issued for the following purposes:

1. To start new undertakings.
2. Expansion or diversification.
3. Modernization.
4. Amalgamation or merger which may be approved by financial institutions.
5. To acquire assets.
6. Restructuring of capital.
7. To increase resources of long- term finance.

• The issue of debentures should not exceed more than 20% of the gross current assets including loans and advances.
• The any redemption of debentures shall not commence before the 7 years since the commencement of the company.
• The payments should be made in one instalment for any small investors having value such as Rs. 5,000.
• The non- convertible debentures can be converted into equity with the consent of SEBI.
• A premium of 5% on the face value is allowed in case of time of non- convertible debentures only and redemption.
• The secured debentures shall be permitted for public subscription.
• The face value of debentures shall be Rs. 100 and it shall be listed in one or more stock exchanges in the country.
• It is necessary to appoint debenture trustees for debenture with maturity of more than 18 months and the name should be stated in the offer document.
• A debenture redemption reserve is a provision which states that the Indian corporation issuing debentures must create a debenture redemption service to protect the interest of the investors against the possibility of default by a company. If no reserve is created by a company within 12 months of issuing the debenture, the company shall be required to pay 2% interest in penalty to the debenture holders.
• SEBI allows listing of debt instruments before equity providing that the rating of instrument is not below minimum rating of ‘A’ or equivalent.
• The issue of Fully convertible debentures (FCDs) having the conversion period more than 36 months shall not be allowed unless conversion is made optional with having the right to buy or sell the stock at a certain price or the obligation to buy or sell the stock at a certain price.

Conclusion

The SEBI performs the function of monitoring and regulating the securities and to protect the interest of the investors. The SEBI guidelines for issue of debentures in India is stated above which are required to be followed for issue of debentures in securities market.

Also, Read: How a Company Issue Debentures to Public?