Securities and Exchange Board of India (SEBI), with the objectives of enhancing transparency, improving price discovery, reducing the time taken for private placement of debt securities and improving liquidity in the corporate bond market as opposed to the "over the telephone" market, has attempted to lay down the groundwork to modernise and simplify the issue procedure for listed private placement of debt securities by introducing the electronic book building process for debt securities on 21 April 2016 (EBM Circular). The electronic book building mechanism for listed privately placed securities will be effective from 1 July 2016.

Applicability based on Issue Size and Number of Investors

The electronic book mechanism will be mandatory for all listed private placements of debt securities which: (a) have an issue size exceeding `5,000 million; and (b) seek listing on a recognised stock exchange in India. The issue size of `5,000 million is inclusive of a green shoe option i.e., an issue size of `4,000 million with a green shoe of `1,500 million need to comply with the EBM Circular.

The electronic book building mechanism shall not be mandatory for: (a) fixed rate issuances which are targeted at a single investor (other than an arranger acting as an underwriter) irrespective of the issue size; and (b) issue size of less than `5,000 million.

For listed private placements of debentures below `5,000 million, additional disclosure requirements have been introduced i.e., the issuer has to disclose the coupon, yield, amount raised, number and category of investors in the prescribed format (not made available yet) to the electronic book provider (i.e., a recognised stock exchange) or another body notified by SEBI.

As on date, the requirements of the EBM Circular will not apply to unlisted private placement of debt securities.

Participants involved and their roles in Electronic Book Building for Debt Securities

Participants Definition Roles and responsibilities
Electronic Book Provider  (EBP) A recognised stock exchange after obtaining approval from SEBI to act as EBP.
  • Complete KYC for the QIBs, before allowing such QIBs to enter their bids, either by utilizing existing KYCs from KYC Registered Agencies (KRAs) registered with SEBI or undertaking a fresh compliance.
  • Provide an accurate, timely and secured bidding platform, operational procedure and timeline for bidding and address all investor grievances which may arise from the bidding process.
Issuer Includes any company, public sector undertaking or statutory corporation which makes or proposes to make an issue of debt securities in accordance with the SEBI (Issue and Listing of Debt Securities) Regulations 2008, as amended, or which has its securities listed on a recognized stock exchange or which seeks to list its debt securities on a recognized stock exchange.
  • To ensure compliance with all applicable laws for placement of debt securities, include the following disclosures in the private placement memorandum (PPM):

    • minimum issue size, inclusive of green shoe option;
    • details of green shoe option including reasons for the retention of excess amount; and
    • may specify upper ceiling limit on the coupon.
  • To enter into an agreement with the EBP.
Arranger and Sub-Arranger (Category I Participants) Arranger includes merchant bankers, RBI registered primary dealers or any other registered intermediaries as notified by SEBI.

Sub-Arranger is any broker registered with SEBI and appointed by an Arranger.
  • Can enter bids on proprietary basis or on behalf of other investors such as high net worth individuals (HNIs), institutional investors etc.
  • Complete Know Your Client (KYC) of the non-institutional investors, before allowing them to make bids, either by utilizing existing KYCs from KRAs registered with SEBI or undertaking a fresh compliance.
  • Uploading the bids, for all non-institutional investors along with their own proprietary bids, if any, on the EBPs platform.
  • In case of non-QIBs investing into debt securities, an arranger will become necessary in order to undertake KYC and upload bids.
Institutional Investors Institutional Investors includes a qualified institutional buyer (QIB) or family trust or systematically important NBFCs registered with Reserve Bank of India or intermediaries registered with SEBI, all with net-worth of more than five thousand million rupees, as per the last audited financial statements (Category II Participants).

Non-Institutional Investors include HNIs, non-QIBs, individuals in each case only those persons eligible to invest in such debt securities (NIIs).
  • Institutional Investors or Category II Participants and are permitted to enter bids on either a proprietary basis or through an Arranger or a Sub-Arranger.
  • For NIIs bids can be entered only through Arrangers/Sub-Arrangers, thereby making the appointment of an Arranger mandatory.

Procedure for Electronic Book Building

Pre-Bidding Procedure
  • Participants enrol with the EBP and only eligible bidders enrolled with the EBP will be allowed to bid.
  • EBP shall provide details of the enrolled participants to the Issuer, which in turn shall enable the Issuer to file the Form PAS 5, required under the rules notified under Companies Act, 2013.
  • Other than QIBs, all the enrolled participants are required to pre-register themselves before being allowed to access the PPM or other information with respect to the issue.
  • In case the number of pre-registered bidders exceeds 200 in a year, the eligible bidders shall be determined by draw of lots or first come first served basis by the EBP, in consultation with the Issuer. This is to ensure that the limit of 200 persons in accordance with Companies Act, 2013 is not exceeded.
  • Only the enrolled eligible participants shall have access to the PPM and to the bidding portal of the EBP.
  • The bidding time window (bidding time, cooling period, renegotiation window etc.) shall be decided by the Issuer in consultation with the EBP, which shall be disclosed, in advance, to the bidders by the EBP.
  • The EBP is required to lay down the operational procedure including steps for uploading PPM, list of eligible participants and timelines for each event.
Bidding Procedure
  • The bidding period shall be decided by the Issuer in consultation with the EBP.
  • The bids shall be made by entering the amount of bid in Rupees and coupon/yield in basis points (bps). A single bidder can submit multiple bids.
  • Upon bidding an acknowledgment number will be generated, for each bid, by the EBP.
Post Bidding Procedure
  • Post closure of bidding period, the EBP shall provide all the bids to the Issuer. Issuer can accept or reject the bids if it agrees to the yield so discovered.
  • The Issuer is required to inform the depositories of the bids that it accepts, before making allotment to the successful bidders.
  • The EBP shall at the end of the bidding time window, disclose the bid details viz. aggregate volume data, including yield, amount including the amount of oversubscription, total bids received, rating(s), category of investor, etc., on an anonymous basis, to avoid any speculation at the end of the bidding time window.
  • Though not specified in the EBM Circular, we infer that based on the bids received, the Issuer will finalise the basis of allotment, post which the procedure for collection of the amount shall be initiated.
  • Thereafter the Board shall allot the securities and take appropriate steps as may be required under various applicable laws.
  • EBP shall upload allotment data on its website to make the information available to public.

Comment

With the goal of developing the debt market in India and attracting more foreign investment in the listed debt segment, such changes in the regulatory framework are a welcome move.

However, with the increase in requirements such as appointment of an Arranger, employing services of the EBP, and the KYC obligations, the issue process is likely to increase the cost in terms of arranger's fee, EBP fee and KRA fee consequentially increasing the cost of borrowing.

Certain aspects, such as the detailed operational procedures to be laid down by the stock exchanges, the period of the bidding process, potential issues of pre-registration of participants to a maximum of 200 per year, leave scope for fine-tuning the framework.

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