Regulatory Aspects Of Debt Market In India

A Debt Market Presentation

Regulatory Aspects OfDebt Market

A Presentation by:

Shashank Udupa Manohar Rao

Ashutosh Parita Thakkar

Amar Vora Yash Thakkar

Purvi Visaria


Topics To Covered

Introduction to the Regulators of Debt Market

• Ashutosh Athavale

Government Securities Act, 2006

• Parita Thakkar

Government Securities Regulation Act, 2007

• Purvi Visaria

SEBI (Disclosure and Investor Protection) Guidelines, 2000

• Yash Thakkar, Amar Vora

SEBI (Issue and Listing of Debt Securities) Regulations, 2008

• Manohar Rao

Recent Data & Analysis, Conclusion

• Shashank Udupa


Who Are The Regulators OfDebt Market In India???

•Reserve Bank Of India(RBI)

•Securities Exchange Board Of India (SEBI)


Involvement Of Regulators In Debt Market Of India

Reserve Bank Of India (RBI)

Issuer Of Debt Instruments

Determines the guidelines as to how the commercial banks can raise

money from the general public.


Involvement Of Regulators In Debt Market Of India

Securities Exchange Board Of India (SEBI)

Secondary Role In Regulatory Aspect

Determines the guidelines for raising money through public issues

SEBI is also the main regulator for Mutual Funds


Government Securities Act, 2006

A security created and issued by the Government for the purpose

of raising a public loan..


Forms of Government Security

Promissory Note Bond Bearer Bond Stock Certificate


Stock

A stock means a Government security;

Registered in the books of the RBI for which

a stock certificate is issued; or held at the

credit of the holder in the SGL account

including the CSGL account maintained in

the Books of the RBI

The transfer of the Government securities

shall be made in such form and in such

manner as may be prescribed.


FAQ

When did the G S Act and the G S Regulations come into force and to which

Government securities do they apply? The G S Act and the G S Regulations came into force with effect from December 1, 2007.

The G S Act applies to Government securities created and issued by the Central

Government or a State Government, whether before or after the commencement of this

Act. The G S Act will apply to all Government securities created and issued even prior to

December 1, 2007.

What does one mean by Government security in the form of Stock? Stock means a Government security registered in the books of RBI for which a Stock

Certificate (SC) is issued or which are held at the credit of the holder in the Subsidiary

General Ledger (SGL) account maintained in the books of RBI and transferable by

registration in the books of RBI.


Government Securities Regulations, 2007

Made by the Reserve Bank of India to carry out the purpose of the

Government Securities Act..


Regulations To The Different Forms

Government security held in the form of Government Promissory Notes

is transferable by endorsement and delivery.

Government securities held in the form of A Stock Certificate, SGL

account including the CSGL account & Bond Ledger Account are

transferable, before maturity, by execution of forms - III, IV & V

respectively appended to the Government Securities Regulations.

Promissory notes and stock


Bond & SGL CSGL

A bearer bond is transferable by delivery and the person in possession

of the bond shall be deemed to be the owner of the bond.

Government securities held in SGL account including the CSGL account

or bond ledger account shall also be transferable by execution of a deed

in an electronic form under digital signature.

Bond and SGL CSGL


FAQ

Are Government securities eligible for creation of pledge,

hypothecation or lien? Yes. Pledge, hypothecation or lien may be created in respect of Government

securities held in the form of SC, BLA, SGL/CSGL and the holder of Government

securities in such forms may avail of loan facility by keeping such securities as

collateral towards loan. However, Government securities issued in the form of

GPN and bearer bonds are not eligible for creation of pledge, hypothecation or

lien.

Whether Government securities are eligible for conversion, consolidation, sub-

division, renewal? Yes. Government securities are eligible for conversion from one form of holding to another

as well as consolidation, sub-division and renewal as per the terms and conditions

prescribed in the G S Regulations.


SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000

SEBI has issued Securities and Exchange Board of India (Disclosure

and Investor Protection) Guidelines in 2000 ..


Guidelines For Issue of Debt Instruments

The issuer making a public issue or rights issue of debt securities shall

appoint one or more debenture trustees in accordance with the provisions of

Section 117B of the Companies Act, 1956.

The issuer making a public issue or rights issue of debt securities shall

appoint one or more Merchant Bankers.

The issuer shall enter into an arrangement with a depository registered with

the SEBI for dematerialization of the debt securities that are proposed to be

issued to the public.

The issuer shall give an option to the subscribers to receive the debt

securities either in the physical form or in dematerialized form


Advertisements of Public Issues

The issuer company shall make an advertisement in an English national

Daily with wide circulation, one Hindi National newspaper and a

regional language newspaper with wide circulation at the place where

the registered office of the issuer is situated

At the time of filing of the offer document with the Registrar of

Companies.

Issue Opening Date, Issue Closing Date.

And contain the minimum disclosures as per Schedule IV.


Requirement of Credit Rating

No public issue or Rights issue shall be made unless credit rating from a

credit rating agency has been obtained.

For a public or rights issue greater than or equal to Rs. 100 crores two

ratings from two different credit rating agencies shall be obtained.

Where credit rating has been obtained from more than one credit rating

agencies, all credit ratings, shall be disclosed.

All credit ratings obtained during the three years for any listed security

of the issuer company shall be disclosed in the offer document.


Requirement Of Debenture Trustee

In case of issue of debentures having maturity more than is months, the

issuer shall appoint a Debenture Trustee.

The name of the debenture trustee must be stated in the offer

document.

A trust deed must be executed by the issuer company in favor of the

trustee within six months of the closure of the issue.

Trustees of the debenture issue shall be vested with the power for

protecting the interest of the debenture holders.


Debenture Redemption Reserve (DRR)

A company has to create Debenture Redemption Reserve (DRR) in case

of issue of debentures with maturity of more than 18 months.

The DRR should be created in accordance with the following provisions:

• Company shall create DRR equivalent to 50% of the amount of

debenture issue before debenture redemption commences.

• Withdrawal from DRR is permitted only after 10% of the debenture

liability has been actually redeemed by the company.

• The requirement of creation of DRR shall not be applicable in case

of issue of debt instruments by infrastructure companies.


Distribution Of Dividends

In the case of existing issuers, prior permission of the lead institution for

declaring dividend exceeding 20% or as per the loan covenants is

necessary if the issuer does not comply with institutional condition.

In case of New companies, distribution of dividend shall require

approval of the trustees to the issue and lead institution, if any

Dividends may be distributed out of profit of particular years only

If residual profits after transfer to debenture redemption reserve are

inadequate to distribute reasonable dividends, issuer may distribute

dividend out of general reserve.


Other Provisions

No company shall issue Fully Convertible Debentures having conversion

period of more than 36 months, unless conversion is made optional

with “Put” and “Call” option.

No issue of debentures by any issuer company shall be made for

acquisition of shares or providing loan.

Premium amount and time of conversion shall be determined by the

issuer company.

The interest rate for debentures can be freely determined by the issuer

company.


SEBI (ISSUE AND LISTING OF DEBT SECURITIES) REGULATIONS, 2008

Issue and Listing of Debt Securities was Implemented by SEBI & has

simplified the Debt market and given it structure..


Issue Requirements for Public Issues

General Conditions.

Filing of draft offer document for Public Issues.

Electronic Issuance.

Price Discovery through Book Building.

Minimum Subscription.

Listing of Debt Securities.


Continuous Listing Conditions:

Should comply with the conditions of listing.

Rating obtained by an issuer should be periodically reviewed.

Change in rating should be promptly disseminated to investors.

Debenture trustee should disclose the information to the investors and

the general public by issuing a press release.


Impact of Regulatory Changes

The Change brought about by the Existence of these Regulatory

Measures..


Impact On The Economy

Government borrowing at market rates.

Greater market absorption of Government securities – lower

devolvement on the Reserve Bank of India.

Increase in the amounts being raised in the market at market

determined rates.

Increase in trading volumes.


Future of India’s Debt Market

Regulations have had a positive impact on the market which has

moved from a credit market to a securities market..


The Future

Greater transparency – RBI has started publishing SGL data.

Availability of information and increased interest in the debt market –

research reports, seminars, discussions, newspaper articles, etc.

Introduction of auctions which have contributed to development of

bidding skills among the investors. Banks are paying special attention to

this sector as profit centers.

Increased focus on treasury management and interest rate risk

management.

Possibility of a market responsive yield curve emerging.

Larger amounts being raised by the corporate sector.

Education

Regulatory Aspects Of Debt Market In India