In a significant move to reduce regulatory burden and stimulate the corporate bond market, the Securities and Exchange Board of India (Sebi) has substantially relaxed the criteria for classifying High Value Debt Listed Entities (HVDLEs). The decision, taken by the Sebi board on Wednesday, 17 December, raises the threshold for identification from ₹1,000 crore to ₹5,000 crore in outstanding non-convertible debt.
Easing the Burden for Regulated Entities
The market regulator stated that this amendment is aimed at facilitating the ease of doing business. The earlier limit of ₹1,000 crore was deemed "very low" by Sebi Chairman Tuhin Kanta Pandey, especially in relation to the debt amounts raised by large regulated entities. This change is expected to benefit a wide range of institutions including Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), Asset Reconstruction Companies (ARCs), insurance companies, and Real Estate Investment Trusts (REITs).
"This will make it easier for regulated entities... to raise funds through corporate bond issuance," Sebi clarified in its official release. By redefining the HVDLE classification, these companies can avoid the additional corporate governance requirements and associated costs that come with the tag, thereby simplifying their capital-raising process.
Rationale Behind the Regulatory Shift
Explaining the board's decision, Chairman Pandey highlighted the constraint the old limit posed. He noted that many entities, particularly large NBFCs, routinely raise debt far exceeding the previous ₹1,000 crore mark. The classification as an HVDLE brought with it stringent corporate governance norms, which acted as an extra layer of compliance and cost.
"So that's been raised to ₹5,000 crore. And so this is an ease of doing business. What happens with the HVDLE is the additional corporate governance requirements. And those corporate governance requirements would be an extra cost also to them," Pandey elaborated. The revision directly addresses this pain point, allowing companies more operational flexibility.
Tweaks to Accompanying Corporate Governance Norms
Alongside the revised threshold, Sebi also approved modifications to specific corporate governance norms applicable to HVDLEs. These amendments provide more clarity and relaxation in certain areas:
1. Director Tenure and Appointments: If a non-executive director wishes to continue beyond the age of 75 years, it will now require approval via a special resolution from shareholders. Sebi also specified that the time taken for obtaining necessary regulatory or government approvals will be excluded from the timeline set for securing shareholder consent for director appointments.
2. Exemption for Nominee Directors: Companies have been granted an exemption from seeking shareholder approval for appointing nominee directors who represent financial sector regulators, Debenture Trustees, or those appointed directly by a Court or Tribunal.
3. Vacancy Fill-up Period: HVDLEs will now have a three-month window to fill any vacancies that arise on their board, providing them with reasonable time to find suitable candidates.
4. Board Rationale Disclosure: The recommendations made by the board to shareholders must now explicitly include the rationale behind the directors' decisions, promoting greater transparency.
Implications for India's Debt Market
This regulatory easing is a strategic step by Sebi to deepen India's corporate bond market. By lowering the compliance hurdle for a significant segment of large debt issuers, the regulator hopes to encourage more companies to opt for bond issuances as a viable method of fundraising. This aligns with broader governmental efforts to shift corporate borrowing from traditional bank loans to the capital markets, which can offer more flexibility and potentially lower costs. The move is widely seen as a positive development for financial institutions and the overall ease of doing business in India's financial sector.
