This is part of a proposal under consideration by Sebi where the listing agreement will be amended to have different norms depending on the nature of the instrument. Currently, the listing agreement has an omnibus set of norms for both equity and debt and does not distinguish between instruments. There is also the grey area of hybrid instruments. Sebi will also bring this proposal before its advisory committee on secondary markets.
A top Sebi official told FE, “Not all disclosures can be treated equally across instruments. We are looking into whether there should be different norms for debt instruments as far as the listing agreement goes.”
The theory behind this move is simple. Defaults are often rampant on the debt side, and there is little regulatory action to prevent that or even insist on periodic disclosures on debt issuances. “There will have to be a separate set of norms for continuous disclosures on the debt side,” Sebi officials said. This is crucial since most often banks are major subscribers of such corporate debt issuances, and their going bad adds to the mountain of non-performing assets (NPAs).
Sebi is also planning to look into other aspects of regulating debt instruments. For instance, the role of debenture trustees in various situations including default will have to be closely examined. “The role of debenture trustees also has to be studied closely and they have to be activated if necessary,” the officials said.
On private placement of debt, the market regulator is considering whether or not it should get into regulating such offerings.
A substantial quantity of funds is raised through this route, and often it is in tranches to bypass the norms on deemed public issues. “The issue of raising debt funds privately and in tranches to avoid coming under the public issue definition is also going to be examined,” a Sebi official pointed out. Trading of debt instruments is also an area currently engaging Sebi’s attention.
The debt market is currently plagued by problems relating to ratings, quality of issuances and the ability of issuers to service the debt they raise. The Reserve Bank has also recently called for a cap on banks’ subscription to unrated paper to 10 per cent of their non-SLR portfolios.
Another point which has come up is whether the equity instruments of a defaulting entity should be impacted by a debt default on the part of the issuer. This point is also being looked into by the regulator.
At a time when the financial institutions are steeped in non-performing assets owing to defaults by corporates and even state government entities, the Sebi move is expected to go some way in regulating the manner in which debt is raised and serviced.