Primary market debt offering through private placement on electronic book
(Brief Extract from above consultation paper)
It has been observed from the available data that the majority of the issuances in India take place through private placement route, which are subsequently listed on stock exchange. During financial year 2014-15, private placement accounted for approximately 98% of debt securities issuances that have been subsequently listed. These issues of private placements are usually negotiated by the issuers directly with the investors such as Qualified Institutional Buyers (QIBs)/ High Net Worth individuals (HNIs) or placed through the arrangers over-the-telephone market and then listed on stock exchanges. It is felt that this mechanism may lack transparency and is an informal way to discover price.
Based on a review of sample private placement allotment data for FY 2014-15, received from the market participants regarding types of investors coming to the primary market for private placement of corporate bonds, it has been observed that banks and mutual funds, inter-alia, constitute the majority of the investors.
The key benefits of electronic book vis-à-vis over-the-telephone market, inter-alia, are improvement in efficiency, transparency of the price discovery mechanism and also reduction of cost and time taken for such issuance. Usage of electronic book by investors for trading securities in Indian markets have demonstrated that the benefits can percolate in terms of efficient price discovery, reduction in timelines, reduction of cost, transparency, etc.
Keeping in view the benefits of electronic auction mechanism such as making it a formal and transparent mechanism, it is proposed that a platform for electronic book may be created in India.
Applicability – Optional or mandatory: With respect to this platform for electronic book, two approaches are possible:
- To begin with, the electronic book may be provided as an alternative to the existing mechanism. Subsequently, based on the performance/ acceptability of such a book , this could be made mandatory for all issuers for issuance of privately placed Non-Convertible Debentures (NCDs), which are proposed to be listed or ;
- To make electronic book mandatory for all private placement issues having a threshold of Rs. 500- Rs 1,000 crores in terms of amount being raised.
In order to enable issuers to use electronic book for private placement of corporate bonds, which are subsequently proposed to be listed, it is proposed to create a platform for creation of electronic book, which would be provided by entity to be called as “Electronic Book Provider” (EBP).
The issuer shall enter into an agreement with the EBP, before using its services. The agreement shall contain necessary terms and conditions for usage of the book as well as rights and liabilities of both the parties.
The issuer and EBP shall ensure that all requisite compliances prescribed under various legislations such as Companies Act, SEBI Regulations etc. with regards to private placement, are adhered to by the electronic book. For example – the EBP shall ensure that there is no public solicitation and the total number of bidders should not exceed 200 (excluding QIBs) as required under Companies Act, 2013 and the rules made thereunder.