Listed cos explore issuing bonds through unlisted arms to avoid listing the debt

The amendment is aimed at ensuring better transparency in price discovery for all NCDs.
The amendment is aimed at ensuring better transparency in price discovery for all NCDs.


Companies are eyeing private placements via unlisted subsidiaries to avoid the compliance burden and costs that listing debt instruments entail, experts said.

Mumbai: A new regulation to enhance transparency in India's corporate bond market is not working out as planned, lawyers and financial experts said.

Companies with publicly traded bonds planning to sell fresh non-convertible debt papers have to mandatorily list them on stock exchanges, under a new rule that took effect earlier this year. However, the rule has prompted companies to raise debt through their unlisted subsidiaries instead, the people said. The capital raised can then be transferred to the parent through inter-company loans or other mechanisms.

Corporate lawyers said on condition of anonymity that several companies are in touch with them for private placements of unlisted debt through unlisted subsidiaries to avoid the compliance burden that comes with listed papers. Some companies, especially in power and infrastructure, are planning unlisted subsidiaries to house projects requiring high capital investment for this purpose, they added. Private placement is essentially selling bonds to pre-selected investors rather than offering them in the market.

Private placements

The number of non-convertible debenture (NCD) issuances through unlisted subsidiaries is expected to increase as companies aim to avoid the regulatory compliance associated with listed NCDs, said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap, a boutique financial advisory firm specializing in corporate debt. He added that this trend will likely be prominent among companies struggling to secure debt in the domestic market, who will instead turn to private credit funds and other high-risk investors for borrowing.

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Last month, resources major Vedanta Ltd’s subsidiary Vedanta Semiconductors raised just over 18,000 crore through this route from a clutch of private credit funds. The capital was then transferred to Vedanta Ltd via an inter-company loan. A leading Gujarat-based conglomerate is also considering a similar issue, the lawyers cited above said.

Vedanta did not respond to a request for comment.

“Companies typically take into consideration the disclosures to be made under the listed regime, compulsory rating requirements for listed paper, creditor mix currently in the entity, and timelines and costs involved in a listed issue before opting for a listed versus an unlisted debt issue," said Manisha Shroff, partner at law firm Khaitan & Co. “Since the amendments to the regulations last year which made the disclosures more exhaustive and stringent, the trend for many companies has been to opt for unlisted issuances or issuance through their unlisted subsidiaries," Shroff said.

Amendments to the Securities and Exchange Board of India's (Sebi) Listing Obligations and Disclosure Requirements effective 1 January mandate companies with outstanding listed non-convertible debt securities (NCDS) to sell only listed NCDS going forward. However, a company that doesn’t have any listed NCDS may issue such unlisted papers. Essentially, a company cannot have listed and unlisted debt securities.

A query emailed to a Sebi spokesperson remained unanswered.

Towards transparency

The amendment is aimed at ensuring better transparency in price discovery for all NCDs, and to facilitate easier exit for investors. Sebi also expects the amendment to help reduce investor confusion between listed and unlisted papers of the same company and prevent mis-selling of unlisted bonds to investors.

“However, these amendments may not have the desired knock-on effect, and may, in fact, push investors and issuers to voluntarily delist existing listed NCDs or turn to other sources or avenues of fund-raising, including traditional routes like banks and non-banking finance companies where possible," law firm AZB said in a blog in February this year. “It may now also be practically impossible for issuers having outstanding listed NCDs to execute bilateral arrangements with investors and arrangers of unlisted NCDs, which are otherwise fairly common," they noted.

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Experts say that by issuing the bonds through unlisted subsidiaries, companies can return to such bilateral arrangements.

However, companies may need to offer collateral from their most credit-worthy entity in the group to provide comfort to an investor to invest in an unlisted paper of an unlisted group entity, Khaitan & Co’s Shroff said.

Parent's guarantee

Borrowings of unlisted subsidiaries are typically guaranteed by their listed parents with higher credit rating.

Chirag Shah, a senior lawyer in securities law, added that if Sebi actually wanted listed companies to list their NCDS, it should mandate that not just the listed company, but its wholly owned subsidiary or material subsidiary should also do the same. “This is the only way to curb any circumventing of the law via unlisted subsidiaries. In any event, such unlisted subsidiaries wouldn’t be able to raise money without the parent's support or guarantee," Shah said.

Kunal Sharma, partner at Singhania & Co, clarified that it was for Sebi to contemplate whether investors are under serious financial risk if NCDS are unlisted.

“It would be naive to think that regulators did not deliberate on whether the entities seeking borrowing through means of NCDS would engineer for exceptions, especially when among other benefits of having unlisted NCDS, one such benefit would be no requirement of periodic credit review as mandated under SEBI (LODR) Regulations for Listed Entities" he said.

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