By : Adv.K.Shahzad, Partner- Alishahz Legal LLP
Introduction
The increase in the urban population all over the world started putting strain on urban infrastructure, leading to an increase in demand for urban services including roads, transportation, water supply, sanitation, healthcare etc. India was also no different. In order to tackle the situation, urban planners are required to formulate appropriate plans and execution thereof¹. In order to facilitate and regulate the issue and trade of Municipal Bonds, which can be utilised for finding funds for the development of Urban Infrastructure, Stock Exchange Board of India (SEBI), in the year 2015, promulgated the regulation on the issue and listing of Municipal Securities, developing the framework and regulating the issuance and listing of the municipal debt securities.
The regulation enabled the Municipalities coming under Article 243Q of the Constituion of India to raise funds for its developmental activities. The regulation gives an opportunity for the general public to participate in the trading of the Municipal Debt Securities, which would be of less risk than that issued by the companies. And since the securities are issued by the Municipalities and other institutions covered under the regulation, not only that the securities holds the strength of the ones issued by a constitutional institution, the same would enable the public to have the satisfaction of contributing to be a part of an activity intended for the benefit of the society at large, and at the same time letting them to gain income from the money invested.
SEBI (Issue and Listing of Debt Securities by Municipalities) Regulation, 2015, hereinafter referred to as SEBI-ILDMR, regulates the issue and the listing of the municipal securities through the stock exchange. The regulation, since promulgated in the year 2015, has substantially amended in the year 2019, with effect from September 2019, broadening the arena of institutions covered under the regulations apart from further strengthening the protection to the investors, and further, easing and simplifying the process of the issuance and listing of the securities through the stock exchange.
Let us examine some of the features of the SEBI-ILDMR :
- What are Municipal Debt Securities –
Regulation 2(m) of SEBI-ILDMR, states that municipal debt securities shall mean non-convertible debt securities which create or acknowledge indebtedness, and include debenture, bonds and such other securities of an issuer.
Regulation 2(n) states that municipality shall mean an institution of self-government constituted under Article 243Q of the Constitution of India.
- Who can issue securities or What is an issuer –
Earlier, a Corporate Municipal Entity, defined in Regulation 2(d) as – the company as defined under Companies Act, 2013, which is a subsidiary of a municipality and which is set up for the purpose of raising funds for a specific municipality or group of municipalities, shall be the issuer of the debt securities. Now that the said definition itself is taken away by the amendment and instead a very broad definition under the term “Issuer” is incorporated in Regulation 2(l) of SEBI-ILDMR. Hence, unlike in earlier regulation, which permitted only the issuance of the securities by a company, which is the subsidiary of a municipality – and not the municipality by itself – the amendment permits the Municipality by itself as well any Statutory Body, Board, Corporation, Authority, Trust or Agency established or notified by any Central or State Act or any Special Purpose Vehicle notified by the State Government or Central Government, undertaking the functions under Article 243W of the Constitution of India or any Structure constituted under the Pooled Finance Development Fund Scheme of the Government of India or a Body Corporate to whom the Companies Act, 2013 applies and which is set up by the State Government(s) or Central Government for the purpose of raising funds for a Person performing the functions under Article 243W of the Constitution of India, can issue and list the debt securities. The amendment has thus marginally widened the scope of the entities which can raise the funds by issuing the securities, such that not only that the Municipalities but also the Urban Development Authorites, Other Planned Agencies and other Structures can find funds for the developmental activities.
- Eligibility of the Issuer –
Not all entities which covered under the definition of issuer can issue and list their securities in the stock exchange. SEBI-ILDMR has formulated certain eligibility criteria, so as to entitle an issuer to issue and list the securities.
An issuer shall not be eligible to issue and list the debt securities, if it is not authorised to issue and list the debt securities by its constitution (Regulation 4(a) of the SEBI-ILDMR). The Regulation further provides that the accounts of issuer shall be prepared in accordance with the National Municipal Accounts Manual, or Municipal Accounts Manual of the respective State Governments, or as per the Accounting standards, applicable to issuers, under the Companies Act, or as per the Accounting standards/policies specified in the constitution document of the issuer-Regulation 4(b).
Further, the issuer shall not be a loan defaulter or defaulter in the payment of the debt securities, during the preceding three hundred and sixty five days (Regulation 4(c)), and neither the issuer nor shall its promoter(s) or group company or its director(s) be declared as a wilful defaulter (Regulation 4(e).
Under Regulation (4(d) the issuer or its promoter, group or directors shall also not be barred from accessing the securities market by the SEBI, and that no promoter(s), director(s) of the issuer shall be declared as a fugitive economic offender (Regulation 4(f)).
Thus the SEBI has taken adequate precautionary measures to ensure the credit worthiness and fitness of the issuer, its promoter(s), group company, director(s) etc. so as to safeguard the interest of the investors.
- Issuance and Listing of Securities –
The regulation permits the issuance and listing of the securities in two types- (1) Public Issue and (2) Private Placement.
Though the process of the issuance and listing of the securities are not as strict and cumbersome as that of the issuance and the listing of the securities by the companies, yet the SEBI ensures adequate disclosure of information about the issuer, its creditworthiness, object of raising funds, detailed project about the utilisation of funds, expected cash flow and redemption of the securities, etc.
The regulations requires the issuer of a Public Issue to publish the offer documents containing true, fair and material disclosures, which are necessary for the subscribers of the municipal debt securities to take an informed investment decision (Regulation 6). In case of the issue by Private Placement, a Placement Memorandum, detailing the aspects of the issue and the issuer shall be placed before the SEBI (Regulation 14A). The offer document and the placement memorandum shall covers the particulars of the issuer including the General Information about the issuer, capital structure of the issuer, object of the issue, issue specific information, financial information about the issuer, legal matters pending by or against the issuer, risk factors to the issue, tax benefits, government approvals etc.
The issuer also requires to appoint merchant bankers registered with the SEBI as intermediaries to the issue (Regulation 6A) and the merchant banker owes the duty to ensure the compliance of the regulation by the issuer (Regulation 27). The lead manager (merchant banker) is required to conduct the due diligence and shall issue certificates to the SEBI in the various stages of the issue and listing process (Regulation 27(5)).
The issuer shall execute a trust deed in favour of the Debenture Trustee for securing the securities (Regulation 20). The Debenture Trust Deed shall contain the matters specified in the Schedule IV of the of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993. The Debenture Trustees owes the duty to protect the interest of the holders of the municipal debt securities (Regulation 26).
The regulations prescribes the method of allotment of securities (Regulation 12), advertisement of public issue (Regulation 9), underwriting of securities in case of under subscription (Regulation 13), refund of money in case of non-allotment of securities (Regulation12(4).
- Other Aspects :
- Mandatory Listing : The securities issued shall be mandatorily listed in a recognised stock exchange and for the same, the issuer shall mandatorily enter into listing agreements with one or more stock exchanges-Regulation 4E.
- Minimum Contribution : The SEBI-ILDMR requires the issuer to contribute a minimum of twenty percentage of the total project cost-Regulation 18B.
- Minimum Subscription : There is no prescribed minimum subscription of securities for the public issue. The issuer may determine the same in the offer document (Regulation 11). In case of the private placement the regulation prescribes the minimum subscription per investor as Rupees Ten Lakhs-Regulation 15.
- Creation of Escrow Accounts : The issuer is required to create a structured payment mechanism and maintain specific escrow accounts for the purpose of debt servicing of the municipal debt securities as specified by SEBI from time to time-Regulation 19.
- Credit Rating : The issuer shall obtain credit rating from at least one credit rating agency registered with the Board, which shall be disclosed in the offer document or placement memorandum-Regulation 4B.
- Dematerialisation : The issuer shall issue securities to the public in dematerialised form only-Regulation 4C.
- Roll-over : The issuer may roll-over the redemption of the issued securities, it may do so by passing a special resolution to that effect in the meeting of the holders of the securities-Regulation 21.
- Buy-back : The issuer may provide the option to buy-back the securities at a value which shall not be less than the face value of the debt securities, from the investors-Regulation 17.
- Put or Call Option : The regulation permits the issuer to recall the debt securities (call) prior to the maturity date or the holder of the debt securities to exercise the right of redemption of the securities prior to the maturity date-Regulation 17A.
- Accounting and Audit : The accounts of the issuer shall be audited as per the regulation mentioned in the eligibility criteria-Regulation 24.
- Draft Offer Documents : The issuer is required to file draft offer document with the SEBI for the verification, scrutiny and satisfaction of SEBI, in case of public issue-Regulation 7.
- Preliminary Placement Memorandum : The issuer shall file preliminary placement memorandum with the SEBI for the verification, scrutiny and the satisfaction of the SEBI, in case of private placement-Regulation 14A.
- Shelf Offer Document : The regulation permits the issue of securities in one or more offers over a period of one year, through Shelf Offer Document, without the issue of a further offer document-Regulation 2(x).
- Limit of members for Private Placement : The regulations restricts the limit of the number of persons in a private placement issue to two hundred. However the qualified institutional buyers shall not be counted in the same-Regulation 2(s).
- Control of SEBI : The Regulation empowers SEBI with the authority to issue appropriate directions in case of violation of any provisions by the issuer-Regulation 27A.
Conclusion
The regulation of the issuance of municipal debt securities makes the issuance of the municipal debt securities transparent to the public, thereby helping to gain the confidence of the investors to subscribe to the debt securities. The requirement of the disclosure as well as the securing of the assets with the debenture trustees protects the funds of the public from being otherwise used. SEBI-ILDMR is certainly an impetus for the municipalities and other body corporate, performing the functions under Articles 243W of the Constitution of India, to design, develop and implement various prestigious projects beneficial to the society, howsoever, it is saddening that only a very few municipalities or other bodies have reaped the benefits of the salutary regulation. The substantial amendment of the provisions of SEBI-ILDMR has further broadened the arena and has simplified and eased the regulations to such an extent that is expected that more and more municipal or other bodies may utilise the advantage of the Regulation, for implementing the projects which are kept under cold storage due to the shortage of funds, or to formulate projects intended for the benefit of the public at large.
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1. Concept paper on Proposed regulatory framework for issuance of debt securities by Municipalities and the Draft SEBI (Issue and Listing of Debt Securities by Municipality) Regulations, 2015, dated 30.12.2014.