SEBI proposes to increase borrowings threshold for big companies

The Securities and Exchange Board of India on Thursday proposed to increase the threshold of outstanding long-term borrowings for large corporate from ₹100 crore or above to ₹500 crore or above. In a circular, the capital market regulator says that the proposed threshold is in line with the present threshold for an entity to be called a 'high-value debt listed entity.'

"It was felt that the threshold should be aligned with the threshold of 'high-value debt listed entity' to have uniformity in the Regulations. This would also be a breather for companies with outstanding long-term borrowings of less than ₹500 crore to prepare themselves for compliance with these provisions once the framework becomes applicable to them," says the capital markets regulator.

The proposed threshold stems from the 'framework for enhanced market borrowings by large corporates' formulated by the capital markets regulator in 2018 to assist in deepening the corporate bond market in India. At present, large corporate entities include all listed entities except scheduled commercial banks, which have an outstanding long-term borrowing of ₹100 crore or above. Outstanding long-term borrowings mean any outstanding borrowing with an original maturity of more than one year and shall exclude external commercial borrowings and inter-corporate borrowings between a parent and subsidiary (ies), according to SEBI.

Moreover, at present "outstanding long-term borrowings" and "incremental borrowings" exclude external commercial and inter-corporate borrowings between a parent and subsidiaries. The proposed framework suggests the replacement of 'incremental borrowings' with 'qualified borrowings.' The capital markets regulator has also proposed the exclusion of intercorporate borrowings between the parent company and subsidiaries/associate companies from the definition of 'outstanding long-term borrowings' and 'incremental borrowings.' It also proposes the removal of grants, deposits or any other funds received as well as borrowings arising on account of interest capitalisation between parent company and subsidiaries/associate companies from the definition of 'outstanding long-term borrowings' and 'incremental borrowings.'

"The said exclusion is proposed to be extended to inter-corporate borrowings between an LC and its associate companies as there is a significant influence in the case of associate companies as per provisions of the Companies Act, 2013. Further, grants, deposits or any other funds received as per the guidelines or directions of the Government of India, may be excluded as they are provided to the LC, to be used for a specific purpose determined by the Government and could be used without any discretion available to the recipient LC. Furthermore, borrowings arising on account of interest capitalization are not borrowings from the market in the true sense," says the capital market regulator.

It has also proposed to remove the requirement of rating as a criterion for identifying any identifying as large corporates. The present framework is applicable for all listed entities that have a credit rating of "AA and above," where the credit rating shall be of the unsupported bank borrowing or plain vanilla bonds of an entity, which have no structuring/ support built in.

"Since the threshold of long-term outstanding borrowings as an identifying criterion is proposed to be increased from ₹100 crore to ₹500 crore, most of the entities with long-term outstanding borrowings of ₹500 crore or above would fall under the bracket of credit rating of 'AA and above.' Further, the definition of "high-value debt listed entity" also doesn’t entail any credit rating criterion. Thus, it is suggested to remove the criteria of credit rating," says the capital markets regulator.

Meanwhile, SEBI has proposed to remove the block period of three years by large corporates in order to meet specified levels of borrowing on an annual basis.

"The proposed approach of compliance on an annual basis simplifies the manner of reckoning the specified level of borrowing (25%) by way of issuance of debt securities as it is required to be achieved in the present financial year. This would eliminate the need for multi-year tracking by LCs, thereby easing and simplifying the manner of computation," says the capital markets regulator.

The capital markets regulator has also proposed to remove the monetary penalty/fine of 0.2% in case of non-compliance by large corporates.