INTRODUCTION AND BACKGROUND

The Securities and Exchange Board of India (‘SEBI’), by way of a notification dated August 23, 2023, introduced a new chapter VIA (‘Chapter’) to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’), which sets out a dedicated framework for voluntary delisting of inter-alia listed non-convertible debt securities (‘NCDs’)^[1] from all or any of the stock exchanges where they are listed.

Prior to the introduction of the Chapter, while specified securities^[2] had a dedicated framework for delisting, in so far as voluntary delisting of NCDs was concerned, there were stray references to such delisting under the listing agreement and under the LODR Regulations, but there was no dedicated framework or process laid out. Hitherto, issuers desirous of delisting their NCDs had sought approvals of the relevant stock exchanges under regulation 59 of the LODR Regulations, which deals with modification of the structure of NCDs. The Chapter is intended to fill this vacuum only in so far as voluntary delisting is concerned subject to fulfilment of certain eligibility criteria. Any delisting that does not fall within this ambit will continue to be governed by Regulation 59 of the LODR Regulations.

OVERVIEW OF THE REGULATIONS

Applicability:

SEBI has followed the rationale of ‘once listed, always listed’ and permitted delisting of only all the NCDs issued by the entity with the stock exchange. As a result, any entity cannot pick and choose one International Securities Identification Number (‘ISIN’) for delisting, whereas other ISINs continue to be listed.

SEBI has also provided for the following exceptions:

• A listed entity that has outstanding listed NCDs by way of public issue cannot delist its NCDs;
• A listed entity that has more than 200 security holders excluding qualified institutional buyers in any ISIN relating to the NCDs cannot delist its NCDs;
• NCDs which have been delisted by stock exchanges as a consequence of any action under rule 21 of the Securities Contract (Regulation) Rules, 1957 cannot be delisted under the Chapter;
• NCDs that have been delisted by the stock exchanges pursuant to redemption of such securities cannot be delisted under the Chapter; and
• NCDs that have been delisted pursuant to a resolution plan as per Section 31 of the Insolvency and Bankruptcy Code, 2016 cannot be delisted under the Chapter.

Procedure:

In order to undertake delisting of NCDs, an application will have to be made by the issuer to the relevant stock exchange seeking its in-principle approval for delisting the NCDs, after passing of the board resolution by the entity or receiving any other statutory or regulatory approval to that effect, whichever is later. The stock exchange has to consider several matters (as set out in the Chapter) including receipt of necessary approvals of the board of directors, due resolution of all investor grievances, due payments to the stock exchanges and SEBI, compliance with all provisions of the LODR Regulations, and pendency of litigations or actions against the entity pertaining to its activities in the security market, while granting the in-principle approval.

After receipt of the in-principle approval, the issuer entity has to obtain approvals from all NCD holders and a no-objection letter from the debenture trustee. On receiving all requisite approvals, the entity then has to make the final application to SEBI for delisting.

In case of non-receipt of (i) the in-principle approval of the stock exchanges; or (ii) the approval from the holders of NCDs; or (iii) the no-objection letter from the debenture trustee, the delisting proposal shall be deemed to have failed.

Entities, which have NCDs listed on more than 1 (one) stock exchange, also have the option to choose to delist the NCDs from all stock exchanges except 1 (one) such stock exchange which has nationwide trading terminals.

A snapshot of the timelines prescribed in the Chapter are set out below:

Key takeaways:

• Investor consent: The Chapter prescribes a very high threshold for consent from stakeholders. The requirement of unanimous consent from all holders of NCDs can allow even a single holder to block the delisting. It is pertinent to note that representations were made to SEBI to lower this threshold, but these suggestions were rejected by SEBI. Entities will have to be mindful about this requirement and ensure that all investors are on board with the delisting proposal prior to approaching the stock exchanges.
• All or none approach: SEBI’s approach of permitting delisting of only all (and not some) of an entity’s NCDs leaves certain entities and investors at a great disadvantage. For example, if an entity has issued NCDs where foreign portfolio investors (‘FPIs’) have subscribed to such NCDs and the end-uses of these NCDs are those which fall under the list of negative end-uses for FPIs investing in unlisted NCDs, such NCD issuances cannot be delisted under law, unless specific dispensation is taken from SEBI. Accordingly, all other NCD issuances of that entity which are sought to be voluntarily delisted and which are not fraught with such complications, cannot be so delisted unless SEBI approves the delisting of the first kind of NCDs.
• Disclosures: Entities should also note that they have to make appropriate disclosures to the stock exchanges at every step of the way under Regulation 51 of the LODR Regulations. Additionally, they have to disclose the stock exchanges from which the delisting is proposed, the record date for the delisting, the objects and reasons of the delisting, proposed timeline, prescribed disclaimers by the issuer, statements from board of directors and the debenture trustee, certain undertakings from the issuer, disclosure about related party holdings, and details of the compliance officer. Entities should prepare themselves in advance and have all draft disclosures in place at the time of applying for the in-principle approval. In addition, the requirement of related parties not being able to vote on the proposal for delisting practically takes away the right of an entity to delist NCDs issued by it to its parent or certain other affiliates.
• Procedures of stock exchanges: In addition to the procedure under the LODR Regulations, the stock exchanges may also issue their own checklists for obtaining the in-principle approval. Entities will have to ensure compliance with such checklists as well.

CONCLUSION

While the introduction of a dedicated framework for voluntary delisting of NCDs is a welcome move from SEBI and will most certainly help augment ease of doing business and allow greater flexibility to entities in managing their debt portfolios while also reducing the burden of compliances that are associated with issuing listed NCDs, there is much left to be desired.

Footnotes:

^[1] The term ‘Non-convertible debt securities’ in the LODR Regulations tracks back to the definition of the term ‘debt securities’ under the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021, which is defined thereunder to mean “non-convertible debt securities with a fixed maturity period which create or acknowledge indebtedness and includes debentures, bonds or any other security whether constituting a charge on the assets/properties or not, but excludes security receipts, securitized debt instruments, money market instruments regulated by the Reserve Bank of India, and bonds issued by the Government or such other bodies as may be specified by the Board.”

^[2] ‘Specified securities’ has been defined in the LODR Regulations to mean “‘equity shares’ and ‘convertible securities’ as defined under clause (eee) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.”

^[3] WD shall mean ‘working day’ as defined under the LODR Regulations.