The Securities and Exchange Board of India (SEBI) has issued a press release of SEBI Board meeting held on 8 March 2013, wherein SEBI approved the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations 2013 (Regulations) to govern issuance and listing of such securities. Though the full text of the Regulations is not yet available, it appears that the Regulations will provide a robust framework for public issuance of non-convertible redeemable preference shares (NCRPS) as well as listing of privately placed redeemable preference shares.
Some Key Features of the Regulations
- Listing of privately placed NCRPS would require a minimum application size of Rs. 1 (one) million for each investor.
- Public issuance of NCRPS would require minimum 3 (three) year tenure of these instruments as well as a minimum rating of “AA-” or equivalent.
- The Regulations are also applicable to non-equity instruments issued by banks namely, perpetual non-cumulative preference shares and innovative perpetual debt instruments which are in compliance with the specified criteria for inclusion in Additional Tier I Capital, as per Basel III norms.
The Banking Laws (Amendment) Act, 2012, which came into effect recently, permits banks to raise capital inter alia by issuing preference shares. These may be perpetual, redeemable or irredeemable. Section 80 (5A) of the Companies Act, 1956, however, prescribes a maximum period of 20 years after which the preference shares must be redeemed. Given the specific relaxation under the Banking Laws (Amendment) Act, 2012 read with the Regulations, banks may issue and (now) list perpetual non-cumulative preference shares and the provisions of the Companies Act would not apply to banks. Having said that, there is no such restriction for issuing perpetual debt instruments (non-redeemable bonds with no maturity date but paying a steady stream of interest forever) under the Companies Act, 1956, either for banks or other companies.
As the current FDI policy only allows foreign investment into fully convertible preference shares, any foreign investment into non-convertible preference shares issued by an Indian company will be treated as debt and, accordingly, must conform to RBI’s External Commercial Borrowings (ECB) norms. While the Regulations will throw some more light on this, as a lot of interest in Indian public securities markets is evinced by foreign investors, absent a specific relaxation, it will be good to see how the restrictions on foreign investment will impact the development of the NCRPS market in India.
The Regulations will bring about clarity in the process of generating capital through NCRPS. The listing of privately placed NCRPSs will create a market for trading these securities. However, the level of disclosures required under the Regulations may also impact the market for these securities.
As these perpetual instruments carry a high yield high risk ratio, measures must be taken to protect the interests of the investors. The minimum application size and the tenure have been seemingly brought in to protect small investors from such high risk securities.
However, NCRPSs may fail to attract foreign investment on account of the additional regulatory barriers i.e. compliance with ECB guidelines.
Overall, the passing of these Regulations will bring about significant changes in capital generation by corporate entities and banks through various innovative instruments.