Benefits that SEBI and RBI tried to offer to small and medium sized private companies are largely offset by the countermeasures of Companies Act, 2013
From the recommendations of the RH Patil Committee, emphasising on the importance of the deep and liquid corporate bond market to the constant on-going efforts of Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI), to catalyse the corporate bond market in India there has been limited success at the fore. The corporate bond market in India, which stands below 5% of GDP at present, has the potential to reach to a level of 15% of GDP during the 12th Five Year Plan (2012-17) on back of policy and regulatory reforms, according to a survey conducted by the Confederation of Indian Industry (CII). A robust corporate bond market is imperative to meet the funding needs of the emerging Indian economy considering the limitations of bank financing and government funding. If there were not enough regulatory bottlenecks before India Inc on raising funds via corporate bonds, the requirements of Companies Act, 2013 (CA, 2013) makes the process even more treacherous and do not seem to be in tandem with the counterpart regulators’ reform targets.
SEBI and RBI’s efforts catalysing corporate bond market
The public issue requirements are already onerous and stringent. More than 90% of the debt raised is privately placed and the secondary market for corporate bonds is severely constrained by the lack of liquidity, transparency and the price discovery process is not satisfactory. To top it all the investor base remains limited to long term investors. SEBI’s efforts over the years has made several efforts to address these challenges, some which include:
To improve liquidity and give the corporate bond market a boost, the RBI has also been taking various initiatives. Some of these are recounted below:
Companies Act, 2013 whammy
Despite these measures, the sea of amendments in the corporate laws may bring some high tides for the bond market. Under Companies Act, 2013 (CA, 2013), any company that lists any of its securities on a recognised stock exchange shall be called a listed company. Section 2 (52) of the CA, 2013 defines listed company as:
(52) “listed company” means a company which has any of its securities listed on any recognised stock exchange;
This would mean any company including a private company which has any security, which includes debt instruments listed on a recognised stock exchange shall be called a listed company for the purpose of this Act and all the provisions of the listed company shall be applicable to such companies as well. Compare this with the erstwhile Companies Act 1956, where the definition of listed companies excluded private companies, even if such private companies had listed debt or structured debt securities. Simply put, private companies which have not yet gone public through an IPO but have listed debt securities with a stock exchange are covered in the new regime under the definition of listed companies.
As a listed company, these companies will have to comply with the following provisions of the CA, 2013:
If the draft rules were to be implemented as is, listed companies will be required to appoint internal auditor (u/s 138), appoint a woman director on board (u/s 149(1)) and also appoint key managerial personnel (u/s 203) which shall include a managing director, company secretary and a chief financial officer.
While some of these disclosure requirements could be called to be well placed for listed public companies but the current provisions seem more mindless in their approach. Also the fine imposed for contravention of the provisions of some of the sections may result call for an imprisonment of a term which may extend upto one year or fine which may extend to Rs5 lakh or both.
For a MSME to get its debt securities listed the regulatory compliance burden may out weigh the benefits of price discovery, liquidity and transparency and the repercussion may be such companies may not be able to attract angel investors either. While funding is critical for the growth of these companies and the development of the economy, the burden of compliance is so huge that it surely comes in the way of becoming a listed company.
Such extensive compliance requirements are onerous for private and small companies, for they entail extra regulatory costs and burden. Most SMEs would be doing these for the first time. These will act as a disincentive for SMEs to get securities listed. Hence the benefits that SEBI and RBI tried to offer to small and medium sized private companies are largely offset by the countermeasures of CA, 2013. It seems that until the market regulator and the central bank succeeds in convincing the Ministry of Corporate Affairs to relax the norms for SMEs, the regulatory quagmire may just put the bond market in a worse of position than it already was.
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