Sebi Relaxes Lending Standards For Major Corporations Using Debt Securities

Sebi, the capital markets regulator, loosened borrowing standards for large corporates by issuing debt securities to suit their funding needs on Thursday.

The rule requires companies classified as major corporates to meet a 25 percent statutory borrowing requirement via bonds.

Large corporates are defined as having an outstanding long-term borrowing of at least Rs 100 crore with a credit rating of ‘AA and above’ and debt instruments listed on a stock exchange.

Sebi has added incentives for major corporates in case of surplus in the required borrowings and moderated disincentives if they fail to raise at least 25 percent of their additional borrowings through debt securities under the new framework.

According to the circular, in the case of shortfall or surplus due to the issuing of debt securities, the LC must make additional or lower contributions to the core Settlement Guarantee Fund (SGF) of the Limited Purpose Clearing Corporation (LPCC).

Currently, if there is a gap in the required borrowings at the end of three years, a monetary penalty of 0.2 percent of the shortfall in the borrowed amount is levied.

To assist compliance as well as ease of doing business, the regulator has kept the requirement that compliance with the framework be met over a contiguous block of three years.

“From FY 2025 onwards, the requirement of mandatory qualified borrowing by an LC in an FY will be met over a contiguous block of three years”, Sebi noted.

Furthermore, the phrase ‘incremental borrowings’ has been changed to ‘qualified borrowings’ by the market regulator.

The framework will become effective on April 1, 2024, for LCs that use April-March as their fiscal year, and on January 1, 2024, for LCs that follow January-December as their fiscal year.

Furthermore, Sebi stated that large corporates will be required to raise 25 percent of their incremental borrowings done during financial years 2022, 2023, and 2024 respectively, through the issuance of debt securities until March 31, 2024, failing which such corporates will be required to provide a one-time explanation in their annual report.

Also read: Israel-Hamas War: Russia And China Are Coordinating Middle East Policy