Delisting NCDs: Is the Indian debt capital market prepared?

In a bid to ensure operational convenience, Sebi has recently released a consultation paper prescribing a formal framework governing delisting of NCDs by ‘listed entities’, (which interestingly includes corporates, REITs, InvITs and other entities that may have issued listed NCDs). Note that the proposed regime is not applicable to compulsory delisting scenarios, including any non-compliance or an IBC-compliant resolution plan.

Compulsory delisting of all NCDs: Does one size actually fit all?
Sebi has mandated obtaining a unanimous consent from all listed NCD holders prior to their delisting. Note that Sebi in February had proposed that an issuer can either have all its NCDs listed or unlisted. This implies that with the proposed delisting regime in place, any delisting of NCDs under a specific ISIN would tantamount to delisting of all NCDs issued. This is likely to adversely impact the flexibility of issuers to raise debt generally.


The above concern of omnibus delisting also becomes relevant where certain listed investors which have the benefit of SARFAESI would cease to be entitled to the remedies available thereunder upon delisting. This could also trigger a situation where upon delisting, certain eligible investors continue to have the benefit of SARFAESI, such as banks, despite such rights having been stripped away from the other classes of investors.

Additionally, Sebi permits REITs and InvITs to only issue listed debt securities. Since the proposed framework currently applies to all ‘listed entities’, necessary clarifications to exclude REITs and InvITs would certainly be welcome.

Gestation period prior to delisting
The current listing regime permits exit options to issuers and investors after expiry of 1 year from the date of issuance. Accordingly, unless clarified, any delisting option available prior to 1 year could enable exercise of call/put options prior to the said period after the NCDs are delisted unless any specific listing period is prescribed (alien to the delisting regime for equity shares).

FPI investment in unlisted debt securities
FPIs have been permitted to invest in unlisted debt securities, subject to certain specific end-use restrictions. Therefore, where the proceeds of listed NCDs have been specifically utilised for such end-uses and are now subsequently delisted, it would be interesting to observe the stance taken by both Sebi and RBI especially in context of compliance with exchange control laws and any previously issued informal guidance(s) in this context.

Regulatory compliance: A conundrum
Sebi presently prescribes: (i) an execution of an inter-creditor agreement upon occurrence of default by the issuer of listed NCDs; and (ii) the creation of a recovery expense fund by issuers to cover related enforcement expenses incurred by trustees. However, under the proposed framework, it would raise a legal conundrum, where certain investors having agreed to the ICA would cease to be covered under such arrangement upon delisting. Further, the treatment of the REF will also have to be evaluated in such scenarios.

Tax Implications
Under the Income Tax Act, unlisted NCDs held by a taxpayer are treated as short-term capital asset (STCA) if it is held for not more than 36 months. However, in case of a listed NCD, it is treated as STCA only if it is held for 12 months or less from the date of allotment/acquisition. Accordingly, if listed NCDs are delisted, investors may have to factor holding the asset for more than 36 months (and not 12 months) for the asset to be regarded as a long-term capital asset, for being eligible for lower tax rates.

Conclusion
The introduction of a delisting mechanism for NCDs in line with global practices is a welcome initiative especially for addressing financial constraints or tradability related concerns. However, the viability of a straight-jacket formula in a highly nuanced regulatory landscape seems limited especially when the larger regulatory intent is to ensure the deepening of bond markets in India.

(The author is Partner, INDUSLAW & Rishabh Bhojwani, Senior Associate, INDUSLAW)

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