New Delhi (Agency): India’s capital markets watchdog, the Securities and Exchange Board of India (Sebi), announced new proposals on Thursday concerning the identification and regulation of ‘Large Corporates’ (LC) in the borrowing sector. The main change proposed is raising the borrowing threshold from the current Rs 100 crore to Rs 500 crore. This move is aimed at offering more flexibility to corporate entities and improving the overall borrowing landscape.
Currently, an entity is tagged as a ‘Large Corporate’ if it has outstanding long-term borrowings of at least Rs 100 crore, possesses a credit rating of ‘AA and above’, and has an objective to secure funding primarily through long-term borrowings (spanning more than a year). However, Sebi’s latest suggestions would see changes in this criterion. Notably, the requirement for a credit rating to identify an entity as LC is suggested to be dropped. Furthermore, Sebi is considering removing the penalty for LCs not adhering to borrowing rules.
To nurture the bond market’s growth, Sebi had earlier mandated that LCs must secure at least one-fourth of their financing from the debt market. Now, there’s a shift in the language used. The term “incremental borrowings” may be replaced by “qualified borrowings”.
Another significant proposal pertains to the penalties associated with borrowing. Currently, if an LC doesn’t achieve the required borrowing amount after three years, they are fined 0.2% of the shortfall. Sebi now proposes an alternative approach. Instead of this monetary penalty, LCs would make higher or lower contributions to the core Settlement Guarantee Fund (SGF) of the Limited Purpose Clearing Corporation (LPCC), based on whether they have borrowed more or less than required.
Further simplification is also on the cards. Sebi aims to ease the computation process by changing the current rule. At present, the borrowing requirement over a financial year needs to be satisfied over a continuous three-year block, starting from FY2022. Sebi now proposes that this borrowing requirement for any LC should be checked annually, making the assessment simpler and more straightforward.
Sebi’s announcements come in the form of a consultation paper. The regulator is inviting public feedback on these proposals until August 31. These changes, once implemented, are expected to reshape the borrowing dynamics for corporate entities, providing them with more leeway and reducing the stringent regulatory demands they currently face.