Sebi Eases Merchant Banker Rule for Small Debt Issuers

The Securities and Exchange Board of India (Sebi) has put forward a proposal to exempt certain listed issuers from the mandatory requirement of appointing a merchant banker. This exemption applies to raising small-value debt through private placement, aiming to streamline the process.

This initiative by Sebi seeks to significantly lower issuance costs and alleviate the substantial burden on smaller debt issuances. The regulator identified that the current mandatory appointment leads to disproportionate expenses and can cause delays. Delays are particularly problematic given the limited number of merchant bankers operating in the debt segment and the rapid fluctuations in market yields.

Key Definitions

• Small-value debt: Defined as debt securities or non-convertible redeemable preference shares issued at a face value of ₹10,000.

Eligibility Criteria for Exemption

This proposed exemption is not universal; it is strictly available only to select issuers who meet specific, rigorous eligibility criteria.

• The issuer must be regulated by a financial sector regulator within India.
• They must have been listed on a stock exchange for at least one year.
• No pending penalties from Sebi or stock exchanges for violations of listing regulations.
• The issuer must not have defaulted on repayment obligations for deposits, debt securities, preference shares, or term loans, including related interest and dividend, during the previous three financial years or the current financial year. An auditor’s certificate is required to confirm this compliance.
• The exemption specifically covers senior debt that is secured by a first or pari passu charge on identifiable assets.
• This debt must carry a credit rating of at least AA- at the time of the private placement.

Underlying Rationale

Sebi’s reasoning for this targeted exemption acknowledges that listed issuers are already subject to continuous disclosure and robust regulatory oversight. Many of these entities are also under the purview of the central bank and other financial sector regulators, providing an existing layer of scrutiny. This move aims to balance regulatory requirements with practical market efficiency for smaller debt offerings.