Rishabh Raj

Introduction

Corporate governance in India has inherently been devised with equity-listed companies in mind. However, changes brought through debt instruments as a primary funding source have highlighted the urgent need for regulatory frameworks catering exclusively to high-value debt- listed entities (HVDLEs). The Securities and Exchange Board of India (SEBI), which has taken notice of these issues, looks to propose reforms in the SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations of 2015 to ease compliance without compromising on strong governance standards. So that governance suits better to the true nature of HVDLEs

This article outlines the challenges HVDLEs face in the current framework, the rationale behind the proposed amendments by SEBI, and how these updates may help strike the right balance between oversight and practical applicability towards enabling the developing corporate debt market of India.

Theoretical Framework and Rationale

Theories of corporate governance, among them agency and stakeholder theory, are considered to be extremely useful in revealing the differential needs of HVDLEs as far as their governance is concerned. Agency theory points out how the governance of such entities as debt-focused ones often requires frameworks meant to mitigate managerial-stakeholder conflicts. A further emphasis by the stakeholder theory is on specific concerns of a debt holder toward predictable returns from speculative growth.

The proposals of SEBI resonate with these theoretical perspectives because it tries to align governance norms to the needs of debt issuers. However, if these theories are more explicitly articulated in policy formulation, the rationale for the differential treatment of HVDLEs will be stronger and will reinforce the theoretical underpinnings of the regulatory framework.

Complexities Under Existing Regulation

While most of our governance and compliance structures have basically been built around the equity-listed companies, unfortunately, the same has been followed for the debt listed companies as well. But with the changing time and the evolving structure of the present-day companies, in which debt instruments play a major role, our governance structure falls short at some intervals. For instance, the SEBI’s  LODR, 2015 place corporate governance norms on HVDLEs in relation to outstanding nonconvertible debt securities of Rs. 500 crores or more. Although such regulations were beneficial to the debenture holders and would have developed better governance practices in the long term, they inadvertently presented many stumbling blocks in practice.

One of the major shortcomings was that there was no differentiation between entities listed as equity entities and those listed as debt entities. Therefore, governance norms are those generic norms developed and applied to all listed entities without catering for the specific needs of HVDLEs. For example, the need for uniform directorship and committee membership led to overburdened directors who could not find much time to attend to actual governance matters. It exposed directors with multiple commitments, thus lowering the quality of governance. This mismatch has facilitated compliance challenges, mainly for smaller entities.

It was somewhat visible in the provisions that related to board structures, committee alignment, and reporting requirements. These are equity-market-specific provisions that were not quite what debt-centric firms needed, and this led to compliance problems. The worst hit here were the smaller firms, as they also lacked systems or processes associated with equity-market compliance. The mismatch has made the case for a one-size-fits-all approach to be reassessed. This is particularly evident from the related party transaction provisions under RPT, which are strict and demand shareholder approval but also prove impractical for HVDLEs with concentrated shareholding structures. In most such cases, the non-existence of unrelated shareholders makes compliance impossible, stalling crucial business decisions.

The Rs. 500 crore threshold casts a wide net, encompassing entities of varying scales, including many smaller issuers. These entities faced the challenge of forming multiple committees and meeting detailed disclosure requirements, which often outweighed the benefits of enhanced governance. Moreover, in the context of debt markets, debenture holders, unlike equity investors, are the central stakeholders. Existing oversight mechanisms, such as the role of debenture trustees, already safeguarded their interests, making certain governance requirements redundant.

Compounding these issues was the perpetual applicability of governance norms, even when an entity’s outstanding debt fell below Rs. 500 crores. Regulation 3(3) (LODR) stipulated that such norms would continue indefinitely, irrespective of the entity’s reduced scale. This lack of a sunset clause placed smaller entities under unwarranted compliance obligations, creating inefficiencies and escalating costs without proportionate benefits. With maturity in Indian debt markets, it was better understood that there were risks and challenges unique to the issuers of debts. Such a governance framework, therefore, was required to meet the needs of such issuers. Here, SEBI came to realise that this uniform framework applicable to issuers with different debt structures and varying public exposure needs to bring in conformity. The earlier deficiencies, including responsibilities on reporting in harmonised formats and no advance declarations of related party transactions (RPT), reflected uncertainties in the protection of debenture-holder interests.

Proposed Amendments and Benefits

The Securities and Exchange Board of India (SEBI) has come up with proposed amendments that are truly required to minimise and draw attention to the complexities faced by high-value debt-listed entities (HVDLEs). These amendments aim to minimise the compliance burden while robustly maintaining standards of governance and protection for investors. One of the principal suggestions has been raising the threshold for identification as HVDLEs from outstanding non-convertible debt securities of Rs. 500 crore to Rs. 1,000 crore. This will exempt smaller entities from rigid governance norms and direct the regulatory efforts towards larger, more impactful entities, making the rules in line with market realities.

To further address governance challenges, the body has proposed to include HVDLEs within the limits of directorships and committee membership within equity-listed entities. The proposed limit will ensure the directors sit on not more than seven boards so that they can have ample time and resources at their discretion to serve effectively. Furthermore, the limit on memberships or chairpersonships in board committees shall now include HVDLEs. They are, as of now, capped at ten memberships and five chairpersonships. This integration avoids the cluttering of directors, better oversight, and improved quality of governance among both equity and debt-listed entities.

Another important proposed amendment provides for a sunset clause of applicability of governance. Presently, after classification as an HVDLE, the entity is required to adhere to norms of governance perpetually, even if it remains below the threshold. The above change allows entities to withdraw their applications once their debt remains subthreshold for three successive financial years. This would be fair practice, avoid unnecessary regulatory burden, and implement the norms only when justified by scale of finance.

SEBI is also streamlining the compliance process regarding RPTs, which has been an issue in existence for HVDLEs with concentrated shareholding. Here, the proposed amendment provides for the issuers to report upfront their RPT limits in their offer documents. The monitoring by credit rating agencies and debenture trustees will supplement these efforts towards greater transparency while at the same time ensuring compliance without overburdening the procedure. Hence, this reform aligns the governance requirements with the peculiar financial structures of debt-listed entities that safeguard the interest of a debenture holder.

SEBI has further suggested that to make compliance easier, a separate chapter on HVDLEs be introduced in the LODR Regulations. Such a distinct chapter shall define norms uniquely applicable to debt listed entities and clearly distinguish them from equity listed entities. This will remove ambiguity and help HVDLEs better understand their compliance needs. The proposed method also facilitates combining some key board committees. The HVDLEs can also delegate to the audit committee certain responsibilities of the Nomination and Remuneration Committee (NRC) Regulation 19(4), the Risk Management Committee (RMC) Regulation 21(4), and the Stakeholder Relationship Committee (SRC) Regulation 20(4), or can choose to constitute RMC, NRC, and SRC. This will allow some flexibility in governance processes and generally streamline the governance process of entities with relatively smaller boards without sacrificing oversight.

Further, in order not to have any unnecessary regulatory conflicts, SEBI has proposed carving out bodies like NABARD, SIDBI, NHB, and EXIM Bank, which are not governed by the Companies Act, 2013. This means that governance norms entrenched in 17 to 27 of the LODR Regulation, 2015 would apply only up to the extent that they do not go against their respective statutes and the guidelines issued by the concerned authorities, thus balancing the requirement of compliance with practical considerations.

Filings in Extensible Business Reporting Language (XBRL) and voluntary adoption of Business Responsibility and Sustainability Reports (BRSR) represent some of the most prominent advancements in the pursuit of greater transparency and sustainability. XBRL filings improve regulatory oversight as the reporting formats become standardised, which in turn improves the speed and efficiency with which regulators and other stakeholders can analyse the data. On the flip side, technology and training investments are likely to be huge at the initial stages.

In addition, voluntary adoption of BRSR for ESG disclosures will help HVDLEs align with international best practices for sustainability, thereby building their reputation in the eyes of socially responsible investors. However, this potential can be undermined by uneven adoption of BRSR. SEBI may need to make such disclosures mandatory for larger HVDLEs so that the greater percentage of HVDLEs align with ESG goals.

Comparative Analysis

Useful templates for differentiated governance frameworks exist in the jurisdictions of the US, EU, and Singapore. For instance, the US Sarbanes-Oxley Act, 2002 has internal control requirements on equity issuers, which are much stricter compared to debt issuers because of the former’s inherently higher risk profiles. The EU’s corporate governance directives also highlight proportionality as the guiding principle of compliance, considering the size, nature, and market exposure of an entity. Such provisions include flexibility mechanisms, such as “comply or explain” principles, by which entities may justify deviations from standard norms insofar as such deviations are consonant with stakeholder interests.

The Singaporean approach takes a principles-based approach, allowing debt issuers to be offered governance frameworks that are aligned to their financial structure but ensure the protection of the investor. “Code of Corporate Governance” for listed companies in Singapore incorporates recommendations that would streamline disclosure and board practices, with the focus on proportionality and transparency.

The global best practices draw several lessons to SEBI and, mainly in respect of adaptability, proportionality, and flexibility. In incorporating these principles, the proposals advanced by SEBI can be even further fine-tuned to cater for specific Indian market requirements yet be sufficiently competitive globally. A comparative regulatory perspective that is enhanced further will position India at the frontiers of new governance innovations pertaining to debt markets.

Challenges and Potential Drawbacks

The proposed reforms deserve praise, although several challenges will be presented. The creation of a differential framework will demand greater initial costs for compliance among smaller entities adopting new technological needs, such as filing using XBRL. Capacity building is required so that regulators and issuers gain the capacity to implement these changes successfully.

The aspect relating to the voluntary nature of ESG disclosures might create uneven adoption and therefore disadvantage those that invest in sustainability as opposed to those who do not. Also, too much reliance on debenture trustees to monitor RPT could lead to enforcement gaps in the system if such trustees are either lacking authority or adequate resources to ensure compliance. It is going to be crucial that there is accountability in this system if its outcomes are to be realised.

Recommendations

Incorporation of deeper engagement with corporate governance theories in the formulation of policies can strengthen the effectiveness of the proposals. Comparative analysis with international frameworks would help determine best practices and potential pitfalls. The shift of ESG disclosures from being voluntary to mandatory for the larger HVDLEs over time would achieve flexibility and accountability simultaneously. And the capacity-building initiatives among the regulators and the smaller entities would make this easier.

Conclusion

Proposals by SEBI to amend LODR Regulations are an important step for aligning the Indian corporate governance regime with changes in the scenario of debt markets. Balancing the need to reduce regulatory burdens and demands for having sound governance standards, in fact, directly grapple with the very specific challenges posed by HVDLEs. The greater classification threshold, the sunset clause, and the separate chapter in the LODR Regulations for HVDLEs are all important steps to make compliance processes smooth while ensuring the efficacy of governance remains effective and well-cut to suit the needs of debt issuers. It further brings clarity and freedom to achieve flexibility and efficiency, especially for smaller entities, whereby resources are utilised on business growth rather than disproportionate costs on compliance. In making transparency, sustainability, and investor protection more essential through mandatory XBRL filings as well as voluntary BRSR, these amendments signify SEBI’s responsiveness to market dynamics, reinforcing its role in facilitating a more inclusive, transparent, and sustainable financial ecosystem.

The author is a fourth year law student at MPLC Aurangabad MH.