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Note On Fund Raising
Note On Fund Raising
This note briefly summarizes certain modes of fund raising available to statutory agencies and
statutory corporations.
There are various ways the government agencies / government companies can raise finance, in the
form of debt from money markets. Some of the forms under which debt can be raised are briefly
touched upon as mentioned hereunder.
Debt Securities
Issuance and listing of non-convertible debt securities (excluding bonds issued by governments)
issued by any company, public sector undertaking or statutory corporations is governed by SEBI
(Issue and Listing of Debt Securities), 2008 (“Debt Regulations”).
Therefore, this route of raising debt can be availed by any statutory corporations. In fact, NHAI which
is a statutory corporation has issued debt securities under the Debt Regulations. The issuance under
the Debt regulations could be either by way of a public issue or a private placement.
1. File an application to one or more stock exchanges for listing of the debt securities and obtain
approval.
2. Disclose the credit ratings, including the unaccepted credit rating from one or more credit
rating agencies in the offer document made with regard to the debt securities.
3. Enter into an agreement with a depository for dematerialisation of debt securities (just like
shares are dematerialised for public trading) in accordance with Depositaries Act, 1996 and
the relevant regulations made thereunder.
4. Appoint one or more merchant bankers for letting them create debenture redemption
accounts (which come into operation when there is a default in payment) under Companies
Act, 2013.
5. The draft and Final offer documents shall be displayed online on concerned stock exchange
websites.
Some of the conditions for listing on the basis of private placement are as follows:
1. The issuer has issued the debt securities in compliance with the provisions of Companies Act,
2013, rules prescribed thereunder and other applicable laws
2. At least one credit rating agency registered with SEBI has issued credit rating with respect to
the debt securities that are intended to be listed.
3. The proposed debt securities are in dematerialised form.
4. The disclosures with respect to the debt securities have been made in accordance with
Regulation 21 of SEBI (ILDS) Regulations, 2008
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5. If the application for listing of debt securities has been made to more than one recognized
stock exchanges, then the issuer should choose one of them as a designated stock exchange.
The issuer company should enter into a Listing Agreement with the stock exchange where the debt
securities are sought to be listed and the former should comply with the conditions of listing in
accordance with the same. The designated stock exchange collects regulatory fee from the issuer
company, according to Schedule V, at the time of listing of debt securities issued on a private
placement basis.
In the case of Non-receipt of minimum subscription, all the application money received in the public
issue has to be refunded.
The allotment in the public issue of debt securities should be made on the basis of date of upload of
each application into the electronic book of the stock exchange. However, on the date of
oversubscription, the allotments should be made to the applicants on proportionate basis.
Listed issuers, who are in compliance with the listing agreement, may disclose unaudited financials
with limited review report in the offer document.
Municipal Bonds
Municipal bonds are issued by local bodies like municipal corporations to raise money for public
projects, such as to construct roads, bridges, schools or other infrastructure, and are repaid from
returns generated by such projects or tax revenue.
The advantages of using municipal bonds to finance urban infrastructure are increasingly evident in
India. Ahmedabad Municipal Corporation issued a first historical Municipal Bond in Asia to raise Rs
100 crore from the capital market for part financing a water supply project. So far eight local bodies
in India have raised Rs 3,390 crore via municipal bonds.
The following are some of the conditions and requirements under SEBI (Issue and Listing of Debt
Securities by Municipalities) Regulations, 2015 (“SEBI Regulations, 2015”):
1. As per the SEBI Regulations, 2015, a municipality or a Corporate Municipal Entity (CME) should
meet certain conditions:
The accounts of the ULB shall be prepared in accordance with National Municipal Accounts
manual or in accordance with similar municipal accounts manual adopted by respective State
Government for atleast 3 immediate preceding years.
The ULB shall have a surplus income as per its income and expenditure statement in any any
3 immediately preceding financial years. Further, the ULB should not have negative net worth
in any of three immediately preceding financial years.
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Non-default: The municipality should not have defaulted in repayment of debt securities or
loans obtained from banks or financial institutions during the last 365 days.
Not a wilful defaulter: The corporate municipal entity, its promoter, group company or
director(s), should not have been named in the list of the wilful defaulters published by the
RBI or should not have defaulted of payment of interest or repayment of principal amount in
respect of debt instruments issued by it to the public, if any.
2. SEBI instructs that revenue bonds should have mandatory ratings above investment grade for
pubic issue. The bonds should have atleast a three-year maturity period. The ULB shall appoint
one or more merchant banker with atleast one of them as a lead merchant banker. The ULB shall
create as separate escrow account for servicing of revenue bond with earmark revenue. The ULB
shall appoint a monitoring agency such as banks, or PFIs to monitor earmark revenue in revenue
account, provided, if the issuer is a corporate municipal entity, it shall appoint a debenture
trustee registered with SEBI.
3. The funds raised from public issue shall be used only for the projects specified in the offer
document. The issuer offering debt securities to the public shall make an application for listing
to stock exchanges.
4. The offer document shall contain the disclosures set out in SEBI Regulations.
5. An issuer can also issue debt securities on private placement and such securities could be general
obligation bonds or revenue bonds. Minimum subscription in such case shall not be less than 25
lakhs. Credit rating has to be obtained. The disclosures in Schedule I of SEBI Regulation shall be
made.
6. The common requirements are that the issuer shall maintain 100% asset cover sufficient to
discharge the principle amount.
Municipal bonds in India have tax-free status if they conform to certain rules and their interest rates
will be market-linked. Municipal bonds can be issued by both as public issue or as private placement.
SEBI allowed urban local bodies to raise money through the issue of revenue bonds as
well. Municipal bonds where the funds raised are kept for one project are termed revenue bonds.
Servicing of these bonds can be made from revenue accrued from the project.
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A Masala Bond is a rupee-denominated bond issued to overseas investors and is settled in US Dollars
and is typically subject to English law. Masala Bonds are a form of External Commercial Borrowings
(ECB) denominated in INR and are in the nature of bonds/ debentures. Also, they can be plain vanilla
Rupee denominated bonds issued overseas, which can be either placed privately or listed on
exchanges as per host country regulations.
All entities eligible to raise foreign direct investment are entitled to issue Masala Bonds.
The minimum average maturity shall be 3 years and all in cost shall be benchmark cost+450 basis
points. Benchmark rate for rupee denominated bonds is prevailing yield of government securities of
corresponding maturity period.
Major Masala Bond issues at the London Stock Exchange include IREDA's Masala Bond in 2017, the
first green Climate Bonds Certified and investment grade rated bond by a financial institution; NTPC's
listing in 2016, the world's first Indian green Masala Bond and first Masala Bond by a quasi-sovereign
issuer; and HDFC's 2016 listing, the first Masala Bond by an Indian corporate on London Stock
Exchange.
The Kerala Infrastructure Investment Fund Board's (KIIFB) first sub-sovereign entity in India to tap
the offshore Rupee international bond market with the $312 million equivalent (Rs 21.5 billion)
senior secured fixed-rate bond and is aimed at accessing capital from international investors for the
southern state's infrastructure development. KIIFB issued a bond, with a five-year tenor and a 9.723
percent coupon, has been admitted to London Stock Exchange's International Securities Market
(ISM).
Given the importance of these two sectors in the country, and the paucity of public funds available to
stimulate their growth, it is imperative that additional channels of financing are put in place.
The InvIT is designed as a tiered structure with Sponsor setting up the InvIT which in turn invests
into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs).
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The InvITs are regulated by the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“SEBI
Regulations, 2014”). SEBI has vide its circular CIR/IMD/DF/55/2016 dated May 11, 2016 provided
the detailed guidelines for the public issue of units of InvITs.
Some of the conditions and requirements for InvITs under SEBI Regulations, 2014 are as follows:
1. The InvIT should be a trust with main objective as to undertake activity of an InvIT.
2. The InvITs are registered with SEBI as a Trust and there are four parties involved namely-
a. Trustee who oversees the role of the entire InvIT and ensures all rules are complied with;
b. Sponsors –firms who setup the InvIT;
c. Investment Managers who manage the assets and investments; and
d. Project Managers who executes projects.
3. An application for grant of certificate to SEBI shall be made by the sponsor on behalf of the
trust in Form A and accompanied with the prescribed fees.
4. The instrument of the trust shall be in the form of deed duly registered under Registration
act, 1908.
5. Persons shall have been designated as sponsors, investment managers and trustee and all
such persons shall be separate entities.
6. SEBI may grant in-principal approval to the trust and on satisfaction of all requirements shall
grant final approval.
While granting approval, SEBI will take into consideration the following aspects:
1. The sponsor shall setup InvIT and transfer its entire shareholding or interest and rights in
the holding company/ SPV or ownership of infrastructure project. Sponsor shall hold not less
than 15% of the total units of InvIT on a post issue basis for a period not less than 3 years
from the date of listing of such units.
2. In case of private and public participation projects (PPP Projects), the project is a completed
and revenue generating project, or which has achieved commercial operations date and does
not have a track record o revenue from operator for a period of not less than 1 year or is a
pre COD project i.e. has not achieved commercial operations date and has achieved
completion of atleast 50 % of construction of project or expanded not less than atleast 50%
of the total capital cost.
3. In case of non PPP Projects, the project has received all requisite approvals and certifications
for commencement of construction of the project.
The issuance of units would be either in the form of a Public Issue or a Private Placement.
The rights of the unit holders to receive income shall be set out in offer document or placement
memorandum. Those documents shall make the disclosures as required under SEBI Regulations,
2014.
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