Debt securities

SEBI completes the application process for public issuance of debt securities by introducing the UPI mechanism

True to its objective of streamlining the process of public debt issuance, across the entire range of securities, SEBI published a circular on November 23, 2020 (Circular), introducing the unified payment interface mechanism (UPI ) as an additional mode for making online applications for public issuances of various debt securities such as bonds, redeemable non-convertible preferred shares, securitized debt securities and municipal debt securities. The circular prescribes the addition of the UPI mechanism as an optional application functionality for public debt issues open for subscription as of January 1, 2021.

Highlights of the circular

  • In addition to requests through the Blocked Amount Supported Applications (ASBA) mode (Self-Certified Syndicate Banks (SCSB) ASBA), investors can request up to 2 lakhs INR through the UPI mechanism: (i) offered via a scholarship web / app interface; and (ii) through Syndicate Members, Registered Investment Dealers, Registrar and Transfer Agent, and Participating Custodians (Intermediaries).
  • These new modes of application also provide for real-time validation of investor details such as PAN, DP ID / Client ID, provided at the time of the auction, by the stock exchange (s) with the depositaries. This will reduce the time required for the overall application process and ensure the completion of the listing of the securities and the start of trading within T + 6 days.

UPI enforcement mechanism

(i) Mode of application –

An investor can submit the offer request form (Form) via the following methods:

(ii) Processing of the request via the UPI mechanism

a. Tendering and validation process

  • An investor submits the form, which includes offer details and UPI ID, to intermediaries or downloads the app through the exchange’s app / web interface.
  • The intermediaries then upload the details of the offer and the UPI ID to the stock auction platform, after which the exchange and the custodian respectively undertake the validation of the investor’s PAN and demat account (in near real time). ).
  • Subsequently, the stock exchange will send an SMS to the investor concerning the submission of his form.

b. Blocking process

  • After the validation process, the exchange will continuously update the sponsoring bank with the details of the offer as well as the UPI ID.
  • The Sponsor Bank will initiate an electronic mandate request to the investor for authorization to block funds or for any modification. Display on which the investor can view the details of the offer and authorize the unique mandate (given for each request). However, the investor cannot add / modify the form, but can withdraw the offer and reapply. In the event of a mismatch between the offers, it will be sent to the sponsoring bank for further processing by the exchange.
  • Upon successful validation, the investor’s bank will receive the request to block the required funds, equivalent to the request amount and the investor would be notified of the blocking of funds and the information containing the status of the block request should be shared with the sponsor. Bank and stock exchange and displayed on the stock exchange platform. For reconciliation purposes, this information should also be shared with the Registrar.

vs. After the show closes

  • After receiving the information on the offers and blockings of the stock exchanges, the registrar reconciles the data of the offers and confirms the blockings corresponding to the offers of all the applications of the category of investors and prepares the allocation basis.
  • After approval of the Basis of Allocation, the Registrar will share the debit file with the sponsoring bank (via the exchange) or the SCSBs, for credit of funds or release of excess funds, as the case may be.
  • Accordingly, the sponsoring bank must liaise with the investor’s bank and issue the request for debit / collection of fund movement on the public issuing account (PIA) and release of any remaining funds, if applicable. appropriate and after confirmation of receipt of funds in the PIA, the securities will be credited to the investor’s account in accordance with the full / partial allocation. In the absence of attribution to an investor, the mandate will be revoked, and the amount of the request will be released.

Increased responsibilities

The circular introduced increased responsibilities for participants in the IPU process, among others:

(i) The exchanges are responsible for: (a) the accurate, rapid and secure transfer of the electronic application dossier to the Registrar as well as the periodic dissemination of information on the website of the exchange; and (b) deal with investor complaints arising from inquiries submitted electronically through the trading application / web interface portal or through its trading members.

(ii) Intermediaries are responsible for: (a) dealing with investor complaints arising from requests they have uploaded; and (b) the rejection of applications in the event of a discrepancy between the data entered on the exchange platform and obtained by the registrar.

(iii) The receiving bank is responsible for (a) dealing with investor grievances arising from the non-confirmation of funds at the registrar despite the successful completion of the payment instrument in the PIA; and (b) if there has been a delay or operational failure in sending the forms to the Registrar.

comments

SEBI’s intention with the introduction of the UPI mechanism is (i) reduction of post-issue delays for allocation and registration; and (ii) allow more modes of investor participation in the public issuance of debt securities. With the UPI mechanism, SEBI sought to (a) further digitize the process of issuing public debt and bringing it to the same level as issuance of shares; and (b) provide platforms for instant fund transfer, real-time mandate creation and the nomination process. These measures are expected to increase individual participation, the investor base for issuers and enhance investor confidence.

It can be noted that the UPI mechanism introduced earlier for public equity issues has not yet proven to be the preferred choice of investors. This could be due to the multiple steps that investors have to take to download their offers. The process encountered some problems in the public issuance of equity shares. We hope that these are startup issues that will be resolved in the near future and that the UPI mechanism will become as popular as ASBA. Due to the COVID-19 pandemic, more and more bank account holders are using the UPI mechanism to make their payments. Overall a very welcome step from SEBI.

“The content of this document does not necessarily reflect the opinions / positions of Khaitan & Co but remains solely those of the author (s). For any further questions or follow-up, please contact Khaitan & Co at [email protected]


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