Net Worth Requirement for Issuance of Market Linked Debt Securities: SEBI

SEBI Informal Guidance No. SEBI/DDHS/Div-1/PR/OW/2023/10537/1, Dated 14.03.2023

Query raised by the Applicant Company

The Applicant Company sought informal guidance regarding the computation of minimum net worth required under Chapter X of the SEBI Operational Circular dated August 10, 2021, issued under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021. In addition, the company also sought clarification on whether it meets the minimum net worth requirement for issuing market-linked debt securities (MLDs).

Transition of the company’s financial statements to IND AS

As on September 30, 2022, the shareholders’ fund of the company was Rs. 106.07 crores, and the balance in the Reserves and Surplus account included a revaluation reserve to the tune of Rs 152.52 crores (pursuant to conversion of firm to the company, the assets were revalued) as per the financial statements prepared under Indian Generally Accepted Accounting Principles (IGAAP).

The Applicant Company voluntarily opted for the transition of its financial statements from IGAAP to IND AS. As a result, its net worth exceeded 100 crores, which is the minimum net-worth required for the issuance of MLDs. However, this transition led to confusion as to whether the company is eligible to issue market-linked debt securities.

IND AS 101 ‘First time adoption’

According to IND AS, all the adjustments or impacts arising from the transition to IND AS, including the revaluation of assets will be accounted for as an adjustment to retained earnings.

Thus, post Ind AS adoption, the net worth of the Company will be more than the minimum eligible net worth of Rs. 100 Crores as required for the issuance of structured or market-linked debt securities.

Definition of ‘Net worth’ as per Companies Act, 2013

Section 2(57) of the Companies Act, 2013 defines the term “net worth” as the aggregate value of the paid-up share capital and all reserves created out of the profits (Securities Premium Account and debit or credit balance of Profit and Loss Account), after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet.

However, reserves created out of revaluation of assets, write-back of depreciation and amalgamation are not included in net-worth.

The SEBI’s observation

The SEBI was of the view that the definition of the term `networth’ in the SEBI (Issue and listing of non-convertible securities) Regulations, 2021 is linked to the one provided by the Companies Act, 2013.

Section 129 of the Companies Act, 2013 read with the Companies (Accounts) Rules, 2014, Companies (Indian Accounting Standards) Rules, 2015 (IAS) and the newly introduced Companies (Accounting Standards) Rules, 2021 provides for mandatory and voluntary transition to IND AS.

SEBI’s reply & conclusion

The SEBI clarified that the calculation of net worth for issuance of MLDs shall be as per the applicable Accounting Standards and Companies Act, 2013. Pursuant to Regulation 48 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, listed entity must comply with all applicable and notified Accounting Standards.

In conclusion, the SEBI’s Informal guidance clarified that the Applicant Company is eligible to issue market-linked debt securities.

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