Note on Market-Linked Debentures


A market-linked debenture (“LDM”) is essentially a non-convertible debenture of a hybrid nature that combines the characteristics of an ordinary debt security and exchange-traded derivatives. An MLD provides principal protection, which is a predominant characteristic of a debt security, combined with the characteristic that the returns arising from this MLD are not fixed but are linked to an underlying market/index, usually the markets actions. For this instantaneous reason, there are various nomenclatures used in place of MLDs such as equity-linked debentures, equity-linked debentures, etc.

As previously stated, the principal component of an MLD falls within the definition of “debt securities” under the Securities Exchange Board of India’s Regulation 2(k) (“SEBI“) (Issue and listing of Non-convertible securities) 2021 Regulations (“SEBI NCS Regulation“) as shown below :

“Debt Securities” means non-convertible debt securities of fixed maturity which create or acknowledge indebtedness and include debentures, bonds or any other security whether or not a charge on assets/properties, excluding receipts for securities , securitized debt securities, money market instruments regulated by the Reserve Bank of India and bonds issued by the government or any other body specified by the Board”;

SEBI NCS Regulation 28 provides that an issuer of a debt security, when making a public issue of a debt security and seeking to list it on a recognized stock exchange, must disclose in a statement as set forth in Annex I of the SEBI NCS Regulation. and disclosures under the Companies Act 2013. The issuer should ensure that the audited financial statements contained in the draft prospectus and the prospectus are not older than six months from from the date of filing of the draft offer document or the date of opening of the issue, as in force. All the information specified above must also be made available on the websites of the stock exchange(s) where the issue and listing of these securities are offered, of the issuer and of the lead manager and must be available for download. in pdf/html format. The issuer will also file the prospectus with the stock exchange(s) and simultaneously with the Registrar of Companies for dissemination on their respective websites before the opening of the issue.

Similarly, SEBI NCS Regulation 45 provides that an issuer of a debt security, while making a private placement of a debt security and seeking listing on a recognized stock exchange, must make disclosures in a detailed statement in Annex II of the SEBI. NCS Regulations and Disclosures under the Companies Act 2013. The issuer must ensure that the audited financial statements contained in the offering memorandum and tranche offering memorandum are not older than six months from the date of filing of the placement memorandum or the opening date of the issue, as the case may be. .

In view of the fact that MLDs are different in their nature and the risk-return relationship, SEBI had prescribed additional information to MLDs in its circular”Operational Circular for the issuance and listing of Non-Convertible Securities, Securitized Debt Securities, Receipts of Securities, Municipal Debt Securities and Treasury Notes” dated August 10, 2021 and bearing reference no. SEBI/HO/DDHS/P/CIR/2021/613 (“Operational circular”). The information contained in the operational circular is in addition to the information prescribed by the SEBI NCS regulation. The operational circular is largely based on and reiterates the position specified in the previous SEBI circular on ‘Guidelines for the issuance and listing of structured products/market-linked notes bearing reference number. Cir. /IMD/DF/17/2011 and dated September 28, 2011.

The Operational Circular also specifies that debt securities which do not undertake to return the principal in full at the end of the term of the instrument, i.e. the “unprotected principal” will not be considered as “debt securities” subject to the SEBI NCS regulations and will therefore not be eligible for issue and listing under the SEBI NCS regulations.


2.1. Issuer eligibility and minimum subscription

The issuer of an MLD must have a minimum net worth of at least INR 100 crore at the time of issue.

2.2. Disclosure requirements:

  • Credit rating by any registered credit rating agency will bear a prefix “PP-MLD” designating Principal Protected Market Linked Debentures followed by standardized rating symbols.
  • A detailed scenario analysis/valuation matrix showing the value of the security under different market conditions, such as rising, flat and falling market conditions, should be presented in a table accompanied by an appropriate graphical representation .
  • A risk factor clearly indicating that these securities are subject to model risk should be displayed, i.e. the securities are created based on complex mathematical models involving multiple derivative exposures which may or may not be hedged and the actual behavior of the securities selected for hedging may differ materially from the returns predicted by mathematical models.
  • An additional risk factor should also be prominently displayed indicating that in case of principal protected MLD, the principal amount is subject to the credit risk of the issuer, the investor may or may not recover all or part of the funds in the event of default by the Issuer.
  • Where indicative yields/interest rates are stated in the prospectus in percentage terms, these figures should only be stated on an annualized basis.
  • The most recent valuation and history of MLDs must be disclosed and made available on the websites of the issuer and the appraiser appointed for this purpose.
  • All commissions, however named, if any, paid by the issuer to the distributor for the sale/distribution of such securities to end investors must be disclosed in the offering document.
  • The terms for early redemption of such securities, if any, should also be clearly stated in the offering document.

2.3. Appointment of an independent assessment agency

  • A third party rating agency which will be an association of mutual funds in India (“AMFI”) designated assessment agency, must be designated by the issuer.
  • This valuation agency must provide the issuer with the value of the securities at a frequency which is not less than once per calendar week. The valuation must be made and published on the website of the valuator as well as on that of the issuer. In addition, the issuer must make arrangements to provide an investor with the value whenever the investor requests it and the costs involved in the valuation must be specifically disclosed in the offering document and the issuer cannot charge investors for these services.

2.4. Guarantees for retail investors

The issuer should ensure that the following safeguards are in place when selling MLD to retail investors:

  • The intermediary selling the security to the retail investor must be a SEBI-regulated entity.
  • The intermediary must explain to the investor the risks associated with these MLDs, ensure that the investor is able to take the risk posed by these securities and must ensure that the securities are suitable for the risk profile of the investor
  • The intermediary provides and makes available to the investor the offer document.
  • The intermediary will provide investors with information on obtaining a valuation of the securities, ie the places where this information would be available (issuer or third party).
  • Specific advice should be provided by the intermediary to the investor on exit charges/exit options/liquidity support, if any, etc. provided by the issuer or via the secondary market.

The contents of this document do not necessarily reflect the views/positions of Khaitan & Co but remain solely those of the authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected].

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