10 Navigating Breaches, Defaults, and Remedies: A Comprehensive Guide for Debenture Trustees

Key Takeaways:

- 'Default' is defined as non-payment of interest or principal amount in full on the pre-agreed date, recognized at the first instance of delay in servicing any interest or principal on debt.

- Debenture trustees must appoint a director nominated by them on the boards of issuers as per Regulation 23(6) of SEBI NCS Regulations.

- The process for convening meetings of holders of debt securities, obtaining consent for enforcement of security, and signing the ICA is outlined, including the conditions for debenture trustees to sign the ICA.

- Debenture trustees must take necessary action in case of breaches of covenants or terms of issue, as decided in the meeting of holders of debt securities.

Detailed Narrative:

Navigating the intricate world of breaches, defaults, and remedies is a crucial aspect of a debenture trustee's role. The Securities and Exchange Board of India (SEBI) has laid down comprehensive guidelines to ensure that debenture trustees are equipped to handle these situations effectively.

At the heart of this matter lies the definition of 'default,' which is clearly outlined in Regulation 51 read with the Explanation to Clause A (11) in Part B of Schedule III of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations). According to this regulation, 'default' is recognized as the non-payment of interest or principal amount in full on the pre-agreed date, and it is identified at the first instance of delay in servicing any interest or principal on debt.

It is crucial to note that the 'event of default' is reckoned at the ISIN (International Securities Identification Number) level, as all terms and conditions of issuance of security are the same under a single ISIN, even though it might have been issued under multiple offer documents.

Appointment of Director Nominated by Debenture Trustee on Boards of Issuers:

Regulation 23(6) of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (SEBI NCS Regulations) mandates that an issuer, which is a company under the Companies Act, 2013, must ensure that its Articles of Association require its Board of Directors to appoint a person nominated by the debenture trustee(s) as a director, in terms of clause (e) of sub-regulation (1) of regulation 15 of the SEBI (Debenture Trustees) Regulations, 1993.

For issuers other than those mentioned above, they must submit an undertaking to their debenture trustees stating that in case of events mentioned in Regulation 15(1)(e) of SEBI (Debenture Trustees) Regulations, 1993, a non-executive/independent director/trustee/member of its governing body shall be designated as a nominee director for the purposes of Regulation 23(6) of NCS Regulations, in consultation with the debenture trustee(s).

Process of Convening Meeting of Holders of Debt Securities and Consent for Enforcement of Security and Signing the Inter Creditor Agreement (ICA): The Reserve Bank of India (RBI), through its Prudential Framework for Resolution of Stressed Assets Directions 2019, specified the mechanism for resolution of stressed assets by lenders, including investors in debt securities as financial creditors. These investors are approached by other lenders to sign an agreement referred to as the ICA (Inter Creditor Agreement) under specific terms detailed in the framework.

Regulation 59 of SEBI LODR Regulations states that material modification in the structure of debt securities shall be made only after obtaining the consent of the requisite majority of investors. Regulation 39 of the SEBI NCS Regulations, applicable in case of public issue of debt securities, stipulates a period of fifteen days for giving notice in case of roll-over of debt securities and further requires approval from not less than three-fourth of the holders by value of such debt securities.

As the resolution plan in the ICA may involve restructuring, including roll-over of debt securities, requiring the consent of the investors, the process to be followed for seeking consent for enforcement of security and/or entering into an ICA is as follows:

1. The debenture trustee shall send a notice to the investors within three days of the event of default by registered post/acknowledgement due or speed post/acknowledgement due or courier or hand delivery with proof of delivery, as well as through email with a read receipt.

2. The notice shall contain:

a. A provision for negative consent for proceeding with the enforcement of security.

b. A provision for positive consent for signing the ICA.

c. The time period within which the consent needs to be provided (within 15 days from the date of notice).

d. The date of the meeting to be convened.

e. A disclosure stating that in case requisite consents are not received, the debenture trustee shall take further action as per the decision taken in the meeting of the holders of listed debt securities.

3. The debenture trustee shall convene the meeting of holders of listed debt securities within 30 days of the event of default, unless the default is cured between the date of notice and the date of the meeting, in which case the convening of such a meeting may be dispensed with.

4. In case of debt securities issued by way of public issue, the notice sent by the debenture trustee shall not contain the consent for enforcement of security, and the requirement to convene a meeting for enforcement of security shall not be applicable, as per Regulation 15(2)(b) of SEBI (Debenture Trustees) Regulations, 1993.

5. The debenture trustee shall take necessary action to enforce security or enter into the ICA or as decided in the meeting of investors, subject to the following:

a. If the majority of holders of listed debt securities express dissent against enforcement of the security, the debenture trustee shall not enforce security.

b. If the majority of holders of listed debt securities express consent to enter into the ICA, the debenture trustee shall enter into the ICA.

c. If requisite consents are not received either for enforcement of security or for signing the ICA, the debenture trustee shall take further action as per the decision taken in the meeting of the holders of listed debt securities.

d. The debenture trustee may form a representative committee of the holders of listed debt securities to participate in the ICA or to enforce the security or as may be decided in the meeting.

6. The consent of the majority of holders of listed debt securities shall mean the approval of not less than 75% of the holders of listed debt securities by value of the outstanding debt and 60% of the holders of listed debt securities by number at the ISIN level.

Conditions for Signing of ICA by Debenture Trustee on Behalf of Holders of Listed Debt Securities:

The debenture trustee(s) may sign the ICA and consider the resolution plan on behalf of the holders of listed debt securities upon compliance with the following conditions:

a. The signing of the ICA and agreeing to the resolution plan is in the interest of holders of listed debt securities and in compliance with the Companies Act, 2013, the Securities Contracts (Regulations) Act, 1956, the Securities and Exchange Board of India Act, 1992, and the rules, regulations, and circulars issued thereunder from time to time.

b. If the resolution plan imposes conditions on the debenture trustee that are not in accordance with the provisions of the aforementioned acts and regulations, the debenture trustee shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA. Under these circumstances, the resolution plan shall not be binding on the debenture trustee(s).

c. The resolution plan shall be finalized within 180 days from the end of the review period. If the resolution plan is not finalized within this timeframe, the debenture trustee shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA, and the resolution plan shall not be binding on the debenture trustee. However, if the finalization of the resolution plan extends beyond 180 days, the debenture trustee may consent to an extension beyond 180 days, subject to the approval of the investors regarding the total timeline, which shall not exceed 365 days from the date of commencement of the review period.

d. If any of the approved resolution plans are contravened by any of the signatories to the ICA, the debenture trustee shall be free to exit the ICA and seek appropriate legal recourse or any other action deemed fit in the interest of the investors.

The debenture trustee shall ensure that the conditions mentioned above are suitably incorporated in the ICA before signing it.

Action to be Taken in Case of Breach of Covenants or Terms of Issue:

In case of a breach of covenants or terms of the issue by the issuer, the debenture trustee shall take steps as outlined in the process for convening meetings of holders of debt securities and obtaining consent for enforcement of security, and thereafter take necessary action as decided in the meeting of holders of debt securities in this regard.

FAQs:

Q1. What is the significance of the definition of 'default' under SEBI LODR Regulations?

A1. The definition of 'default' as non-payment of interest or principal amount in full on the pre-agreed date, recognized at the first instance of delay in servicing any interest or principal on debt, is crucial for debenture trustees to identify and address defaults promptly.

Q2. Why is the appointment of a director nominated by the debenture trustee on the boards of issuers important?

A2. The appointment of a director nominated by the debenture trustee on the boards of issuers ensures that the interests of the holders of debt securities are represented and protected at the highest level of the issuer's governance structure.

Q3. What is the purpose of the process for convening meetings of holders of debt securities and obtaining consent for enforcement of security and signing the ICA?

A3. This process aims to ensure that the debenture trustee acts in the best interest of the holders of listed debt securities and follows a transparent and democratic process when it comes to enforcing security or signing the ICA, which may involve restructuring or modification of the debt securities.

Q4. What are the conditions for a debenture trustee to sign the ICA on behalf of the holders of listed debt securities?

A4. The debenture trustee must ensure that signing the ICA and agreeing to the resolution plan is in the interest of the holders of listed debt securities and complies with relevant laws and regulations. Additionally, the debenture trustee must have the option to exit the ICA if the resolution plan imposes conditions that are not in accordance with the applicable laws and regulations.

Q5. What action should the debenture trustee take in case of a breach of covenants or terms of the issue by the issuer?

A5. In case of a breach of covenants or terms of the issue by the issuer, the debenture trustee shall follow the process for convening meetings of holders of debt securities and obtaining consent for enforcement of security, and then take necessary action as decided in the meeting of holders of debt securities.

Key Precedents:

1. Regulation 51 read with the Explanation to Clause A (11) in Part B of Schedule III of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations):

This regulation defines 'default' as non-payment of interest or principal amount in full on the pre-agreed date, recognized at the first instance of delay in servicing any interest or principal on debt.

2. Regulation 23(6) of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (SEBI NCS Regulations):

This regulation mandates that an issuer, which is a company under the Companies Act, 2013, must ensure that its Articles of Association require its Board of Directors to appoint a person nominated by the debenture trustee(s) as a director.

3. Regulation 15(1)(e) of the SEBI (Debenture Trustees) Regulations, 1993:

This regulation outlines the events in which a non-executive/independent director/trustee/member of the issuer's governing body shall be designated as a nominee director for the purposes of Regulation 23(6) of NCS Regulations.

4. RBI's Prudential Framework for Resolution of Stressed Assets Directions 2019:

This framework specifies the mechanism for resolution of stressed assets by lenders, including investors in debt securities as financial creditors, and the process of signing the Inter Creditor Agreement (ICA).

5. Regulation 59 of SEBI LODR Regulations:

This regulation states that material modification in the structure of debt securities shall be made only after obtaining the consent of the requisite majority of investors.

6. Regulation 39 of the SEBI NCS Regulations:

This regulation, applicable in case of public issue of debt securities, stipulates a period of fifteen days for giving notice in case of roll-over of debt securities and requires approval from not less than three-fourth of the holders by value of such debt securities.

7. Regulation 15(2)(b) of SEBI (Debenture Trustees) Regulations, 1993:

This regulation exempts the requirement to convene a meeting for enforcement of security in case of debt securities issued by way of public issue.

These precedents establish the legal framework and guidelines for debenture trustees to navigate breaches, defaults, and remedies, ensuring that the interests of the holders of debt securities are protected and that the debenture trustees act in compliance with the applicable laws and regulations.

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Here's the SEBI's Debenture Trustees' circular's verbatim Chapter X

Chapter X: Breach of Covenants, Default and Remedies{31}

1. Event of default

1.1.Regulation 51 read with the Explanation to Clause A (11) in Part B of Schedule III of SEBI LODR Regulations defines ‘default’ as non-payment of interest or principal amount in full on the pre-agreed date which shall be recognized at the first instance of delay in the servicing of any interest or principal on debt.

1.2.In the manner of calling ‘event of default’, due to the presence of multiple ISINs which may have been issued under the same offer document or a single ISIN which may have been split across multiple offer documents it is clarified that ‘event of default’ shall be reckoned at the ISIN level, as all terms and conditions of issuance of security are same under a single ISIN even though it might have been issued under multiple offer documents.

2. Appointment of Director nominated by the Debenture Trustee on boards of issuers{32}

2.1.Regulation 23(6) of the SEBI NCS Regulations obligates an issuer which is a company under the Companies Act, 2013 to ensure that its Articles of Association requires its Board of Directors to appoint as director, the person nominated by the debenture trustee(s) in terms of clause (e) of sub-regulation (1) of regulation 15 of the SEBI (Debenture Trustees) Regulations, 1993.

2.2.Issuers other than those mentioned in para 2.1 above shall submit an undertaking to their Debenture Trustees that in case of events as mentioned in Regulation 15(1)(e) of SEBI (Debenture Trustees) Regulations, 1993, a non-executive / independent director / trustee / member of its governing body shall be designated as nominee director for the purposes of Regulation 23(6) of NCS Regulations, in consultation with the Debenture Trustee, or, in case of multiple Debenture Trustees, in consultation with all the Debenture Trustees.

3. Process of convening meeting of holders of debt securities and consent of investors for enforcement of security and for signing the Inter Creditor Agreement (ICA)

3.1.The Reserve Bank of India (“RBI”), vide Circular dated June 07, 2019, issued the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 which inter alia specified the mechanism for resolution of stressed assets by Lenders [viz. Scheduled Commercial Banks, All-India Term Financial Institutions, Small Finance Banks, Systemically Important Non-Deposit Taking Non-Banking Finance Companies (NBFCs) as well as Deposit Taking NBFCs].In terms thereof, investors in debt securities, being financial creditors, are approached by other lenders to sign an agreement, referred to as the ICA, under specific terms detailed in the framework as stipulated by RBI.

3.2.Regulation 59 of SEBI LODR Regulations provides that material modification in the structure of debt securities shall be made only after obtaining the consent of the requisite majority of investors. Regulation 39 of the SEBI NCS Regulations, applicable in case of public issue of debt securities, stipulates a period of fifteen days for giving notice in case of roll-over of debt securities and further provides for approval to be obtained from not less than three-fourth of the holders by value of such debt securities.

3.3.As the resolution plan in the ICA may involve restructuring including roll-over of debt securities, requiring the consent of the investors, the process to be followed for seeking consent for enforcement of security and/or entering into an ICA shall be as under:

3.3.1. The Debenture Trustee shall send a notice to the investors within three days of the event of default by registered post/ acknowledgement due or speed post/ acknowledgement due or courier or hand delivery with proof of delivery as also through email as a text or as an attachment to email with a notification including a read receipt, and proof of dispatch of such notice or email, shall be maintained.

3.3.2. The notice shall contain the following:

a) A provision for negative consent for proceeding with the enforcement of security; and

b) A provision for positive consent for signing the ICA (in case the Debenture Trustee is approached by other lenders for signing/ joining the ICA); and

c) the time period within which the consent needs to be provided, viz. consent to be given within 15 days from the date of notice; and

d) the date of meeting to be convened.

e) A disclosure to the effect that in case requisite consents are not received either for enforcement of security or for signing ICA, then the Debenture Trustee shall take further action, if any, as per the decision taken in the meeting of the holders of listed debt securities.

3.3.3. Debenture Trustee shall convene the meeting of holders of listed debt securities within 30 days of the event of default:

Provided that in case the default is cured between the date of notice and the date of meeting, then the convening of such a meeting may be dispensed with.

3.3.4. In view of Regulation 15(2)(b) of SEBI (Debenture Trustees) Regulations, 1993, in case of debt securities issued by way of public issue, the notice sent by the Debenture Trustee shall not contain the consent as per para 2.3.2.a) and the requirement to convene a meeting for enforcement of security, as per para 2.3.4, shall not be applicable.

3.3.5. The Debenture Trustee shall take necessary action to enforce security or enter into the ICA or as decided in the meeting of investors, subject to the following:

a) In case(s) where the majority of holders of listed debt securities express dissent, i.e. against enforcement of the security, the DEBENTURE TRUSTEE shall not enforce security

b) In case(s) where majority of holders of listed debt securities express consent, i.e. to enter into the ICA, the DEBENTURE TRUSTEE shall enter into the ICA.

c) In case requisite consents are not received either for enforcement of security or for signing ICA, then the Debenture Trustee shall take further action, if any, as per the decision taken in the meeting of the holders of listed debt securities.

d) The Debenture Trustee may form a representative committee of the holders of listed debt securities to participate in the ICA or to enforce the security or as may be decided in the meeting.

3.3.6. The consent of the majority of holders of listed debt securities shall mean the approval of not less than 75% of the holders of listed debt securities by value of the outstanding debt and 60% of the holders of listed debt securities by number at the ISIN level.

4. Conditions for signing of ICA by Debenture Trustee on behalf of holders of listed debt securities

4.1.The Debenture Trustee(s) may sign the ICA and consider the resolution plan on behalf of the holders of listed debt securities upon compliance with the following conditions:

a) The signing of the ICA and agreeing to the resolution plan is in the interest of holders of listed debt securities and in compliance with the Companies Act, 2013 and the rules made thereunder, the Securities Contracts (Regulations) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and the rules, regulations and circulars issued thereunder from time to time.

b) If the resolution plan imposes conditions on the Debenture Trustee that are not in accordance with the provisions of Companies Act, 2013 and the rules made thereunder, the Securities Contracts (Regulations) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and the rules, regulations and circulars issued thereunder from time to time, then the Debenture Trustee shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA. Under these circumstances, the resolution plan shall not be binding on the Debenture Trustee(s).

c) The resolution plan shall be finalized within 180 days from the end of the review period. If the resolution plan is not finalized within 180 days from the end of the review period, then the Debenture Trustee shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA and the resolution plan shall not be binding on the Debenture Trustee. However, if the finalization of the resolution plan extends beyond 180 days, the Debenture Trustee may consent to an extension beyond 180 days subject to the approval of the investors regarding the total timeline. The total timeline shall not exceed 365 days from the date of commencement of the review period.

d) If any of the approved Resolution Plan are contravened by any of the signatories to the ICA, the Debenture Trustee shall be free to exit the ICA and seek appropriate legal recourse or any other action as deemed fit in the interest of the investors.

4.2.The Debenture Trustee shall ensure that the conditions mentioned in paragraphs 3.1 (b), (c) and (d) are suitably incorporated in the ICA, before signing of the ICA.

5. Action to be taken in case of breach of covenants or terms of issue

In case of breach of covenants or terms of the issue by the Issuer, the Debenture Trustee shall take steps as outlined in paras 2.3.1 and 2.3.3 of this chapter and thereafter take necessary action as decided in the meeting of holders of debt securities in this regard.

Note:-

{31}SEBI/HO/MIRSD/CRADT/CIR/P/2020/203 dated October 13, 2020;

{32}SEBI/HO/DDHS/POD1/P/CIR/2023/112 dated July 04, 2023