11 Navigating the Aftermath: SEBI's Framework for Defaulted Debt Securities

Key Takeaways:

- SEBI has introduced guidelines to regulate transactions in defaulted debt securities after their maturity or redemption date.

- The framework outlines the responsibilities of debenture trustees, issuers, and depositories in managing defaulted debt securities.

- It emphasizes the importance of timely communication and information sharing among stakeholders.

- The guidelines aim to ensure transparency, protect investor interests, and facilitate the recovery process.

Detailed Narrative:

In the ever-evolving landscape of debt securities, defaults can occur, leaving investors in a precarious position. To address this challenge, the Securities and Exchange Board of India (SEBI) has introduced a comprehensive framework to govern transactions in defaulted debt securities after their maturity or redemption date. This framework aims to streamline the process, ensure transparency, and protect the interests of investors.

At the heart of this framework lies the pivotal role of debenture trustees. These entities are entrusted with the responsibility of monitoring and communicating the status of defaulted debt securities. In the event of a default, debenture trustees are required to seek information from issuers and conduct independent assessments to determine the payment status. This information must be promptly shared with stock exchanges and depositories, facilitating transparency and enabling informed decision-making.

The framework emphasizes the importance of timely communication and information sharing among stakeholders. Issuers are obligated to provide timely updates on the status of defaulted debt securities, including any developments that may impact the default status, such as restructuring, insolvency proceedings, or repayment. Failure to comply with these obligations can result in regulatory consequences.

Depositories play a crucial role in this framework by maintaining a centralized database for defaulted debt securities. This database serves as a repository of information, enabling stakeholders to access and verify default histories and other relevant data. Debenture trustees are responsible for ensuring the accuracy of this information and updating it promptly in case of any discrepancies.

To ensure the smooth implementation of this framework, SEBI has outlined specific timelines and responsibilities for each stakeholder. Debenture trustees must validate and update the status of defaulted debt securities within stipulated timeframes, while issuers are required to provide timely intimation of any changes in the default status.

The framework also addresses the continuous assessment of default status. Debenture trustees are mandated to conduct periodic independent assessments and communicate the updated status to stock exchanges and depositories by the seventh working day of April each financial year. This ongoing monitoring ensures that the default status remains current and accurately reflects the evolving situation.

By establishing this comprehensive framework, SEBI aims to promote transparency, protect the interests of investors, and facilitate the recovery process in cases of defaulted debt securities. The clear delineation of roles and responsibilities, coupled with stringent timelines and communication protocols, ensures that all stakeholders are informed and empowered to take appropriate actions.

FAQs:

Q1: What is the purpose of SEBI's framework for defaulted debt securities?

A1: The framework aims to streamline the process of managing defaulted debt securities after their maturity or redemption date, ensure transparency, and protect the interests of investors.

Q2: What are the key responsibilities of debenture trustees under this framework?

A2: Debenture trustees are responsible for monitoring and communicating the status of defaulted debt securities, conducting independent assessments, and updating information in the centralized database maintained by depositories.

Q3: How does the framework ensure transparency?

A3: The framework mandates timely communication and information sharing among stakeholders, including issuers, debenture trustees, stock exchanges, and depositories. It also requires the maintenance of a centralized database for defaulted debt securities.

Q4: What happens if an issuer fails to provide timely updates on the default status?

A4: Failure to comply with the obligations of providing timely updates can result in regulatory consequences for the issuer.

Q5: How does the framework facilitate the recovery process?

A5: By ensuring transparency and accurate information sharing, the framework enables stakeholders to make informed decisions and take appropriate actions to facilitate the recovery process in cases of defaulted debt securities.

Key Precedents:

1. SEBI/HO/DDHS/P/CIR/2021/613 dated August 10, 2021 (as amended from time to time):

This circular established the operational framework for transactions in defaulted debt securities post maturity date or redemption date. It outlined the roles and responsibilities of debenture trustees, issuers, and depositories in managing defaulted debt securities.

2. Securities and Exchange Board of India Act, 1992:

The framework is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992, which empowers SEBI to protect the interests of investors in securities and regulate the securities market.

3. Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993:

The framework draws its authority from Regulation 2A of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, which governs the responsibilities and obligations of debenture trustees.

4. Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021:

Regulation 55 of the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021, provides the basis for the framework's provisions related to the issuance and listing of non-convertible securities.

5. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015:

Regulation 101(1) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, empowers SEBI to issue guidelines to protect the interests of investors in listed securities.

These precedents establish the legal foundation and regulatory authority for SEBI to introduce the framework for defaulted debt securities, ensuring the protection of investor interests and the orderly functioning of the securities market.

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

Chapter XI: Operational framework for transactions in defaulted debt securities post maturity date/ redemption date{33}

The operational framework for transactions in defaulted debt securities (debt securities where redemption amount has not been paid on maturity/ redemption date) has been outlined in Chapter XI of the NCS operational circular. The obligations of Debenture Trustee arising out of the same has been outlined below:

1. Role of Debenture Trustee:

1.1.In case the Issuer fails to intimate the status of payment of the debt securities within stipulated timelines, then Debenture Trustee shall seek status of payment from the issuer and/ or conduct independent assessment (from banks, investors, rating agencies, etc.) to determine the same. Based on such assessment, Debenture Trustee shall intimate Stock Exchange and Depositories the status of payment of debt securities within nine working days of the maturity/ redemption date.

1.2.In case intimation of the status of payment of debt securities is not received by Stock Exchanges and Depositories within stipulated timeline, transactions in such debt securities shall continue to be restricted and such restrictions shall continue until any further intimation is received from Issuer/ Debenture Trustee regarding the status of payment of such debt securities.

2. Continuous assessment of default status:

2.1.In case the Issuer fails to intimate the updated status of payment of the concerned debt securities within the stipulated timelines, the Debenture Trustee shall carry independent assessment as given at paragraph 1 above and intimate the status of payment of debt securities to the Stock Exchange and Depositories by the seventh working day of April of each financial year.

2.2.In case of any developments that impact the status of default of the debt securities (including restructuring of debt securities, NCLT/ NCLAT proceedings relating to insolvency/ bankruptcy, repayment, etc.), the Issuer/ Debenture Trustee shall intimate the Stock Exchanges and Depositories within one working day of such development.

2.3.The process explained above shall be followed either till full payment on these securities is made by the Issuer or the Issuer has been liquidated and money has been realised after completion of recovery proceedings.

Note:-

{33}SEBI/HO/DDHS/P/CIR/2021/613 dated August 10, 2021 (as amended from time to time)