16 Navigating Conflicts of Interest: SEBI's Guidelines for Debenture Trustees and Associated Persons

Key Takeaways:

- Debenture Trustees must actively involve senior management in developing policies and procedures to identify and address conflicts of interest.

- They must maintain high standards of integrity, ensure fair treatment of clients, and prioritize client interests over personal interests.

- Appropriate disclosures must be made to clients about potential conflicts that could impair the ability to provide fair and unbiased services.

- Measures such as information barriers should be implemented to reduce opportunities for conflicts.

- Restrictions should be placed on transactions in securities while handling client mandates to avoid conflicts.

- Boards of Debenture Trustees are responsible for implementing these guidelines and providing necessary guidance.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has recognized the importance of addressing conflicts of interest in the securities market. To align with Principle 8 of the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulations, SEBI has issued comprehensive guidelines for Debenture Trustees and their associated persons to eliminate or manage conflicts of interest effectively.

These guidelines are applicable to all intermediaries, recognized stock exchanges, recognized clearing corporations, depositories, and their associated persons. SEBI's circular CIR/MIRSD/5/2013 dated August 27, 2013, outlines the specific requirements for Debenture Trustees and their associated persons.

Under these guidelines, Debenture Trustees and their associated persons must actively involve senior management in developing policies and internal procedures to identify, avoid, or manage actual or potential conflicts of interest. They are required to establish an internal code of conduct governing operations and formulate standards of appropriate conduct in the performance of their activities. Effective communication of these policies, procedures, and codes to all concerned parties is essential.

Maintaining high standards of integrity in the conduct of business is a fundamental requirement. Debenture Trustees and their associated persons must ensure fair treatment of their clients and avoid discrimination among them. Personal interests should never conflict with the duty to clients, and client interests must always take precedence in advice, investment decisions, and transactions.

Appropriate disclosures must be made to clients regarding potential sources or areas of conflict of interest that could impair the ability to render fair, objective, and unbiased services. Debenture Trustees and their associated persons are expected to endeavor to reduce opportunities for conflicts through prescriptive measures such as information barriers to block or hinder the flow of information between departments or units.

Restrictions should be placed on transactions in securities while handling a client's mandate to avoid conflicts. Dealing in securities while in possession of material non-public information or contributing to manipulating the demand or supply of securities in the market is strictly prohibited. Incentive structures that encourage the sale of products unsuitable for clients' risk profiles should be avoided, and client information must not be shared for personal interests.

The boards of Debenture Trustees are responsible for implementing the provisions of these guidelines and providing necessary guidance to enable the identification, elimination, or management of conflict of interest situations. These guidelines are in addition to any existing provisions in respective regulations or circulars issued by SEBI regarding dealing with conflicts of interest.

FAQs:

Q1: Why are these guidelines necessary?

A1: These guidelines aim to promote transparency, integrity, and fair treatment of clients in the securities market by addressing potential conflicts of interest that could arise for Debenture Trustees and their associated persons.

Q2: What are the key responsibilities of Debenture Trustees under these guidelines?

A2: Debenture Trustees must develop internal policies and procedures to identify and manage conflicts of interest, maintain high ethical standards, ensure fair treatment of clients, disclose potential conflicts, implement measures to prevent misuse of confidential information, and place appropriate restrictions on transactions in securities.

Q3: Who is responsible for implementing these guidelines?

A3: The boards of Debenture Trustees are responsible for implementing the provisions of these guidelines and providing necessary guidance to enable the identification, elimination, or management of conflict of interest situations.

Q4: Are there any specific requirements for associated persons?

A4: Yes, Debenture Trustees are responsible for educating their associated persons on compliance with these guidelines.

Q5: Are there any existing regulations or circulars related to conflicts of interest that Debenture Trustees must follow?

A5: Yes, these guidelines are in addition to any existing provisions in respective regulations or circulars issued by SEBI regarding dealing with conflicts of interest.

Key Precedents:

The guidelines for dealing with conflicts of interest by Debenture Trustees and their associated persons in the securities market are based on the following key precedents:

1. SEBI Circular CIR/MIRSD/5/2013 dated August 27, 2013:

This circular outlines the general guidelines for dealing with conflicts of interest of intermediaries, recognized stock exchanges, recognized clearing corporations, depositories, and their associated persons in the securities market.

2. Principle 8 of the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulations:

The guidelines are aligned with this principle, which emphasizes the importance of addressing conflicts of interest in the securities market.

It is crucial for Debenture Trustees and their associated persons to comply with these guidelines, as well as any existing regulations or circulars issued by SEBI, to maintain the integrity and fairness of the securities market.

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

Chapter XVI: General Guidelines for dealing with Conflicts of Interest by Debenture Trustee and its Associated Persons in Securities Market{38}

1. All intermediaries, recognised stock exchanges, recognised clearing corporations and depositories (hereinafter collectively referred to as "such entities") are presently governed by the provisions for avoidance of conflict of interest as mandated in the respective regulations read with relevant circulars issued from time to time by SEBI. On the lines of Principle 8 of the International Organisation of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulations, it has been decided to put in place comprehensive guidelines to collectively cover such entities and their associated persons, for elimination of their conflict of interest, as detailed hereunder.

2. The Debenture Trustee shall adhere to these guidelines for avoiding or dealing with or managing conflict of interest. It shall be responsible for educating its associated persons for compliance of these guidelines.

3. For the purpose of these guidelines, "associated persons" have the same meaning as defined in Securities and Exchange Board of India Certification of Associated Persons in the Securities Markets) Regulations, 2007.

4. Debenture Trustee and its associated persons shall,

4.1. lay down, with active involvement of senior management, policies and internal procedures to identify and avoid or to deal or manage actual or potential conflict of interest, develop an internal code of conduct governing operations and formulate standards of appropriate conduct in the performance of their activities, and ensure to communicate such policies, procedures and code to all concerned;

4.2. at all times maintain high standards of integrity in the conduct of their business;

4.3. ensure fair treatment of their clients and not discriminate amongst them;

4.4. ensure that their personal interest does not, at any time conflict with their duty to their clients and client’s interest always takes primacy in their advice, investment decisions and transactions;

4.5. make appropriate disclosure to the clients of possible source or potential areas of conflict of interest which would impair their ability to render fair, objective and unbiased services;

4.6. endeavour to reduce opportunities for conflict through prescriptive measures such as through information barriers to block or hinder the flow of information from one department/ unit to another, etc.;

4.7. place appropriate restrictions on transactions in securities while handling a mandate of issuer or client in respect of such security so as to avoid any conflict;

4.8. not deal in securities while in possession of material non - published information

4.9. not to communicate the material non-published information while dealing in securities on behalf of others

4.10. not in any way contribute to manipulate the demand for or supply of securities in the market or to influence prices of securities;

4.11. not have an incentive structure that encourages sale of products not suiting the risk profile of their clients;

4.12. not share information received from clients or pertaining to them, obtained as a result of their dealings, for their personal interest;

5. The boards of the Debenture Trustee shall put in place systems for implementation of the provisions of this chapter and provide necessary guidance enabling identification, elimination or management of conflict of interest situations.

6. The said guidelines shall be in addition to the provisions, if any, contained in respective regulations/ circulars issued by the Board from time to time regarding dealing with conflict of interest, in respect of Debenture Trustee.

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Annex-1

Part A - List of circulars superseded by the Master Circular

Part B - List of circulars wherein applicability to Debenture Trustees only have been rescinded





Note:-

{38}SEBI Circular No. CIR/ MIRSD/ 5/ 2013 dated August 27, 2013;