3 SEBI Unveils Comprehensive Security and Covenant Monitoring System for Debt Securities

Key Takeaways:

- SEBI has mandated the use of a centralized 'Security and Covenant Monitoring System' for recording and monitoring security creation, covenant compliance, and credit ratings of listed debt securities.

- The system will be hosted and maintained by Depositories using distributed ledger technology (DLT) or similar technologies, ensuring data integrity and security.

- Issuers, debenture trustees, credit rating agencies, and other stakeholders will have secure access to the system for recording, verifying, and monitoring relevant information.

- The system aims to enhance transparency, accountability, and investor protection in the debt securities market.

- Debenture trustees will play a crucial role in validating and monitoring security details, covenant compliance, and credit ratings on the system.

Detailed Narrative:

In a significant move to strengthen the regulatory framework for debt securities, the Securities and Exchange Board of India (SEBI) has introduced a comprehensive 'Security and Covenant Monitoring System'. This system, mandated by SEBI through its circular SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P/2021/ 618 dated August 13, 2021, and further detailed in circular SEBI/HO/ MIRSD/ CRADT/CIR/P/2022/38 dated March 29, 2022, aims to enhance transparency, accountability, and investor protection in the debt securities market.

The 'Security and Covenant Monitoring System' will be hosted and maintained by Depositories using distributed ledger technology (DLT) or similar technologies. This cutting-edge technology ensures data integrity, security, and immutability, providing a robust platform for stakeholders to record, verify, and monitor critical information related to listed debt securities.

Under this system, issuers will be required to record relevant details regarding the proposed security creation, security cover, and covenants associated with the debt securities. This information will include asset details, existing encumbrances, consents from charge holders, and other relevant documents. The debenture trustees will play a crucial role in validating and verifying the information provided by the issuers, ensuring its accuracy and compliance with regulatory requirements.

Furthermore, the system will facilitate continuous monitoring of security cover, covenants, interest and principal payments, and credit ratings by various stakeholders. Debenture trustees will be responsible for validating and updating the security cover certificates, monitoring covenant compliance, and verifying the status of interest and principal payments. Credit rating agencies will also have access to the system to validate and update credit rating information for the listed debt securities.

To ensure the uniqueness and traceability of assets offered as security, the system will assign a unique asset identifier (Asset ID) to each asset. This identifier will be generated based on a predefined format, incorporating asset type, sub-type, and a unique alphanumeric code. The system will also include safeguards to detect and address potential duplicate entries for assets, ensuring data integrity and accuracy.

The 'Security and Covenant Monitoring System' will play a pivotal role in enhancing transparency and accountability in the debt securities market. Stakeholders, including investors, regulators, and market participants, will have access to real-time information regarding security creation, covenant compliance, and credit ratings. This will enable informed decision-making and foster investor confidence in the market.

SEBI has outlined specific roles and responsibilities for various stakeholders in the system, including issuers, debenture trustees, credit rating agencies, and depositories. Issuers will be responsible for recording accurate and timely information, while debenture trustees will ensure due diligence, validation, and continuous monitoring. Credit rating agencies will validate and update credit rating information, and depositories will maintain the system's integrity and facilitate data exchange.

The introduction of the 'Security and Covenant Monitoring System' is a significant step towards strengthening the regulatory framework for debt securities in India. By leveraging cutting-edge technology and fostering collaboration among stakeholders, SEBI aims to enhance investor protection, promote market transparency, and maintain the integrity of the debt securities market.

FAQs:

Q1: What is the purpose of the 'Security and Covenant Monitoring System'?

A1: The 'Security and Covenant Monitoring System' aims to strengthen the process of security creation, monitoring, and covenant compliance for listed debt securities. It enhances transparency, accountability, and investor protection in the debt securities market.

Q2: How will the system be hosted and maintained?

A2: The system will be hosted and maintained by Depositories using distributed ledger technology (DLT) or similar technologies, ensuring data integrity, security, and immutability.

Q3: What is the role of debenture trustees in the system?

A3: Debenture trustees play a crucial role in validating and verifying the information provided by issuers regarding security creation, security cover, and covenants. They are also responsible for continuous monitoring of security cover, covenant compliance, and verifying the status of interest and principal payments.

Q4: How will the system ensure the uniqueness and traceability of assets offered as security?

A4: The system will assign a unique asset identifier (Asset ID) to each asset offered as security. This identifier will be generated based on a predefined format, incorporating asset type, sub-type, and a unique alphanumeric code. The system will also include safeguards to detect and address potential duplicate entries for assets.

Q5: What are the roles and responsibilities of other stakeholders in the system?

A5: Issuers are responsible for recording accurate and timely information regarding security creation, security cover, and covenants. Credit rating agencies will validate and update credit rating information for the listed debt securities. Depositories will maintain the system's integrity and facilitate data exchange among stakeholders.

Key Precedents:

1. SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P/2021/618 dated August 13, 2021:

This circular introduced the concept of the 'Security and Covenant Monitoring System' and mandated its implementation for recording and monitoring security creation, covenant compliance, and credit ratings of listed debt securities.

2. SEBI/HO/MIRSD/CRADT/CIR/P/2022/38 dated March 29, 2022:

This circular provided operational guidelines for the 'Security and Covenant Monitoring System', detailing the roles and responsibilities of various stakeholders, the process of recording and monitoring information, and the generation of unique asset identifiers.

3. Regulation 54 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations):

This regulation requires issuers to disclose security cover to stock exchanges and debenture trustees, which will be facilitated through the 'Security and Covenant Monitoring System'.

4. Regulation 15(1)(s) and 15(1)(t) of SEBI (Debenture Trustees) Regulations, 1993:

These regulations mandate debenture trustees to carry out due diligence on a continuous basis for monitoring security creation and covenant compliance, which will be facilitated through the 'Security and Covenant Monitoring System'.

5. SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021:

These regulations govern the issuance and listing of non-convertible securities, including debt securities, and the 'Security and Covenant Monitoring System' will play a crucial role in ensuring compliance with these regulations.

The introduction of the 'Security and Covenant Monitoring System' by SEBI is a significant step towards enhancing transparency, accountability, and investor protection in the debt securities market. By leveraging cutting-edge technology and fostering collaboration among stakeholders, SEBI aims to maintain the integrity of the market and promote investor confidence.

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

Chapter III: Security and Covenant Monitoring System{13}

1. In order to strengthen the process of security creation, monitoring of security created, monitoring of security cover and covenants of the debt securities, a platform for ‘Security and Covenant Monitoring System’ (‘system’) hosted by Depositories has been introduced.

2. The system shall be used for recording and monitoring of the security created and monitoring of covenants of debt securities. The system shall, inter alia, capture:

2.1. the process of creation of security (viz. due diligence, charge creation etc.);

2.2. continuous monitoring of covenants by Debenture Trustees (as applicable);

2.3. credit rating of the debt securities by the Credit Rating Agencies (CRAs).

3. Depositories shall create, host, maintain and disseminate the system for security and covenant monitoring using distributed ledger technology (or similar such technologies). Further, the depositories shall:

3.1.Provide secure login credentials to Issuers, CRAs, Debenture Trustees etc. for recording and/or verifying and/or viewing requisite information on the system.

3.2.Put in place adequate safeguards to ensure the integrity and security of the data on the system.

3.3.Share information with the other Depository for integrating and maintaining a compatible system.

3.4.Develop an alert mechanism to be sent to the stakeholders on submission, acceptance and rejection of information, and alerts for periodic and event based compliances.

3.5.Wherever necessary, provide the feature of document upload by the various stakeholders on the system.

3.6.Provide functionality of maintaining a trail/ log of all the communication/ interaction amongst various stakeholders viz. CRAs, Debenture Trustees, Issuers, Depositories etc. and also in the system on account of recording and/or verification and/or viewing of information by the stakeholders.

3.7.Provide functionality in the system to make changes in already recorded information by stakeholders (in case a change is required to be made for rectifying any discrepancy or recording additional information) and verification of same by responsible stakeholder (as applicable) and due logs/trail and prior versions of such changes.

3.8.Be responsible for the effective and smooth functioning of the system and shall develop a mechanism to establish accountability/ responsibility for the rectification of various issues and glitches that may hamper the effective functioning of the system.

3.9.Have in place operational guidelines for the system after consultation with various stakeholders.

4. In line with current market practices, related to issuance of debt securities, the system, as per the nature of the debt securities, shall enable various stakeholders to record information for the following aspects:

4.1. Security creation, security cover and covenants;

4.2.Periodical monitoring of security cover and covenants;

4.3.Interest and redemption payment (part and full) of debt securities;

4.4.Credit Rating information

5. Accordingly, the role and responsibilities of various stakeholders in the system have been defined below.

A. Recording of information related to security creation, security cover and covenants

5.1. Information regarding assets offered as security (Security creation/ Security Cover):

a) Issuer shall record relevant details regarding proposed ‘Security creation/ Security Cover’ (if applicable) including asset details, other related documents in the system based on the type of asset offered for security creation as per Annex-IIIA of this Master Circular. Issuers shall fill all the requisite fields in the system at the time of creation of temporary ISIN/ ISIN.

b) The assets offered as security by an Issuer shall be recorded in the system pursuant to validation/ verification by the Debenture Trustee in terms of provisions of Chapter II.

c) In case the value and details of assets recorded are not in line with the terms of proposed issue of debt securities, the Debenture Trustee shall not validate the same and shall reject the same on the system and make due remarks explaining the same. The system shall send an intimation to the Issuer to rectify any discrepancy or record additional details regarding assets offered as security before initiating issuance of temporary ISIN/ ISIN which shall also require being validated and verified by the Debenture Trustee.

d) The Debenture Trustee shall also upload the reports/ documents viz. valuation report, ROC search report, title search report/ appraisal report, security cover certificate, due diligence certificate as per Annex-IIA of this Master Circular and other related reports/ certificates as applicable etc. on the system.

5.2. Recording of charge creation and charge registration details on the system:

a) Pursuant to creation of charge in favour of Debenture Trustee (as per provisions of Chapter II), the Issuer shall upload the details of the charge created on the system as per Annex-IIIB of this Master Circular. The Issuer shall also upload all the relevant documents supporting the charge such as Pledge Master Report etc.

b) The Debenture Trustee shall then validate the details of the charge entered in the system from Sub Registrar, ROC, CERSAI, Information Utility of IBBI or any other independently verifiable source and shall confirm the same on the system and update any subsequent changes, in case of any discrepancy.

c) Pursuant to the issuance of due diligence certificate by the Debenture Trustee to the Stock exchange as per Annex-IIB of this Master Circular, the same shall be uploaded on the system by the Issuer.

5.3.Modification in the information recorded on the system:

Any change in already recorded information on the system related to charge creation, registration details etc. due to any discrepancy or any modification in the value or details of the security provided on account of provision of additional security by the Issuer or reduction or substitution of existing security provided by the Issuer, shall be made after verification and validation by Debenture Trustee and information regarding requisite documents and permission/ consent obtained shall also be recorded on the system.

5.4.Recording of covenants in the system:

a) The Issuer shall enter the covenants of the issuance in the system and upload the debenture trust deed within five working days of signing of debenture trust deed, including but not limited to the following:

i. Covenants as to title of Security

ii. Covenants as to Security Cover as per terms of Issue

iii. Covenant as to further borrowing/ issues

iv. Covenant as to creation of further encumbrances on the security

v. Financial covenants including any restrictions on payment of dividends, maintaining Debt/ equity ratio, Gross Debt to EBITDA, Debt to Value Ratio etc.

vi. Covenants as to any change in nature and conduct of business or disposal of assets

vii. Covenants with respect to changes in the composition of its Board of Directors

viii. Covenants with respect to related party transactions by the issuer

ix. Monitoring of Debenture Redemption Reserve, Debenture Redemption Fund, Recovery Expense Fund

x. Other non-financial covenants such as credit rating, negative lien undertaking, etc.

b) Debenture Trustee shall validate the covenants so entered by the Issuer within seven working days of signing the Debenture Trust Deed.

B. Periodic monitoring of Security Cover and Covenants

5.5.The Issuer shall provide the half yearly certificate by the statutory auditor certifying the security cover and upload the same on the system in the format as per Annex-VA of this Master Circular. The periodicity of filing this certificate on the system shall be co-terminus with that of the financial results as per regulation 52 of the SEBI LODR Regulations.

5.6.The Issuer shall, on a periodic basis, upload the necessary and applicable documents, information within stipulated time so as to enable the Debenture Trustee to exercise its functions in relation to monitoring of Security cover and covenants.

5.7.In order to carry out periodical monitoring on security created/ covenants, the Debenture Trustee shall:

a) Validate and upload the security cover certificate

b) Update the value of the assets in the system based on the periodic valuation carried out by the Debenture Trustee, by itself or through professionals in terms of provisions of Chapter II of this Master Circular

c) Upload the title search reports, valuation reports etc., in terms of provisions of Chapter II of this Master Circular

d) The Debenture Trustee shall release charges in case any debt is repaid and update/ validate the same in the platform.

C. Interest and redemption payment

5.8. Interest and principal payment:

a) The Issuer shall record information pertaining to payment of interest and repayment of principal on the system at the time of creation of ISIN/ temporary ISIN. The issuer shall also record the status of such payment/ repayment within one working day of payment/ redemption due date after taking requisite details from Registrar and Transfer Agent. The format for the same is as specified in Annex-IIIC of this Master Circular.

b) Once such information is recorded on the system, the Debenture Trustee shall validate the status of such payment/ repayment in the system after receiving the requisite details from the Registrar and Transfer Agent including file prepared for payment of interest and repayment of principal, Bank confirmation etc. Such status shall be validated within two working days on the basis of the documentary evidence submitted by the Issuer and the Registrar and Transfer Agent.

5.9. Non-receipt of information on the system:

a) In case of non-receipt of information in the system viz. the Issuer fails to intimate the status of payment of interest or repayment of principal, the Debenture Trustee shall seek status of such payment/ repayment from the Issuer and/ or conduct independent assessment (from banks, investors, etc.) to determine the same.

b) Based on such assessment, the Debenture Trustee shall update in the system the status of such payment/ repayment, within seven working days of the interest payment becoming due or nine working days of the maturity/ redemption date.

c) The Debenture Trustee shall update the details in the system and initiate necessary action as per provisions of Chapter IX to this Master Circular.

5.10. Redemption of debt securities:

a) Issuer shall initiate the release of charges and update the system with the relevant documents including but not limited to Statutory Certificate, No dues from the holders of debt securities (applicable only in case of private placement), ISINs Extinguishment letter, ROC Charge Satisfaction forms/ certificate.

b) The Debenture Trustee shall release charges in case any debt is repaid and update/ validate the same in the platform.

D. Credit Rating information

5.11. The Issuer shall upload all the credit rating information for debt securities including rating action, date of press release and hyperlink for press release of credit rating. CRAs shall access the system to validate the rating information uploaded by the Issuer. In case of discrepancy, Issuer and/ or CRAs shall notify the same on system and update the correct information in the system within two working days of such notification.

5.12. Any subsequent rating actions carried out by CRAs shall be recorded in the system by the Issuer within one working day of the press release, which shall inter-alia comprise rating action including rating outlook, date of press release and hyperlink for press release of credit rating. In case of discrepancy, Issuer and/ or CRAs shall notify the same on system and CRAs shall update the correct information in the system within two working days of such notification.

6. Unique asset identifier:

6.1.As the backbone of the system is the uniqueness of the record of assets, a system generated unique identifier (Asset ID) shall be allotted for each asset offered by the Issuer as security for the debt securities. For data exchange and verification across Depositories, format for unique Asset ID shall be a 12 digit alphanumeric string, which will be generated as provided in Annex-IIID of this Master Circular.

6.2.To ensure that there is only one unique asset ID assigned to an asset of the issuer for effective asset creation as well as tracking, the system will provide an alert to the Issuer and the Debenture Trustee by having appropriate validation/ duplicate checks in the system for identifying possible duplicate entries for assets of an issuer and this validation/ duplication check shall be based on the parameters as per Annex-IIIE of this Master Circular. Issuers shall ensure that the entry of the asset is made only once in the system for generation of the unique Asset ID, which shall be verified by the Debenture Trustee.

7. The following assets shall be tracked at portfolio level and no specific parameters for the underlying assets would be captured:

7.1.movable assets viz furniture, equipment, inventory etc.

7.2.current assets viz portfolio of advances/ receivables, etc.

7.3.any other asset of similar nature.

8. On detection of a duplicate asset, an alert shall be generated and sent to the Issuer and Debenture Trustee to cross check and verify the details entered into the system for recording the details of asset. The Issuer and the Debenture Trustee should verify and address the alert before overriding the same.

9. Monitoring/ Trigger events:

9.1.While the Depository shall ensure that there is only one unique asset ID assigned to an asset of the issuer, Debenture Trustee, on a yearly basis, shall reconcile the list of assets recorded in the system for an Issuer and in case any duplicate entry is found for an asset, shall take necessary steps to eliminate such duplicate entries in the system and verify security cover thereof and take remedial action, if required.

9.2.Any event which reduces the security cover below the mandated/ stipulated limit, as per regulation 54 of SEBI LODR Regulations, shall be updated by the issuer in the system immediately. Such event shall be termed as ‘trigger event’ and Depository shall send such trigger events’ alerts to all the concerned stakeholders.

10. All issuers of debt securities shall ensure that the details are recorded in the system before activation of ISIN14. Depositories shall allot or defreeze an existing ISIN (in case of re-issuance), as applicable, only after confirming recording of information in the system.

11. For existing outstanding debt securities, issuers were required to enter the details in the system on or before January 31, 2023 and Debenture Trustees were required to verify the same by February 28, 2023.

12. Issuers, Debenture Trustees, CRAs, etc. shall have such mechanism to execute such functions as required for the system.

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Annex-IIIA

Registration of assets for initial due diligence

1. Type and nature of security offered

a. Immovable Property

b. Movable Fixed Assets

c. Current Assets viz., receivables, book debts

d. Intangible viz., IPRs, etc.,

e. Securities/ Other Financial Asset

f. Assignment of rights

g. Guarantee viz personal corporate, corporate guarantee, government guarantee etc.

2. Details related to security offered – The required data to be to be filled along with supporting documents, wherever applicable:

a. Asset description

i. Asset name

ii. Asset Details (in case of shares, it shall also include ISIN, Quantity, Pledgee Demat ID, Pledgee Instrument ID)

iii. Asset Location (including address of the asset)

iv. Asset ownership details b. Value of security offered: Issuer shall submit documents as required under Chapter II of this Master Circular and other documents given by Issuer for ascertaining the existence, veracity and value of assets.

c. Documents related to existing encumbrance on assets/ security offered:

Issuer shall record following details in the system and/or submit documents:

i. For unencumbered assets, an undertaking that the assets on which charge is proposed to be created are free from any encumbrances.

i. For encumbered assets, on which charge is proposed to be created, the Issuer shall submit documents in system as per para 2.1. (c) of Chapter

II of this Master Circular and any other document required to be given by the Issuer to the Debenture Trustee.

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Annex-IIIB

Manner of updation of charge creation details on System:

1. Issuer shall enter the following details related to charge created on system as and when applicable:

1.1. Asset details

1.2. Type of Charge Creation

1.3. Charge holder

1.4. Amount

1.5. Date on which charge is created

1.6. Modification date

1.7. Charge Closure date i.e. redemption date.

2. System shall ensure every charge details recorded in the system shall have a unique number. Therefore, an asset with a unique asset ID shall be mapped against multiple charge IDs.

3. After registering the charge creation details on ROC, CERSAI and IU or any other independent agency, Issuer, shall update the same on depository platform wherein Issuer will enter the following details:

3.1.Date of application/ filing with statutory/ government authority

3.2.Details of any receipt or challan obtained by Issuer after filing.

3.3.List of documents submitted to Agency

3.4.Certificate/ document obtained from statutory/ government authority after successful registration of charge.

4. An individual charge created maybe required to be registered with more than one agency, hence depository may enable Issuer to upload the above mentioned information for more than one agency.

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Annex-IIIC

Interest and principal payment details

1. Issuers shall fill all the requisite fields in at the time of creation of ISIN/ temporary ISIN as specified by filling in the following details:

2. Issuers shall fill all the following requisite fields to update the status of payment within one working day of payment/ redemption date or a change in the due date of interest payment/ redemption payment as under:

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Annex-IIID

Asset ID = System Code + Asset Type + Asset Sub Type + Unique Number + Check Digit

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Annex-IIIE

1. Common parameters across asset types: The following is an indicative list of parameters which shall be captured for all categories of asset types and subtypes to assign Asset ID:

a) Asset name

b) Short description of Asset

c) Asset type & sub-type

d) Address details of the assets including PIN Code for assets located in India, wherever available.

e) Ownership details of the asset

f) Valuation details of the asset

g) Unique Identification Number, if any, provided by regulator/agencies and the agency identifier.

h) Code along with Code Description in ERP (Enterprise Resource Planning) system of the issuer, wherever available.

i) Code along with Code Description in FAR (Fixed Asset Register) of the issuer, wherever available.

j) Validity/ Expiry date, if any.

k) Encumbrance/ lien details, if any.

2. Specific additional parameters for certain asset types: In addition to the above, following parameters shall also be captured for these specific asset types and subtypes.

Note:-

{13}SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2022/ 38 dated March, 29 2022 and SEBI/HO/MIRSD/MIRSD/CRADT/CIR/P/2021/618 dated August 13, 2021