4 Safeguarding Investor Interests: SEBI's Recovery Expense Fund for Listed Debt Securities

Key Takeaways:

- The Recovery Expense Fund (REF) is a new measure introduced by SEBI to facilitate prompt action by Debenture Trustees in case of default on listed debt securities.

- Issuers are required to contribute 0.01% of the issue size, subject to a maximum of ₹25 lakhs, towards the REF at the time of listing.

- The REF will be maintained by the Designated Stock Exchange in the form of cash, cash equivalents, or Bank Guarantees.

- In case of default, the Debenture Trustee can obtain the consent of debtholders and utilize the REF for legal proceedings and other necessary actions.

- The REF aims to protect the interests of investors in listed debt securities by enabling Debenture Trustees to take prompt action in case of default.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has introduced a new measure to safeguard the interests of investors in listed debt securities. In case of default by issuers, Debenture Trustees often face challenges in initiating legal proceedings or taking necessary actions due to lack of funds. To address this issue, SEBI has mandated the creation of a Recovery Expense Fund (REF).

As per the SEBI circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/207 dated October 22, 2020, and the subsequent circular SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P /2022/67 dated May 19, 2022, issuers proposing to list debt securities are required to contribute an amount equal to 0.01% of the issue size towards the REF. However, this contribution is subject to a maximum cap of ₹25 lakhs per issuer.

The REF will be created and maintained by the Designated Stock Exchange, which is identified and disclosed in the issuer's Offer Document. The issuer shall deposit the contribution in the form of cash, cash equivalents, or Bank Guarantees at the time of making the application for listing the debt securities.

The Designated Stock Exchange will invest the cash contributions in government securities, treasury bills, fixed deposits with scheduled commercial banks, or gilt or overnight mutual fund schemes. The income or interest earned on these investments will be added to the issuer's REF.

In case the issuer provides a Bank Guarantee, it must ensure that the Bank Guarantee remains valid for a period of six months post the maturity date of the listed debt security. The issuer is responsible for keeping the Bank Guarantee in force and renewing it at least seven working days before its expiry. Failure to do so will result in the Designated Stock Exchange invoking the Bank Guarantee.

In the event of default, the Debenture Trustee or the Lead Debenture Trustee (in case of multiple Debenture Trustees) shall obtain the consent of the debtholders for enforcement or legal proceedings. Upon receiving such intimation, the Designated Stock Exchange shall release the amount lying in the REF to the Debenture Trustee or Lead Debenture Trustee within five working days.

The Debenture Trustee shall maintain proper accounts of all expenses incurred from the REF towards legal expenses, hosting meetings, and other costs related to enforcement or legal proceedings concerning the debt securities.

Once the debt securities are redeemed or the call or put option is exercised, the balance in the REF shall be refunded to the issuer upon receiving a 'No Objection Certificate' from the Debenture Trustee. However, the Debenture Trustee must ensure that there is no default on any other listed debt securities of the issuer before issuing the NOC.

To ensure independent verification of the REF's creation, Debenture Trustees are required to obtain confirmation from the Designated Stock Exchange or any other independent source in writing, rather than relying solely on the issuer's communication.

The Stock Exchanges are required to disclose the amount of REFs created by issuers on a half-yearly basis on their websites, along with the details of the Debenture Trustees for the respective debt securities.

The introduction of the Recovery Expense Fund is a significant step by SEBI to protect the interests of investors in listed debt securities. By providing Debenture Trustees with the necessary funds to initiate legal proceedings or take other actions in case of default, the REF aims to ensure timely and effective resolution of investor grievances and safeguard their investments.

FAQs:

Q1: What is the purpose of the Recovery Expense Fund (REF)?

A1: The REF is designed to enable Debenture Trustees to take prompt action, including legal proceedings, in case of default by issuers of listed debt securities. It provides the necessary funds to initiate enforcement actions and protect the interests of investors.

Q2: How is the REF contribution calculated for issuers?

A2: Issuers are required to contribute an amount equal to 0.01% of the issue size towards the REF, subject to a maximum cap of ₹25 lakhs per issuer.

Q3: Who maintains the REF, and in what form is it held?

A3: The REF is maintained by the Designated Stock Exchange, which is identified and disclosed in the issuer's Offer Document. The contribution can be made in the form of cash, cash equivalents, or Bank Guarantees.

Q4: How can the Debenture Trustee access the REF in case of default?

A4: In the event of default, the Debenture Trustee or Lead Debenture Trustee shall obtain the consent of the debtholders for enforcement or legal proceedings. Upon receiving such intimation, the Designated Stock Exchange shall release the amount lying in the REF to the Debenture Trustee within five working days.

Q5: What happens to the balance in the REF after the debt securities are redeemed?

A5: Once the debt securities are redeemed or the call or put option is exercised, the balance in the REF shall be refunded to the issuer upon receiving a 'No Objection Certificate' from the Debenture Trustee, provided there is no default on any other listed debt securities of the issuer.

Key Precedents:

The Recovery Expense Fund (REF) is a new measure introduced by SEBI through the following circulars:

1. SEBI/HO/MIRSD/CRADT/CIR/P/2020/207 dated October 22, 2020:

This circular introduced the concept of the Recovery Expense Fund and outlined the requirements for issuers to contribute towards the REF.

2. SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P/2022/67 dated May 19, 2022:

This circular provided further clarifications and guidelines regarding the REF, including the format for security cover certificates and monitoring requirements.

These circulars establish the legal framework for the REF and outline the responsibilities of issuers, Debenture Trustees, and Stock Exchanges in creating, maintaining, and utilizing the fund. The REF aims to address the challenges faced by Debenture Trustees in initiating legal proceedings or taking necessary actions in case of default, thereby protecting the interests of investors in listed debt securities.

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

Chapter IV: Recovery Expenses Fund{15}

In order to enable the Debenture Trustee to take prompt action for enforcement/legal proceedings in case of ‘default’ in listed debt securities, a ‘Recovery Expense Fund’ (REF) shall be created which shall be used in the manner as decided in the meeting of the holders of debt securities.

1. Manner of creation and operation of REF

1.1.The issuer proposing to list debt securities shall deposit an amount equal to 0.01% of the issue size subject to maximum of Rs. 25 lakhs per issuer towards REF with the ‘Designated Stock Exchange’, as identified and disclosed in its Offer Document.

1.2.The REF shall be created and maintained in the following form:

a. The issuer shall deposit cash or cash equivalent(s) including Bank Guarantees towards contribution to this fund at the time of making the application for listing of debt securities.

b. The Designated Stock Exchange shall invest such cash in the REF in Government Securities or Treasury Bills or Fixed Deposits with a Scheduled commercial bank or gilt or overnight mutual fund schemes and the income/ interest earned thereof shall be added to the REF of the issuer.

c. The issuer shall ensure that the Bank Guarantee remains valid for a period of six months post the maturity date of the listed debt security. The issuer shall keep the bank guarantee in force and renew the Bank Guarantee at least seven working days before its expiry, failing which the Designated Stock Exchange shall invoke such Bank Guarantee.

1.3. In case of any change in status of issuer of the listed debt securities on account of corporate restructuring by way of Scheme of Arrangement etc., the Designated Stock Exchange shall ensure that the amount maintained in the REF is available as per paragraph 1.1 before issuing the ‘No-objection letter’ in that regard.

Manner of utilization of Recovery Expense Fund:

2.1.In the event of default, the Debenture Trustee/ Lead Debenture Trustee shall obtain the consent of holders of debt securities for enforcement/ legal proceedings and shall inform the same to the Designated Stock Exchange. The Designated Stock Exchange shall release the amount lying in the REF to the Debenture Trustee/ Lead Debenture Trustee within five working days of receipt of such intimation.

2.2.For the purpose of the provisions of this Chapter, Lead Debenture Trustee shall mean:

1. A Debenture Trustee who is chosen as the Lead Debenture Trustee by other Debenture Trustees; or

2. A Debenture Trustee who represents holders of more than 50% of the outstanding value of debt securities.

2.3.The Debenture Trustee shall keep a proper account of all expenses incurred out of the funds received from REF towards Legal expenses, cost for hosting meetings etc. towards enforcement/ legal proceedings in relation to the Debt securities

3. Refund of REF to the Issuer

3.1.The balance in the REF shall be refunded to the issuer on repayment to holders of debt securities on their maturity or at the time of the exercise of call or put option, upon a ‘No Objection Certificate (NOC)’ being issued by the Debenture Trustee to the Designated Stock Exchange.

3.2.The Debenture Trustee shall satisfy that there is no ‘default’ on any other listed debt securities of the issuer before issuing the NOC.

4. Verification of creation of REF

4.1.In order to ensure independent verification by a Debenture Trustee regarding creation of REF by issuer, Debenture Trustee shall take confirmation from Designated Stock Exchange or any other independent source in writing regarding the creation of REF by the issuer and shall not rely solely upon the communication by the issuer.

4.2.The Stock Exchange shall disclose on their websites, the amount of REFs created by the issuers on a half yearly basis. Such disclosure shall also include the details of the Debenture Trustee for the debt securities.

Note:-

{15}SEBI/HO/MIRSD/CRADT/CIR/P/2020/207 dated October 22, 2020 and SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P/2022/67 dated May 19, 2022