5 Ensuring Adequate Security Cover for Listed Debt Securities

Key Takeaways:

- Issuers must prepare security cover certificates quarterly, certified by statutory auditors.

- Debenture trustees must certify the market value of assets and submit security cover certificates.

- Specific formulas are provided for calculating exclusive and pari-passu security cover ratios.

- Debenture trustees must address qualifications or disclaimers that impair investors' rights.

- The guidelines ensure transparency and protect the interests of investors in listed debt securities.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has issued comprehensive guidelines to ensure that listed debt securities have adequate security cover. These guidelines outline the responsibilities of issuers and debenture trustees in preparing and submitting security cover certificates, calculating security cover ratios, and addressing any qualifications or disclaimers that may arise.

Issuers' Responsibilities:

Issuers are required to prepare security cover certificates on a quarterly basis, and these certificates must be certified by the issuer's statutory auditor. The certificates should include the book values of the assets provided as security, as well as the market values of these assets. If the market value is not ascertainable for a particular quarter, the issuer must provide the carrying value or book value and justify the reason for not providing the market value.

The guidelines specify the frequency of valuation for different asset classes offered as security. For asset classes where SEBI has prescribed a valuation frequency, the market value must be provided accordingly. For other asset classes, the valuation must be conducted quarterly.

Issuers must disclose the details of any third-party or subsidiary assets offered as security, including the book value certified by the respective statutory auditors. Additionally, issuers must provide information on any unsecured debentures, subordinated debt, or other debt issuances that fall lower in the priority order for liquidation or resolution proceeds.

Debenture Trustees' Responsibilities:

Debenture trustees play a crucial role in verifying the security cover and certifying the market value of assets. On a quarterly basis, debenture trustees must certify the market value of assets based on due diligence carried out either by themselves or through independent professionals. They must submit the security cover certificate to the stock exchanges, certifying the security cover for the secured debt securities to the extent that the security is held by them.

In cases where an issuer has multiple debenture trustees for its listed debt securities, the debenture trustees may choose a common independent professional for preparing the security cover certificate.

Calculation of Security Cover Ratios:

The guidelines provide specific formulas for calculating the security cover ratios for exclusive and pari-passu security cover. These formulas ensure a standardized approach to calculating the security cover ratios, promoting transparency and consistency in the market.

Addressing Qualifications or Disclaimers:

Debenture trustees must ensure that any qualifications or disclaimers (by whatever name called) in the security cover certificates do not impair the rights of holders of debt securities concerning the security provided. If the debenture trustee believes that such qualifications or disclaimers are affecting the rights of investors, they must take corrective action.

The guidelines also require that security cover certificates contain a Unique Document Identification Number (UDIN) generated by the relevant regulatory authority, where applicable.

By implementing these guidelines, SEBI aims to protect the interests of investors in listed debt securities and promote transparency in the debt securities market. Issuers and debenture trustees play crucial roles in ensuring adequate security cover and providing accurate and reliable information to investors.

FAQs:

Q1: Why are security cover certificates important for listed debt securities?

A1: Security cover certificates provide investors with information about the assets offered as security for their debt securities. This transparency helps investors assess the risk associated with their investments and ensures that issuers maintain adequate security cover.

Q2: What is the role of debenture trustees in the security cover certificate process?

A2: Debenture trustees are responsible for verifying the security cover and certifying the market value of assets. They must conduct due diligence, either directly or through independent professionals, and submit security cover certificates to stock exchanges.

Q3: How are security cover ratios calculated?

A3: The guidelines provide specific formulas for calculating exclusive and pari-passu security cover ratios. These formulas ensure a standardized approach and promote transparency in the market.

Q4: What happens if a debenture trustee identifies qualifications or disclaimers that impair investors' rights?

A4: If a debenture trustee believes that qualifications or disclaimers in the security cover certificate impair the rights of investors, they must take corrective action to address the issue.

Q5: What is the significance of the Unique Document Identification Number (UDIN) in security cover certificates?

A5: The UDIN is generated by the relevant regulatory authority and must be included in security cover certificates, where applicable. It helps ensure the authenticity and traceability of the certificates.

Key Precedents:

1. Regulation 54 read with Regulation 56(1)(d) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations):

These regulations require issuers to disclose security cover to stock exchanges and debenture trustees.

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

This circular issued by SEBI provides guidelines for the revised format of security cover certificates, monitoring, and revision of timelines.

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

This regulation places an obligation on debenture trustees to ensure that the assets of the issuer are sufficient to discharge the interest and principal amount with respect to debt securities at all times.

The guidelines issued by SEBI aim to establish a robust framework for ensuring adequate security cover for listed debt securities. By outlining the responsibilities of issuers and debenture trustees, providing formulas for calculating security cover ratios, and addressing qualifications or disclaimers, SEBI seeks to protect the interests of investors and promote transparency in the debt securities market.

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

Chapter V: Security Cover Certificate{16}

In terms of regulation 54 read with regulation 56(1)(d) of SEBI LODR Regulations, Issuers are required to disclose security cover to Stock Exchange and Debenture Trustee. The obligations of the Issuer and the Debenture Trustee with respect to preparation and submission of security cover certificate are given as under:

1. Manner of preparation of security cover certificate by the Issuer:

1.1 The Issuer shall be required to prepare the security cover certificate on quarterly basis and the statutory auditor of the Issuer shall certify the book values of the assets provided in such certificate.

1.2 The Issuer shall provide the values in the format under the market values column including the reference date based on which the market value has been arrived at and the certificate shall be submitted to the Debenture Trustee. In case of loans/ receivables or any other asset offered as security and the market value is not ascertainable in the specific quarter, then the Issuer may provide the carrying value/ book value as per the format for security cover is enclosed at Annex-VA of this Master Circular. However, the Issuer shall provide the justification for not providing the market value along with the certificate in that quarter.

1.3 The frequency of valuation for asset classes offered as security by the Issuer shall be as under:

a) In case of asset classes wherein frequency of valuation has been prescribed by SEBI, the market value shall be provided, accordingly, in the security cover certificate.

b) For the asset classes wherein there is no regulatory guideline on frequency of the valuation of a specific asset class then it shall be on quarterly basis.

1.4 In case, the issuer has more than one Debenture Trustee for its listed debt securities, then the Issuer shall prepare such certificate separately for each Debenture Trustee.

1.5 The assets that are not paid for shall not be included as part of any security cover calculation.

1.6 In case security cover offered for the debt securities comprises the assets of the Issuer only, the security cover shall be prepared on standalone basis.

1.7 In case debt securities are secured by creation of charge on the assets of a third party/ subsidiary/ group/ holding company; or assets of the Issuer are offered for securing the debt securities issued by a third party/ subsidiary/ group/ holding company; or assets of the Issuer are offered for securing the other liabilities of third party/ subsidiary/ group/ holding company, the Issuer shall make disclosure in two separate tables on security cover as follows:

a) Table for security cover on standalone basis for the Issuer and;

b) Table on net summary basis on consolidated level in order to provide the overall/ holistic picture of the borrowings and security cover provided by the Issuer.

1.8 Obligations of the Issuer in case of third party/ subsidiary/ group/ holding company assets being offered as underlying security:

a) The book value for security cover shall be certified by the statutory auditor of the third party/ subsidiary/ group/ holding company with respect to third party/ subsidiary/ group/ holding company assets being offered as underlying security.

b) In case, security cover comprises exclusive charge on third party/ subsidiary/ group/ holding company assets, the security cover certified by the statutory auditor of the concerned third party/ subsidiary/ group/ holding company shall include details of such assets including the book value of such assets.

c) In case, security cover comprises pari-passu charge/ second/ third charge on third party/ subsidiary/ group/ holding company assets, the security cover certified by the statutory auditor of the concerned third party entity shall include the detail of all encumbrances on such assets.

1.9 Further, in order to adequately capture details regarding other debt securities, viz. unsecured debentures, subordinated debt, other debt issuances which fall in the lower priority order in the waterfall mechanism for liquidation/ resolution proceeds, an additional column named “Debt not backed by any assets offered as security” shall be incorporated in the security cover certificate and the same shall be covered under such column.

2. Manner of preparation and submission of security cover certificate by Debenture Trustee(s)

2.1 Debenture Trustee on a quarterly basis shall certify the market value of assets based on the due diligence carried out by it or through independent professionals and shall submit the security cover certificate as per Annex-VA of this Master Circular.

Debenture Trustee shall certify the security cover in respect of the secured debt securities, to the extent that the security is held by it.

2.2 In case the Issuer has more than one Debenture Trustee for its listed debt securities, then Debenture Trustees may choose a common independent professional for preparation of security cover certificate.

2.3 In case of reduction in the computed value of security cover in comparison to the previous quarter or previously calculated security cover, the Debenture Trustee shall record the reason for such variation in the security cover certificate. Clarification, if any, in this regard, may be obtained by Debenture Trustee from the Issuer.

3. Calculation of Security Cover Ratios

In order to standardize calculation of security cover ratio as prescribed in Annex-VA of this Master Circular, the following formulas shall be used:

3.1 Exclusive security cover shall be calculated in the following manner:

4. Affixing Unique Document Identification Number (UDIN) to the security cover certificates:

The security cover certificates as required under the provisions of this Master Circular shall contain, as applicable, the UDIN generated in the manner prescribed by the relevant regulatory authority.

5. Qualifications/ disclaimers in security cover certificates:

The Debenture Trustee shall ensure that the qualifications/ disclaimer (by whatever name called), does not impair the rights of holders of debt securities in terms of security provided. Further, if the Debenture Trustee is of the opinion that such qualifications/ disclaimer are affecting the rights of holders of debt securities, the Debenture Trustee shall take corrective action in this regard.

i. This column shall include book value of assets having exclusive charge and outstanding book value of debt for which this certificate is issued.

ii. This column shall include book value of assets having exclusive charge and outstanding book value of all corresponding debt other than column C.

iii. This column shall include debt for which this certificate is issued having any pari-passu charge - Mention Yes, else No.

iv. This column shall include a) book value of assets having pari-passu charge b) outstanding book value of debt for which this certificate is issued and c) other debt sharing pari-passu charge along with debt for which certificate is issued.

v. This column shall include book value of all other assets having pari-passu charge and outstanding book value of corresponding debt.

vi. This column shall include all those assets which are not charged and shall include all unsecured borrowings including subordinated debt and shall include only those assets which are paid-for.

vii. In order to match the liability amount with financials, it is necessary to eliminate the debt which has been counted more than once (included under exclusive charge column as also under pari-passu). On the assets side, there shall not be elimination as there is no overlap.

viii. Assets which are considered at Market Value like Land, Building, Residential/ Commercial Real Estate to be stated at Market Value. Other assets having charge to be stated at book value/Carrying Value.

ix. The market value shall be calculated as per the total value of assets mentioned in Column O.

Note:-

{16}SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P/2022/67 dated May 19, 2022