6 Debenture Trustees' Continuous Monitoring: Safeguarding Investors' Interests

Key Takeaways:

- Debenture Trustees must conduct independent periodic assessments of compliance with covenants and terms of listed debt securities.

- Regular monitoring of security creation, security cover, and covenants is required through reports, certifications, and disclosures.

- Proactive measures, including disclosures on websites and to stock exchanges, are mandated to address defaults, breaches, and investor grievances.

- Specific timelines and formats are prescribed for various reports, certifications, and disclosures to ensure transparency and accountability.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) recognizes the pivotal role of Debenture Trustees in safeguarding the interests of investors in listed debt securities. To ensure effective monitoring and timely resolution of issues, SEBI has outlined comprehensive guidelines for Debenture Trustees in its Master Circular.

Debenture Trustees are mandated to undertake independent periodic assessments of compliance with covenants or terms of the issue of listed debt securities. This proactive approach aims to identify and address potential breaches or defaults at an early stage, protecting investors' interests.

A key responsibility of Debenture Trustees is the continuous monitoring of security creation and security cover. They must carry out due diligence on an ongoing basis, as prescribed in Regulation 15(1)(s) & 15(1)(t) of the SEBI (Debenture Trustees) Regulations, 1993. This includes verifying that the assets offered as security are free from encumbrances, obtaining necessary consents, and ensuring the adequacy of the security cover.

To facilitate this monitoring process, the terms and conditions related to periodic monitoring must be incorporated in the debenture trust deed. Debenture Trustees are required to submit various reports and certifications to stock exchanges within specified timelines. These include:

1. Security Cover Certificate (in the format specified in Annex-VA of the Master Circular) - Quarterly basis within 75/90 days from the end of each quarter.

2. Statement of value of pledged securities - Quarterly basis within 75/90 days from the end of each quarter.

3. Statement of value for Debt Service Reserve Account or any other form of security offered - Quarterly basis within 75/90 days from the end of each quarter.

4. Net worth certificate of guarantor (in case listed debt securities are secured by personal guarantee) - Half-yearly basis within 75 days from the end of each half-year.

5. Financials/value of guarantor (in case listed debt securities are secured by corporate guarantee) - Annual basis within 75 days from the end of each financial year.

6. Valuation report and title search report for immovable/movable assets - Once in three years within 75 days from the end of the financial year.

Debenture Trustees are also responsible for monitoring covenants and taking appropriate actions in case of breaches. They must establish board-approved internal policies for proactive and effective monitoring of covenant breaches. This includes formulating category-wise lists of covenants, defining monitoring frequencies, and initiating actions such as accelerated payment, borrowing restrictions, or declaring events of default as per the terms of the issue.

Transparency and disclosure play a crucial role in the monitoring process. Debenture Trustees are required to furnish status reports on their websites and to stock exchanges on a quarterly basis, detailing any covenants breached and actions taken. Additionally, they must disclose to stock exchanges any no-objection certificates, no-dues certificates, or consents issued to issuers, as well as any breaches of minimum security cover, within specified timelines.

In cases of defaults or breaches, Debenture Trustees must promptly disseminate information to holders of debt securities, stock exchanges, and the general public through press releases and website updates. This includes defaults in interest or redemption payments, failure to create charges, and revisions in credit ratings assigned to the listed debt securities.

The Master Circular emphasizes the importance of effective grievance redress mechanisms. Debenture Trustees must designate exclusive email IDs for investors to register complaints and ensure timely resolution. They are also required to register on SEBI's Complaints Redress System (SCORES) platform and address investor grievances within specified timelines.

By mandating periodic monitoring, reporting, and disclosure requirements, SEBI aims to enhance transparency, accountability, and investor protection in the listed debt securities market. Debenture Trustees play a pivotal role in ensuring issuers' compliance with covenants, terms of the issue, and timely resolution of defaults and breaches, ultimately safeguarding the interests of investors.

FAQs:

Q1: What is the significance of the Security Cover Certificate?

A1: The Security Cover Certificate is a crucial document that Debenture Trustees must certify on a quarterly basis. It ensures that the assets offered as security are adequate to cover the debt securities issued, providing investors with assurance about the security cover's sufficiency.

Q2: How does SEBI ensure transparency in the monitoring process?

A2: SEBI mandates Debenture Trustees to make various disclosures on their websites and to stock exchanges. These include status reports on covenants breached, no-objection certificates issued, breaches of minimum security cover, and details of defaults or breaches. This transparency enables investors to stay informed and hold issuers and Debenture Trustees accountable.

Q3: What actions can Debenture Trustees take in case of covenant breaches?

A3: In case of covenant breaches, Debenture Trustees can initiate actions such as accelerated payment, borrowing restrictions, not allowing dividend payments before debt servicing, declaring events of default, and enforcing security as per the terms of the issue and the Debenture Trust Deed.

Q4: How does SEBI ensure effective grievance redress for investors?

A4: SEBI requires Debenture Trustees to designate exclusive email IDs for investors to register complaints and to register on SEBI's Complaints Redress System (SCORES) platform. Debenture Trustees must address investor grievances within specified timelines, ensuring prompt resolution.

Key Precedents:

1. SEBI (Debenture Trustees) Regulations, 1993:

- Regulation 15(1)(s) & 15(1)(t): Mandates Debenture Trustees to carry out due diligence on a continuous basis for monitoring security creation and security cover.

2. SEBI/HO/MIRSD/CRADT/CIR/P/2020/230 dated November 12, 2020:

- Outlines the requirements for Debenture Trustees to incorporate terms and conditions related to periodic monitoring in the debenture trust deed.

- Specifies the reports and certifications that Debenture Trustees must submit to stock exchanges, along with their respective timelines and formats.

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

- Provides guidelines for Debenture Trustees to establish internal policies for proactive and effective monitoring of covenant breaches.

- Mandates Debenture Trustees to disclose breaches of covenants, no-objection certificates issued, and breaches of minimum security cover to stock exchanges within specified timelines.

- Outlines the requirements for disseminating information regarding defaults, breaches, and credit rating revisions to holders of debt securities, stock exchanges, and the general public.

4. MIRSD/DPS III//Cir-01/07 dated January 22, 2007:

- Requires Debenture Trustees to designate exclusive email IDs for investors to register complaints and ensure timely resolution of grievances.

5. CIR/OIAE/1/2014 dated December 18, 2014:

- Mandates Debenture Trustees to register on SEBI's Complaints Redress System (SCORES) platform and address investor grievances within specified timelines.

The Master Circular consolidates and reinforces SEBI's commitment to protecting the interests of investors in listed debt securities. By mandating continuous monitoring, reporting, and disclosure requirements for Debenture Trustees, SEBI aims to enhance transparency, accountability, and investor protection in the debt securities market.

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

Chapter VI: Periodical/ Continuous Monitoring by Debenture Trustee{17}

A Debenture Trustee shall undertake independent periodical assessment of compliance with covenants or terms of the issue of listed debt securities.

1. Monitoring of security created/ assets on which charge is created

1.1.Chapter II of this Master Circular has prescribed the manner in which Debenture Trustees shall carry out due diligence for creation of security at the time of issuance of debt securities. As required under Regulation 15(1)(s) & 15(1)(t) of the DT Regulations, Debenture Trustee shall carry out due diligence on continuous basis.

1.2.Towards this, the issuer and the Debenture Trustee shall ensure that the terms and conditions relating to periodical monitoring are incorporated in the debenture trust deed{18}. These terms and conditions shall, inter-alia, entail that the Issuer shall provide relevant documents/ information within a considerable timeline so as to enable the Debenture Trustee shall submit the following reports/ certification to Stock Exchange within the timelines specified:

1.3.Further, in case of pari-passu charge, wherein multiple Debenture Trustees are holding charge over the same assets, a lead Debenture Trustee may be decided amongst the Debenture Trustees based upon the amount of the charge each Debenture Trustees holds and accordingly the exercise of carrying out the valuation and preparation of the valuation report may be carried out by the lead Debenture Trustees.

2. Monitoring of covenants{19}

2.1.On a quarterly basis, the Issuer shall furnish to the Debenture Trustee the compliance status with respect to financial covenants of the listed debt securities which shall be certified by the statutory auditor of the Issuer.

2.2.Regulation 15(f) of the DT Regulations mandates the Debenture Trustee to monitor the breach of covenants. In order to ensure effective monitoring, a Debenture Trustee shall:

a) Establish board approved internal policies with respect to proactive and effective monitoring of breach of covenants and such policy shall inter-alia include:

i. procedure of monitoring of breach of covenants; and

ii. clearly defined role and responsibilities of the employees engaged in the process of monitoring of breach of covenants including delegation of authority with respect to the process of monitoring of breach of covenants.

b) Formulate the category wise list of covenants applicable to the particular issuance defining the frequency of each covenant to be monitored viz. continuous, quarterly, half-yearly, annual etc. The covenants may be categorized as financial covenants, affirmative covenants, negative covenants etc. A guidance notes for the list of covenants prepared in consultation with Debenture Trustees is enclosed as Annex-VIA of this Master Circular.

c) Initiate action in case of breach of covenants viz. accelerated payment, borrowing restriction, not to declare dividend before payment, declaration of event of default, etc. in accordance with the terms of issue/ Offer Document/ Debenture Trust Deed.

d) Independently monitor any breach of covenants from continuous monitoring of any public disclosure on Stock Exchange, company filings, news articles in electronic/ print media or any information available in public domain apart from periodical information/ documents submitted by the issuer.

e) Furnish a status report on its website and to the Stock Exchange for further dissemination on a quarterly basis. Such status report shall contain the covenants breached in the preceding quarter and the actions taken by the Debenture Trustee for the same as per the format prescribed under Chapter VI of this Master Circular.

3. Disclosures by Debenture Trustee{20}:

3.1.In order to enhance transparency with respect to the no-objection certificate (NOC)/ no-dues certificate/ consent/ permission (by whatever name called) issued by the Debenture Trustee, it shall make the following disclosures to the Stock Exchange:

a) No-objection Certificate (NOC)/ no-dues certificate/ consent/ permission (by whatever name called) issued by Debenture Trustee to the Issuer in terms of contractual obligations arising out of offer document/ debenture trust deed or any other transaction document related to debt securities, including the consent/ NOC for further borrowing by issuer within two working days of issuance of such consent/ no-objection certificate; and

b) Any breach of the minimum security cover within two working days of such breach.

Annex-VIA

Guidance note on list of Covenants

Note:-

{17}SEBI/HO/MIRSD/CRADT/CIR/P/2020/230 dated November 12, 2020

{18}For existing debt securities as on November 12, 2020 vide circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/230, listed entities and debenture trustee(s) were given 120 days to enter into supplemental/amended debenture trust deed incorporating the changes in the debenture trust deed

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

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