8 Debenture Trustees: Navigating Trust Deeds and Information Sharing

Key Takeaways:

- Debenture trust deeds must not contain clauses that limit or extinguish the obligations of debenture trustees towards debenture holders.

- Debenture trustees and credit rating agencies must share relevant information to enable effective monitoring and discharge of duties.

- Debenture trustees must promptly disseminate information regarding defaults, rating revisions, and payment status to debenture holders and regulatory bodies.

Detailed Narrative:

The chapter emphasizes the significance of debenture trust deeds, which serve as the foundation for the relationship between issuers, debenture trustees, and debenture holders. It underscores that any clauses in existing or new debenture trust deeds that limit or extinguish the obligations of debenture trustees towards the rights or interests of debenture holders shall be deemed null and void, as per the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 (DT Regulations).

To ensure effective monitoring and discharge of duties, the chapter mandates the sharing of information between debenture trustees and credit rating agencies (CRAs). Debenture trustees are required to share information specified in Annex-VIIIA of the Master Circular, including details on security creation, debenture redemption reserve (DRR) funds, redemption details, defaults, restructuring, utilization of funds, and investor grievances. CRAs, in turn, must provide debenture trustees with rating information, press releases, and instances of non-cooperation by issuers.

The chapter emphasizes the importance of debenture trustees having robust systems in place to ascertain the status of interest payments and principal repayments by issuers on due dates. Debenture trustees must seek ISIN-wise information from issuers at least seven days prior to the due date and promptly share this information with CRAs. In cases where issuers fail to disclose payment status or delay in payment, debenture trustees must inform CRAs within one day after the due date and disclose the non-availability of information on their websites.

Furthermore, the chapter mandates that debenture trustees disseminate information to debenture holders and the general public through press releases regarding defaults, failure to create charges, and rating revisions. Such information must also be published on the websites of debenture trustees, issuers, and stock exchanges promptly, and no later than the next day of the occurrence of such events.

FAQs:

Q1: What is the significance of the provisions related to debenture trust deeds?

A1: The chapter emphasizes that debenture trust deeds must not contain clauses that limit or extinguish the obligations of debenture trustees towards debenture holders. This ensures that debenture trustees can effectively protect the interests of debenture holders.

Q2: Why is information sharing between debenture trustees and credit rating agencies important?

A2: Information sharing between debenture trustees and credit rating agencies is crucial for effective monitoring and discharge of duties. It enables CRAs to perform their obligations effectively and provides debenture trustees with relevant information to protect the interests of debenture holders.

Q3: What are the responsibilities of debenture trustees regarding dissemination of information?

A3: Debenture trustees are required to promptly disseminate information to debenture holders and the general public through press releases and website updates regarding defaults, failure to create charges, and rating revisions. This ensures transparency and enables debenture holders to make informed decisions.

Q4: What actions should debenture trustees take in case of non-disclosure of payment status by issuers?

A4: If issuers fail to disclose payment status or delay in payment, debenture trustees must inform CRAs within one day after the due date and disclose the non-availability of information on their websites. Failure to do so may be considered aiding and abetting the issuer in suppression of material information.

Key Precedents:

1. Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 (DT Regulations):

The chapter refers to the DT Regulations, which provide the broad framework for debenture trustees. It specifically mentions Regulation 15(6), which requires debenture trustees to exercise independent due diligence to ensure the security is free from encumbrances and adequate consent has been obtained from existing charge holders.

2. Circular No. CIR/MIRSD/25/2011 dated December 19, 2011:

This circular, which has been superseded by the Master Circular, addressed the review of regulatory compliance, periodic reporting, and contents of the debenture trust deed.

3. Circular No. CIR/MIRSD/3/2013 dated March 15, 2013:

This circular, now superseded, focused on the sharing of information regarding issuer companies between debenture trustees and credit rating agencies.

4. Circular No. SEBI/HO/MIRSD/MIRSD3/CIR/P/2017/72 dated June 30, 2017:

This circular, which has been superseded, provided clarification on the monitoring of interest/principal repayment and sharing of such information with credit rating agencies by debenture trustees.

The chapter highlights the importance of transparency, information sharing, and compliance with regulatory frameworks in the context of debenture trust deeds and the responsibilities of debenture trustees. It emphasizes the need for clear communication channels and outlines the specific obligations of debenture trustees in monitoring payment status, disseminating information, and ensuring the protection of debenture holders' interests.

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

Chapter VIII: Provisions relating Debenture Trust Deed, Sharing and Dissemination of Information by Debenture Trustee

1. Contents of Debenture Trust Deed{23}

Certain clauses that are included in the trust deed, limit or extinguish the obligations of Debenture Trustee in relation to any rights or interests of holders of debt securities or are in conflict with the provisions of the DT Regulations. Such clauses in the existing or new debenture trust deed shall not be applicable and shall stand null and void.

2. Sharing of information regarding Issuer between Debenture Trustees and CRAs{24}

2.1.DT Regulations require the Debenture Trustees to share information regarding the Issuers that are their clients, with CRAs. The purpose of the said requirement is to enable CRAs to perform their obligations effectively.

2.2.Towards this, Debenture Trustees and CRAs shall share information including but not limited to, as specified in Annex-VIIIA of this Master Circular, in respect of issues/ issuers which would help them in effective discharge of their duties.

2.3.Debenture Trustees and CRAs shall assign designated email addresses for sending and receiving such information and ensure appropriate action, if any, based on the information received.

3. Monitoring of payment of Interest/ repayment of Principal and sharing of such information with CRAs by Debenture Trustees{25}

3.1.Debenture Trustee shall have adequate systems to ascertain the status of payment of interest/ repayment of principal by the Issuer on due dates in timely manner and efficiently share such information with the CRAs which shall include the following:

3.1.1. The Debenture Trustee shall, at least seven days prior to the due date of payment of interest/ repayment of principal, seek ISIN-wise information from Issuers regarding the status of payment of interest/ repayment of principal on or before the due date. While seeking such information, the Debenture Trustee shall also intimate to CRAs.

3.1.2. If the Issuer confirms the status of such payment/ repayment or where no information is received from the Issuer on or before the due date, the Debenture Trustee shall accordingly provide ISIN-wise information to the CRAs latest by one day after such due date which shall state the following:

a) Information about payment made on or before the due date or;

b) Information about delay/ default in payment or;

c) No information forthcoming from the Issuer on the payment status.

3.1.3. In cases where the CRAs have been informed as per point no. 3.1.2 above that no information is forthcoming from the Issuer on the payment/ repayment status, the Debenture Trustee shall update the payment/ repayment status to CRAs as and when any such information is available with the Debenture Trustee.

3.2.The Debenture Trustee shall also ascertain the status of payment/ repayment by the Issuer on the due dates from various independent sources available at its disposal which, inter alia, include the websites of Stock Exchanges, holders of listed debt securities and quarterly reports submitted by Issuer.

3.3.The Debenture Trustee in its communication to the Issuer as mentioned in point no. 3.1.1 above shall inform that non-furnishing of information regarding status of payment/ repayment by due date or non-disclosure of information with respect to timely payment by the Issuer on Stock Exchange website may be considered as suppression of material information and may attract provisions of Section 12A of the Securities and Exchange Board of India Act, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

3.4.If no information regarding payment/ repayment by the Issuer is received by the Debenture Trustee by due date or such information is not disclosed by the Issuer on the Stock Exchange website, then, the Debenture Trustee shall make reference to SEBI accordingly and disclose the non-availability of such information on its website. Failure to make such reference to SEBI and nondisclosure on the website shall be considered as aiding and abetting the Issuer in suppression of material information and may attract provisions of Section 12A of the Securities and Exchange Board of India Act, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

4. Dissemination of Information on Listed Debt Securities{26}

The Debenture Trustee shall disclose the information to the holders of debt securities and the general public by issuing a press release regarding default by Issuer to pay interest on listed debt securities or redemption amount, failure to create a charge on the assets and revision of rating assigned to the listed debt securities. Further, such information shall also be placed on the website of the Debenture Trustee, the issuer and the stock exchanges. It is clarified that such actions shall be taken by the Debenture Trustee promptly and in any case not later than next day of the occurrence of such events.

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Annex-VIIIA

Sharing of information between Debenture Trustees and Credit Rating Agencies

1. Information from Credit Rating Agencies to Debenture Trustees

a) Rating assigned/revised for debt securities along with the rationale for the same.

b) Press release, outstanding ratings etc. in respect of debt securities.

c) Non-cooperation by the issuers with respect to sharing necessary information for monitoring the credit quality of the rated instrument with Credit Rating Agencies.

d) Press release and separate communication to Debenture Trustee on withdrawal of rating post redemption of entire amount due towards.

2. Information from Debenture Trustees to Credit Rating Agencies

a) Whether the asset in respect of which security has been created is free from any encumbrance and adequate to ensure security cover for the debt securities or if there is any breach of the terms of creation of the security. This information shall be shared on a half yearly basis.

b) Funds transferred to Debenture Redemption Reserve (DRR), depletion of the DRR/invocation of guarantee which could affect the payment of debt obligations. This information shall be shared annually.

c) Details of redemption of the issue.

d) Any default committed including the default in payment of interest or redemption of debt or delay in creation of security.

e) Any change or restructuring of the terms of the issue.

f) Periodic reports from lead banks about the progress of the project for which funds have been raised through debentures and certificate from issuer's auditors in respect of utilization of funds.

g) Details of grievances filed by debenture-holders and action taken to resolve them.

h) Non-cooperation by the issuer with respect to furnishing required reports/ certificates/ information.

Information pertaining to points c to h shall be shared on receipt.

Note:-

{23}Circular No. CIR/MIRSD/25/2011 dated December 19, 2011;

{24}Circular CIR/MIRSD/3/2013 dated March 15, 2013;

{25}SEBI/HO/MIRSD/MIRSD3/CIR/P/2017/ 72 dated June 30, 2017

{26}SEBI/HO/MIRSD/MIRSD3/CIR/P/2017/ 72 dated June 30, 2017