SEBI Fortifies Debenture Trustee Regulations for Robust Debt Market

The Indian corporate debt market has witnessed significant growth, necessitating robust regulatory oversight to safeguard investor interests. In a landmark move, the Securities and Exchange Board of India (SEBI) has introduced a Master Circular that consolidates and harmonizes the guidelines for Debenture Trustees, the custodians of investor rights in debt securities. At the core of this circular lies a rigorous framework for the creation and monitoring of security for debt issuances. Issuers are mandated to provide comprehensive documentation and consents related to the assets offered as security, including details of existing encumbrances and permissions from charge holders. Debenture Trustees, through independent professionals, must conduct thorough due diligence to verify the assets' unencumbered status, adequacy of consents, and overall security cover. To ensure transparency and real-time tracking, SEBI has introduced a pioneering "Security and Covenant Monitoring System" built on distributed ledger technology (DLT). This platform will serve as a centralized repository for recording and monitoring security creation, covenant compliance, credit ratings, and interest/redemption payments. Issuers, Debenture Trustees, and Credit Rating Agencies will have secure access to update and validate information, fostering accountability and data integrity. Recognizing the importance of prompt enforcement actions in case of defaults, SEBI has mandated the creation of a "Recovery Expense Fund" (REF). Issuers will contribute a nominal percentage of the issue size towards this fund, which will be utilized by Debenture Trustees to finance legal proceedings and recovery efforts, subject to the consent of debtholders. Furthermore, the circular standardizes the calculation of security cover ratios, introduces a unique asset identifier system, and outlines guidelines for engaging independent professionals by Debenture Trustees. Issuers are required to disclose the terms of the debenture trustee agreement, including fees and security details, in the offer document/placement memorandum. To ensure compliance, Debenture Trustees are directed to maintain comprehensive records, including due diligence reports, valuation certificates, and security cover certificates. These certificates must be prepared quarterly, with statutory auditors certifying the book values and Debenture Trustees validating the market values of the underlying assets. The Master Circular reflects SEBI's commitment to fostering a robust and transparent corporate debt market, safeguarding the interests of investors while promoting ease of doing business for issuers and intermediaries. # FAQs: 1. **What is the significance of the Security and Covenant Monitoring System?** The Security and Covenant Monitoring System, built on distributed ledger technology, is a game-changer in the corporate debt market. It provides a centralized platform for real-time tracking and monitoring of security creation, covenant compliance, credit ratings, and interest/redemption payments. This transparency and accountability will instill confidence among investors and promote market integrity. 2. **How does the Recovery Expense Fund aid in enforcement actions?** The Recovery Expense Fund is a crucial provision that empowers Debenture Trustees to take prompt enforcement actions in case of defaults. By contributing a nominal percentage of the issue size, issuers ensure that Debenture Trustees have access to funds for legal proceedings and recovery efforts, subject to the consent of debtholders. This mechanism aims to protect investor interests and deter potential defaults. 3. **What are the key responsibilities of Debenture Trustees under the new guidelines?** Debenture Trustees play a pivotal role in safeguarding investor interests. Under the new guidelines, they are required to conduct rigorous due diligence on the assets offered as security, verify the adequacy of consents and security cover, and continuously monitor covenant compliance. Additionally, they must maintain comprehensive records, prepare quarterly security cover certificates, and engage independent professionals for valuation and monitoring purposes. 4. **How does the Master Circular enhance transparency and disclosure norms?** The Master Circular emphasizes transparency and disclosure as cornerstones of a robust debt market. Issuers are mandated to disclose the terms of the debenture trustee agreement, including fees and security details, in the offer document/placement memorandum. Furthermore, Debenture Trustees must issue due diligence certificates confirming the adequacy of security creation and covenant compliance. 5. **What are the implications for issuers of debt securities?** Issuers of debt securities will need to comply with the stringent guidelines outlined in the Master Circular. This includes providing comprehensive documentation and consents related to the assets offered as security, creating and registering charges within stipulated timelines, and contributing to the Recovery Expense Fund. Additionally, issuers must ensure accurate and timely updates on the Security and Covenant Monitoring System, fostering transparency and accountability.