SEBI Fortifies Debenture Trustee Regulations for Robust Debt Market

Key Takeaways on Master Circular:

- Rigorous due diligence on assets offered as security, ensuring unencumbered status and adequate cover

- Pioneering distributed ledger technology platform for real-time tracking of security creation, covenant compliance, and payments

- Dedicated Recovery Expense Fund to finance legal proceedings and recovery efforts in case of defaults

- Standardized security cover ratio calculations and unique asset identifiers for transparency

- Enhanced disclosure norms for issuers, including terms of trustee agreements and security details

- Comprehensive record-keeping and quarterly certification requirements for trustees

Here're Master Circular's Chapterwise Keytakeaways:

- Debenture trustees must familiarize themselves with the online registration mechanism through the SEBI Intermediary Portal for various activities, including registration, processing applications, and granting final registration.

- SEBI has enabled digital modes of payment (RTGS/NEFT/IMPS) for fees, penalties, and other remittances, streamlining financial transactions.

- Debenture trustees are required to obtain prior approval from SEBI in case of a change in control, with specific guidelines for transfer of shareholdings among immediate relatives and transmission of shareholdings.

- Guidelines are provided for the transfer of business by SEBI-registered intermediaries to other legal entities, outlining scenarios where new registration or retention of existing registration numbers is required.

- Debenture trustees must follow prescribed procedures for the surrender of registration certificates, including obtaining necessary consents and providing undertakings.

- Maintaining a designated email ID for regulatory communication with SEBI is mandatory to facilitate the issuance of digitally signed circulars.

- Debenture trustees are advised to establish comprehensive policies and procedures for outsourcing activities, ensuring proper due diligence, risk management, and contractual agreements.

Click me to read commentary on Chapter 1

- Debenture Trustees must exercise independent due diligence to verify the adequacy and enforceability of security for debt securities.

- Detailed guidelines are provided for assessing the validity of security, obtaining necessary consents, and evaluating asset valuation reports.

- Continuous monitoring of security cover, covenants, and issuer compliance is mandated through periodic reporting and certification requirements.

- Debenture Trustees are responsible for timely disclosure of any breaches, defaults, or adverse developments to investors and regulatory authorities.

Click me to read commentary on Chapter 2

- SEBI has mandated the use of a centralized 'Security and Covenant Monitoring System' for recording and monitoring security creation, covenant compliance, and credit ratings of listed debt securities.

- The system will be hosted and maintained by Depositories using distributed ledger technology (DLT) or similar technologies, ensuring data integrity and security.

- Issuers, debenture trustees, credit rating agencies, and other stakeholders will have secure access to the system for recording, verifying, and monitoring relevant information.

- The system aims to enhance transparency, accountability, and investor protection in the debt securities market.

- Debenture trustees will play a crucial role in validating and monitoring security details, covenant compliance, and credit ratings on the system.

Click me to read commentary on Chapter 3

- 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.

Click me to read commentary on Chapter 4

- 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.

Click me to read commentary on Chapter 5

- 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.

Click me to read commentary on Chapter 6

- Debenture Trustees must disclose credit rating revisions, payment status, security cover monitoring, covenant breaches, investor grievances, and default cases on their websites.

- These disclosures ensure transparency and enable investors to make informed decisions.

- Specific formats and timelines are prescribed for different types of disclosures, ranging from continuous basis to annual basis.

- Debenture Trustees must also disclose their compensation arrangements with clients on their websites.

- Failure to comply with these disclosure requirements may attract regulatory action.

Click me to read commentary on Chapter 7

- 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.

Click me to read commentary on Chapter 8

- Debenture trustees must prominently display grievance redressal mechanisms and contact information for investors.

- Dedicated email IDs and SEBI's SCORES platform facilitate efficient grievance reporting and tracking.

- Strict timelines are imposed for acknowledging, investigating, and resolving investor complaints.

- Debenture trustees are required to disclose complaint data and resolution status on their websites regularly.

- Collaboration with SEBI and stock exchanges ensures effective oversight and investor protection.

Click me to read commentary on Chapter 9

- 'Default' is defined as non-payment of interest or principal amount in full on the pre-agreed date, recognized at the first instance of delay in servicing any interest or principal on debt.

- Debenture trustees must appoint a director nominated by them on the boards of issuers as per Regulation 23(6) of SEBI NCS Regulations.

- The process for convening meetings of holders of debt securities, obtaining consent for enforcement of security, and signing the ICA is outlined, including the conditions for debenture trustees to sign the ICA.

- Debenture trustees must take necessary action in case of breaches of covenants or terms of issue, as decided in the meeting of holders of debt securities.

Click me to read commentary on Chapter 10

- SEBI has introduced guidelines to regulate transactions in defaulted debt securities after their maturity or redemption date.

- The framework outlines the responsibilities of debenture trustees, issuers, and depositories in managing defaulted debt securities.

- It emphasizes the importance of timely communication and information sharing among stakeholders.

- The guidelines aim to ensure transparency, protect investor interests, and facilitate the recovery process.

Click me to read commentary on Chapter 11

- Debenture Trustees must access the database to verify default history and other relevant information.

- In case of discrepancies, Debenture Trustees must notify Stock Exchanges and update correct information within seven days of knowledge of default.

- The database aims to provide a centralized repository of default-related information, enhancing transparency and investor protection.

- Timely updates by Debenture Trustees are crucial for maintaining the accuracy and reliability of the database.

Click me to read commentary on Chapter 12

- Debenture Trustees must furnish half-yearly compliance reports to SEBI within 75 days of each half-year.

- The compliance report covers various aspects, including conflicts of interest, changes in status or constitution, compliance with registration requirements, and details of any deficiencies or non-compliances.

- The Debenture Trustee's Board of Directors is responsible for reviewing the compliance report before submission to SEBI.

- Timely and accurate reporting by Debenture Trustees enhances transparency and accountability in the debt securities market.

Click me to read commentary on Chapter 13

- Debenture Trustees must have a comprehensive policy approved by their Board to assess and govern outsourcing activities.

- Outsourcing arrangements should not impair SEBI's supervisory authority or the Debenture Trustee's ability to fulfill obligations to investors and regulators.

- Debenture Trustees remain fully liable and accountable for outsourced activities as if the services were provided in-house.

- Robust due diligence, written contracts, contingency plans, and confidentiality measures are mandatory for outsourcing arrangements.

- Debenture Trustees must ensure that outsourcing does not lead to conflicts of interest or co-mingling of information.

Click me to read commentary on Chapter 14

- Intermediaries must have proper internal codes of conduct and controls to prevent the circulation of unverified market information by their employees.

- Access to blogs, chat forums, and messenger sites should be restricted or supervised to prevent the spread of rumors.

- Logs of such activities should be maintained as records per applicable regulations.

- Employees should forward any market-related news to the compliance officer for approval before circulation.

- Failure to comply with these guidelines will be considered a violation of SEBI Act, Rules, and Regulations, and intermediaries and their employees will be liable for action.

Click me to read commentary on Chapter 15

- Debenture Trustees must actively involve senior management in developing policies and procedures to identify and address conflicts of interest.

- They must maintain high standards of integrity, ensure fair treatment of clients, and prioritize client interests over personal interests.

- Appropriate disclosures must be made to clients about potential conflicts that could impair the ability to provide fair and unbiased services.

- Measures such as information barriers should be implemented to reduce opportunities for conflicts.

- Restrictions should be placed on transactions in securities while handling client mandates to avoid conflicts.

- Boards of Debenture Trustees are responsible for implementing these guidelines and providing necessary guidance.

Click me to read commentary on Chapter 16

Commentary on Master Circular

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:

Q1: What is the significance of the Security and Covenant Monitoring System?A1: 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.

Q2: How does the Recovery Expense Fund aid in enforcement actions?

A2: 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.

Q3: What are the key responsibilities of Debenture Trustees under the new guidelines?

A3: 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.

Q4: How does the Master Circular enhance transparency and disclosure norms?A4: 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.

Q5: What are the implications for issuers of debt securities?

A5: 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.