Upload
others
View
2
Download
0
Embed Size (px)
Citation preview
Page 1 of 17
SECURITIES AND EXCHANGE BOARD OF INDIA
Review of the Regulatory Framework for Corporate Bonds and Debenture
Trustees
1. Objective
1.1. This memorandum seeks the approval of the Board to make amendments
to the SEBI (Debenture Trustee) Regulations, 1993 (“DT Regulations”),
SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“ILDS
Regulations”) and SEBI (Listing Obligations and Disclosure
Requirements), 2015 (“LODR Regulations”) pursuant to public comments
received on the consultation paper issued for reviewing the Regulatory
Framework for Corporate Bonds and Debenture Trustees (DTs).
2. Background:
2.1. In order to enhance the role of the Debenture Trustees (DT(s)) and
empower them to effectively discharge their responsibilities and overcome
challenges regarding charge creation, enforcement of security of the
secured debentures, voting mechanism, Inter Creditor Agreement (ICA)
process and other related issues, a Consultation paper for strengthening
the regulatory framework for DT(s) for the above-mentioned issues and
putting in place provisions pertaining to enhanced disclosures by DT(s) and
issuer companies was placed for public comments. The following
proposals were put up for consultation:
2.1.1. Creation of identified charge by the Non-Banking Financial
Companies (NBFCs)
2.1.2. Enhanced due diligence of identified assets and granular “Asset
Cover” certificate
2.1.3. Calling of event of default at ISIN level
2.1.4. Mechanism/ conditions of joining ICA
2.1.5 Voting Mechanism
Page 2 of 17
2.1.6. Creation of recovery fund
2.1.7. Minimum disclosures on the website by DT(s)
2.1.8. Disclosures regarding performance of DT(s)
2.1.9. Public disclosure of all covenants by the issuer in Offer Document /
Information Memorandum
2.1.10. Standardization of Debenture Trust Deed (DTD)
2.1.11. Enhanced Disclosures in the Offer Document / Information
Memorandum and Debenture Trust Deed
2.1.12. Framework for imposing fines and Standard Operating Procedure
(SOP)
A copy of the Consultation Paper is placed at Annexure I.
3. Analysis of public comments
3.1. Comments (including suggestions) were received from 32 entities/
persons, which included issuer companies, DTs, Credit Rating Agencies
(CRAs), Mutual Funds (MFs), Insurance companies, other institutions and
individuals. Analysis of the same along with the rationale for acceptance/
non-acceptance and final recommendations are placed at Annexure II
(This has been excised for reasons of confidentiality).
3.2. The proposals warranting change in DT Regulations, ILDS Regulations
and LODR Regulations are discussed in the following paras:
4. Creation of a recovery expense fund:
4.1. Proposal in Consultation Paper:
4.1.1. A fund shall be created by the issuer at the time of issuance of debt
securities that may be utilised by DT in the event of default towards
expenses of recovery proceedings.
4.1.2. The value of such fund shall be 0.01% of size of the issue subject to
the cap of 25 lakhs per issuer.
Page 3 of 17
4.1.3. Disclosure to such effect shall also be made in the offer document /
Information Memorandum. Such fund shall be overseen by the DT.
4.1.4. The fund shall be returned to the issuer at the time of maturity of the
debt securities, in case there is no default by the issuer.
4.2. Rationale:
4.2.1. In the event of default, while DT(s) are obligated to work towards
enforcement of security, they are not able to recover their dues/ fees from
the defaulting issuer.
4.2.2. In case of default by an issuer, DT(s) are required to call for a meeting
of all the debenture holders to decide the further course of action
including cost incurred for initiation of recovery proceedings of their dues/
fees which is mostly borne by the debenture holders. However, delays
have been observed in the enforcement proceedings as the amount is
not always received from the debenture holders in time.
4.2.3. To prevent such delays in initiating enforcement proceedings, it is
necessary that DT(s) are adequately funded in advance.
4.3. Comments/ suggestions received and our views:
4.3.1. All public comments received, except one, are in favour of the proposal.
Suggestions have also been received that creation of such fund maybe
in the form of Fixed Deposit with lien marked to the DT.
4.3.2. In order to ensure that proposed fund is readily available at the
disposal of DT(s), it is necessary that such fund may be maintained in
the form of cash or cash equivalent.
4.4. Proposal for consideration of the Board:
4.4.1. Accordingly, to enable the creation of recovery expense fund as
proposed in paras 4.1 and 4.3.2, the following amendments to SEBI
(ILDS) Regulations and SEBI (DT) Regulations are proposed:
4.4.1.1. Following clause may be inserted in Regulation 26 of ILDS
Regulations:
Page 4 of 17
“26(7) The issuer shall create a recovery expense fund in the
manner as maybe specified by the Board from time to time
and inform the Debenture Trustee about the same.”
4.4.1.2. Following may be inserted in the summary term sheet provided
under Para 3(B)(a) of Schedule I of ILDS Regulations:
Creation of
recovery
expense
fund
a. Details and purpose of the recovery expense fund.
4.4.2. The Regulation 15(1)(h) of the DT Regulations maybe amended as
under:
“15(1)(h) ensure the implementation of the conditions regarding
creation of security for the debentures, if any, debenture redemption
reserve and recovery expense fund;”
5. Mechanism/ Conditions of joining ICA:
5.1. Proposal in Consultation Paper:
5.1.1. DTs may join ICA subject to approval of debenture holders and
following conditions:
5.1.1.1. Signing of ICA and agreeing to the Resolution Plan should be
in best interest of the debenture holders and investors.
5.1.1.2. DT(s) shall ensure that the following conditions are part of the
ICA before signing the ICA:
a. If Resolution Plan imposes condition(s) on the DT(s) which are
not in accordance with the provisions of SEBI Regulations and
circulars issued, then DT(s) shall exit ICA altogether with the
same rights as it if never signed ICA. In such a circumstance,
resolution plan would not be binding on the DT(s).
b. Resolution Plan shall be finalized within 180 days from the end
of review period. If not, the DT(s) shall exit the ICA altogether
Page 5 of 17
with the same rights as it if never signed the ICA. In such a
circumstance, resolution plan would not be binding on the
DT(s). However, If ICA extends beyond 180 days, DT(s) can
take extension beyond 180 days’ subject to approval of
debenture holders with total timeline not exceeding 1 year
from commencement period of ICA.
c. If any of the terms of the approved Resolution Plan are
contravened by any party to the ICA, DT(s) shall exit the ICA
and take legal recourse or take any other action as deemed fit
in the interest of the debenture holders.
5.1.2. Further, a debenture holders representative committee consisting of
debenture holders having majority investment may be formed after
default by the issuer, to fast track the ICA process and consent
seeking by DTs during the course of ICA.
5.2. Rationale:
5.2.1. Reserve Bank of India vide June 07, 2019 circular has issued ICA
framework to banks for resolution of stressed assets. For resolution
under this framework bank lenders have been inviting DT(s) to
become a member of ICA as the assets are charged on a pari-passu
basis.
5.2.2. However, due to majority of debenture holders being MFs, DT(s) face
multiple challenges (detailed as under) in joining the ICA framework:
i. Under the ICA, period of 180 days is provided for finalization of
resolution plan. However, it may be extended by additional 6
months, if no plan is finalized by the lenders within the given
timeframe. In the event of the lenders not reaching any resolution
plan, enforcement of security by the DTs would be delayed.
ii. The resolution plan finalized may involve infusion of additional
money, conversion of debt into equity etc. which may not be
acceptable to DT(s) as it goes against the mandate of regulations
Page 6 of 17
governing mutual fund schemes which may be major debenture
holders by value.
iii. Under the ICA, the resolution plan approved by the majority
lenders is final and binding on all the lenders. The dissenting
lenders are provided payment of “not less than liquidation value”
of assets. Since, debt holders have less probability of getting
favorable resolution plan, the above scenario might be the
favourable path for DT(s) in every case, which could be achieved
through Debt Recovery Tribunal without the delay of 6 months.
iv. As part of the ICA, the lenders agree not to initiate any legal
action or proceedings (including proceedings under Insolvency
and Bankruptcy Code, 2016) against the borrower for realization
of security during the period of ICA.
5.3. Comments/ suggestions received and our views:
5.3.1. All public comments received except one are in favour of the
proposal.
5.3.2. The proposed conditions for joining ICA are in line with the
instructions issued to Association of Mutual Funds in India vide letter
dated August 29, 2019 which is already being followed by MFs while
giving their consent to DT(s).
5.4. Proposal for consideration of the Board:
5.4.1. Accordingly, Regulation 15 of DT Regulations maybe amended and
a clause maybe inserted as under:
“15(7) Subject to the approval of the debenture holders and the
conditions as may be specified by the Board from time to time, the
debenture trustee, on behalf of the debenture holders, may enter into
inter-creditor agreements provided under the framework specified by
the Reserve Bank of India.”
Page 7 of 17
5.4.2. Accordingly, ‘Event of default’ section in the summary term sheet
provided under Para 3(B)(a) of Schedule I of ILDS Regulations
maybe amended as under:
6. Voting mechanism:
6.1. Proposal in Consultation Paper:
6.1.1. Time period sought for seeking consent shall be reduced to 15 days
from 21 days.
6.1.2. DTs shall enforce the security by taking negative consent in the event
of default.
6.1.3. The consent of debenture holders for enforcement of security and for
joining ICA shall be taken simultaneously in the same letter.
6.1.4. Negative consent for enforcement of security and positive consent
for joining ICA shall be taken in the same letter.
6.1.5. Proof of dispatch and delivery shall be maintained by the DTs.
6.1.6. Providing e-Mail IDs shall be compulsory for debenture holders in
case of private placement.
6.2. Rationale:
6.2.1. The DT(s) are required to take consent of debenture holders for
future course of action in cases of default. While DT(s) may go for
direct enforcement of security in case of public issue, DT(s) face
various problems in seeking such consent, in other issues, as under:
i. Often the debenture holders do not respond to the DT(s) when
consent is sought by the DT(s) despite repeated reminders, thus
slowing down the enforcement proceedings.
ii. In case of DT(s) joining ICA, taking consent twice - first for joining
ICA and then later for enforcement of security, in case no
Event of Default (including
conditions of joining Inter-
Creditor Agreement)
Page 8 of 17
resolution plan is finalized, causes further delay in enforcement
of security.
iii. The contact details including email of debenture holders with the
DT(s) are not updated most of the times, which makes it difficult
for DT(s) to communicate with debenture holders.
6.2.2. The above mentioned challenges could be addressed by mandating
providing of email ids (in case of issues other than public issue) and
through seeking negative consent of debenture holders, for
enforcement of security. This would facilitate prompt filing of recovery
by DT(s). It is also stated that taking negative consent is an
established practice in mutual fund Industry.
6.2.3. Maintenance of proof of dispatch and delivery by the DT(s) may be
necessary, so that the negative consent sustains, if legally
challenged.
6.3. Comments/ suggestions received and our views:
6.3.1. Majority of the comments received are against the proposal and have
suggested to continue the practise of positive consent citing that
debenture holders should have an active role rather than DT(s)
taking decision on their behalf.
6.3.2. However due to muted response of investors to the consent sought
by DT(s), there is delay in enforcement proceedings. Therefore, in
order to prevent delays due to inaction on the part of debenture
holders, negative consent maybe implemented for voting conducted
by DT(s).
6.4. Proposal for consideration of the Board:
6.4.1. While the manner of voting shall be issued by way of circular, its
disclosure in offer document/ Information Memorandum is
necessary. Accordingly, ‘Event of default’ section in the summary
term sheet provided under Para 3(B)(a) of Schedule I of ILDS
Regulations maybe amended as under:
Page 9 of 17
7. Public disclosure of all Covenants by the issuer in Offer Document/
Information Memorandum:
7.1. Proposal in Consultation Paper:
7.1.1. All covenants including the accelerated payment covenants whether
given by way of side letter or otherwise shall be incorporated in the
offer document/ Information Memorandum by the issuer at the time
of issuance of debentures.
7.1.2. The issuer shall also be obligated to inform the DT(s) of such
covenants for monitoring of the same by DT(s) on behalf of the
investors.
7.2. Rationale:
7.2.1. As per ILDS Regulations, offer document/ Information Memorandum
shall contain all material disclosures necessary for the subscribers of
the debt securities to take an informed investment decision.
However, it has been observed that issuers and investors at the time
of issuance of debt securities sign specific documents which contain
certain covenants. These are generally called “side letters.”
7.2.2. One of such covenants is an “accelerated payment clause” which
states that if the borrower violates the terms of the covenant(s),
including default or downgrade of debt, such lender is entitled to
demand immediate repayment. This accelerated repayment
exercised by one lender may have a bearing on other lenders and
may have a cascading effect on the liquidity and operations of the
borrower, leading to insolvency.
Event of Default (including
manner of voting /conditions of
joining Inter Creditor
Agreement)
Page 10 of 17
7.2.3. The disclosure of such side letters in offer document/ Information
Memorandum will therefore abridge the information asymmetry
between investors.
7.3. Comments/ suggestions received and our views:
7.3.1. All comments received are in favour of proposal.
7.4. Proposal for consideration of the Board:
7.4.1. To facilitate disclosure in Offer Document/ Information Memorandum,
following may be inserted in the summary term sheet provided under
Para 3(B)(a) of Schedule I of ILDS Regulations:
All covenants of the issue
7.4.2. Regulation 56(1) of LODR Regulations maybe amended and a sub
clause maybe inserted as under:
“56(1)(c)(iv) All covenants of the issue”
8. Standardization of Debenture Trust Deed:
8.1. Proposal in Consultation Paper:
8.1.1. Debenture Trust Deed shall be bifurcated into two parts:
i. Part A of Debenture Trust Deed shall contain
generic/standard clauses common to all Debenture Trust
Deeds.
ii. Part B of Debenture Trust Deed shall contain specific and
customized clauses/covenants relevant to the particular
issue for which the Debenture Trust Deed is executed.
8.2. Rationale:
8.2.1. Currently, Debenture Trust Deed signed between the issuer and the
DT(s) includes standard covenants given in the DT Regulations and
Page 11 of 17
Form SH12 of the Companies (Share Capital and Debentures)
Rules, 2014.
8.2.2. However, Debenture Trust Deed also includes customized clauses
specific to the issue, which makes it a lengthy, legal documents
running into hundreds of pages sometimes.
8.2.3. There is a need to standardize Debenture Trust Deed and split it into
two parts on the lines of MF offer documents for providing better
readability and understanding of the document by investors.
8.3. Comments/ suggestions received and our views:
8.3.1. All public comments received are in favour of having standardized
Debenture Trust Deed.
8.3.2. The standardization of Debenture Trust Deed would make it more
comprehendible for the debenture holders.
8.4. Proposal for consideration of the Board:
8.4.1. Accordingly, the following amendments to the DT Regulations and
ILDS Regulations may be made:
8.4.1.1. The following shall be added to Regulation 14 of the DT
Regulations:
“Such trust deed shall consist of two parts:
a. Part A containing statutory/ standard information pertaining
to the debt issue.
b. Part B containing details specific to the particular debt issue.”
8.4.1.2. Regulation 15(2) of ILDS Regulations maybe substituted as
under:
“Every debenture trustee shall amongst other matters,
accept the trust deeds which shall contain the matters as
prescribed under section 71 of Companies Act, 2013 and
Form No. SH.12 of the Companies (Share Capital and
Debentures) Rules, 2014.
Page 12 of 17
Such trust deed shall consist of two parts:
a. Part A containing statutory/ standard information
pertaining to the debt issue.
b. Part B containing details specific to the particular debt
issue.”
9. Due diligence and monitoring of asset cover by DT
9.1. Proposal:
9.1.1. The DT(s) while creating a charge on the security, shall exercise
independent due diligence (by itself or through its appointed agency) to
ensure that the charged security is free from any encumbrance or the
DT(s) has obtained consent from other existing charge-holders before
opening of the issue.
9.1.2. The DT(s) shall exercise due diligence while monitoring the asset
cover of the issuer periodically, as specified by SEBI from time to time.
9.1.3. The submission of asset cover certification by the statutory auditor shall
be on a half-yearly basis instead of annual basis.
9.2. Rationale:
9.2.1. It was observed that currently as part of initial due-diligence all the
documents like verification of title of the asset, valuation, maintenance of
asset cover etc., is provided by the issuer to the DT(s) instead of the
DT(s) doing such verification on its own. DT(s) also completely rely on
the documents provided by the issuer/ issuer appointed agency with
respect to the periodic monitoring of the asset cover which is used for the
purpose of monitoring the adequacy of assets charged against the debt
obligations of the issuer.
9.2.2. The current practice of DT(s) relying on the issuer or issuer appointed
auditor for monitoring may not be appropriate as it possesses the risk of
auditor working under the undue influence of issuer company
compromising the quality of assets charged.
Page 13 of 17
9.2.3. Accordingly, it is felt that DT(s) need to have their own independent
mechanism/ framework for initial due diligence and periodical monitoring
including verification on the presence of adequate security cover before
creating further charge on assets, as done by the lender banks while
lending money.
9.2.4. It is observed that while the submission of No Objection Certificate
(NOC)/ necessary consent for creating security and security creation
takes place before opening of issue in public issuances (due to the
requirements in ILDS Regulations), in private placements, as a practice,
NOC submission mostly happens before the issuance and charge
creation takes place after the issuance but within the 3-month regulatory
timeline of executing the trust deed.
9.2.5. Presence of NOC before the opening of the issue, from the existing
charge holders, is important to enable timely creation of charge. Further,
it is important that initial due diligence including independent verification
of title of the asset, valuation, maintenance of asset cover etc., is done
by the DT(s), instead of the issuer providing the same.
9.2.6. To ensure the sanctity of assets, it is imperative that a debt shall be
considered as secured only if the charged asset is registered with any
independent agency or verifiable through an independent source (for eg.
Hypothecation/ mortgage being registered with Registrar of Companies;
pledge being registered in the depository system etc.). However, certain
types of undertakings in support of creation of charge such as personal
guarantee, negative lien are not registered with any independent
agencies and hence there exists the issue of verification of such
undertakings. Therefore, disclosures with respect of these undertaking
need to be made in the offer document/ Information Memorandum.
9.2.7. Monitoring of asset cover is of utmost importance. The periodicity of the
monitoring of the asset cover by DT(s), is currently done quarterly by way
of certification from independent auditor provided by the issuer and
annually by way of such certification from the statutory auditor of the
issuer. However, it has been observed that once the issuer comes under
Page 14 of 17
stress, it stops cooperating with the DT and does not submit the quarterly
asset cover endangering the interests of the debenture holder.
9.2.8. While the reliability of the periodical assessment may be enhanced by
ensuring that the same is conducted by the DT(s) or through the DT
appointed agency, it is necessary that the statutory auditor certification
is obtained on a half yearly basis rather than on an annual basis. While
the implementation of this proposal may increase the cost of compliance
for the issuers, it would also enhance the monitoring of the quality of
underlying assets by the DT(s).
9.3. Proposal for consideration of the Board:
Accordingly, to enable seeking of NOC from existing charge-holders
before opening of the issue and to mandate the periodic monitoring of
asset cover and initial due-diligence (at the time of creation of charge) by
the DT (itself or through its appointed agency), the following amendments
to the Regulations, are proposed:
9.3.1. A new Regulation as under may be inserted in Chapter III of ILDS
Regulations:
“Creation of Security
21B. The issuer shall give an undertaking in the offer document/
Information Memorandum that the assets on which charge is
created are free from any encumbrance and in cases where the
assets are already charged to secure a debt, the permission or
consent to create a second or pari-passu charge on the assets
of the issuer has been obtained from the earlier creditor.”
9.3.2. ‘Security’ section in the summary term sheet provided under Para
3(B)(a) of Schedule I of ILDS Regulations maybe amended as
under:
Description regarding Security (where
applicable) including type of security
(movable/immovable/tangible etc.),
Page 15 of 17
type of charge (pledge/ hypothecation/
mortgage etc.), date of creation of
security/ likely date of creation of
security, minimum security cover,
revaluation, replacement of security,
interest to the debenture holder over
and above the coupon rate as
specified in the Trust Deed and
disclosed in the Offer Document/
Information Memorandum.
9.3.3. In the LODR Regulations, Regulation 56(1)(d) along with the proviso
may be substituted as under:
“56(1)(d) a half-yearly certificate regarding maintenance of hundred
percent asset cover or as per the terms of offer document/
Information Memorandum including compliance with all the
covenants, in respect of listed non-convertible debt securities, by the
statutory auditor, along with the half-yearly financial results.
Provided that the submission of half yearly certificate is not
applicable where bonds are secured by a Government guarantee.”
9.3.4. A new clause in Regulation 15 of DT Regulations may be inserted
as under:
“15(6) Before creating a charge on the security for the debentures,
the debenture trustee shall exercise independent due diligence to
ensure that such security is free from any encumbrance or that it has
obtained the necessary consent from other charge-holders if the
security has an existing charge, in the manner as may be specified
by the Board from time to time.”
Page 16 of 17
9.3.5. Regulation 15(1)(t) of DT Regulations may be replaced as under:
“15(1)(t) In case where listed debt securities are secured by way of
receivables/ book debts it shall, -
(i) On a Quarterly basis-
a. carry out the necessary due diligence and monitor the
asset cover in the manner as may be specified by the
Board from time to time.
(ii) On a Half-Yearly basis-
a. Obtain a certificate from the statutory auditor giving the
value of receivables/ book debts including compliance
with the covenants of the offer document/ Information
Memorandum in the manner as may be specified by the
Board from time to time.”
10. Guidelines to be issued by way of Circular
Detailed guidelines on the following proposals shall be issued by way of
circular:
10.1. Pursuant to approval of the Board:
10.1.1. Manner of creation of recovery expense fund.
10.1.2. Conditions for joining the ICA framework specified by RBI.
10.1.3. Voting mechanism
10.1.4. Initial due diligence framework by DT(s), format of Asset Cover
certificate and timelines in the event of default.
10.2. Other proposals:
10.2.1. Calling of event of default at ISIN level
10.2.2. Additional disclosures in the Offer Document / Information
Memorandum by the issuer.
10.2.3. Disclosures by the DT(s) on its website.
11. Proposal
11.1. The Board is requested to consider and approve the proposed amendments
as mentioned in paras 4 to 9 and authorize the Chairman to make
Page 17 of 17
necessary consequential or incidental changes to the SEBI (Issue and
Listing of Debt Securities) Regulations, 2008 and SEBI (Debenture
Trustees) Regulations, 1993 and SEBI (Listing Obligations and Disclosure
Requirements), 2015 and take consequent steps, as may be deemed
appropriate, to give effect to the decision.
Page 1 of 14
Annexure I
Consultation paper on Review of the Regulatory Framework for Corporate bonds
and Debenture Trustees
1. Objective
The objective of the consultation paper is to seek comments/ views from the public on the
proposals that are expected to strengthen the regulatory framework for Corporate bonds, secure
the interest of the debenture holders, enhance the role of the Debenture Trustees (DTs) and
empower them to effectively discharge their responsibilities towards the debenture holders of
listed debt issues / proposed to be listed debt issues.
2. Background
SEBI recently, increased the minimum net worth of DTs to raise the bar for financial entities
entering the trusteeship business, put in place the provisions of penalizing issuers for non-
creation of charge on security, e-voting mechanism for consent taking etc. in its on-going efforts
to enhance the role debenture trustees play in the market ecosystem. However, it has been
observed that still there have been cases of delay in enforcing the security in the event of default,
which is detrimental to the interests of the investors. The increased events of default by a few
financial institutions and the lapses/ complications on the part of debenture trustees in the
expeditious enforcement of the security has brought to the fore the need for a review of the
present regulatory framework for Debenture Trustees.
According to the data received from the Trustee Association of India (TAI), it is observed that in
past 5 years, around 2.3 % of the issues have defaulted (93% of which are secured debentures)
out of which DTs have been able to enforce the security successfully in around 10 % of the
secured issues, recovery proceedings are pending at different stages in around 60% of the
issues and in around 30% of the issues recovery is pending due to non-communication from
debenture holders. It is observed that Non-Banking Financial Companies (NBFCs) are the
frequent bond issuers. Based on the outstanding long term borrowings of NBFC (for top 100
based on long term outstanding borrowings) as on March 2019, it is noted that largely NBFCs
borrow through bonds (approximately 56%) in comparison to loans (approximately 44%). In last
5 Financial Years the bond issuances were largely secured (approximately 76%).
Page 2 of 14
DTs facilitate in holding the assets by creating lien on it without the transfer of title or possession
of those assets. This protects investors from the risk of non-payment, and allows possession
and sale of the assets if the borrower defaults or enters insolvency/ liquidation. In Indian bond
market, secured bonds are issued by way of creating fixed or floating charge on the assets of
borrower.
In the case of manufacturing companies, fixed charge is created in favour of trustees on Pari-
Passu basis on underlying tangible assets (namely plant and machinery) for borrowing through
debt and bank loan while in case of NBFCs floating charge is created on the existing and future
receivables which are dynamic and intangible in nature and includes the entire balance-sheet of
the company. Since, the charge is created on the entire balance sheet of the company, for any
future issuances, further charge is created on a Pari-Passu basis on the entire assets
(Receivables) of the company. Such a Pari-Passu charge does not specify a certain identified
portion of the assets to each specific lender, but treats all lenders to have the same claim (in the
respective proportion of the amounts borrowed from them) on the assets charged.
While the security is enforced by DT without any major complications in the case of
manufacturing companies at event of default (EoD), the same is not true in the case of NBFCs
due to floating charge and absence of identified security.
Vide June 07, 2019 circular, RBI introduced Inter Creditor Agreement (ICA) for resolution of
stressed assets in banking industry. While signing of ICA is applicable on lender banks, the
lender banks have in recent case of default by DHFL, invited DTs to be a part of ICA as majority
of the lending was done by debenture holders. Debenture Trustees sought consent from the
debenture holders for joining and acceding to the terms of the ICA. However, since the debenture
holders were unaware of the terms and the functioning of the ICA, there was a mixed response
from the debenture holders to the DTs regarding joining the ICA. Further, there was
apprehension by the debenture holders that ICA process being dominated by banks may
primarily focus on the interest of the banks. The debenture holders also feared that the
introduction of ICA could lead to increase in the instances of the process of enforcement of
security getting delayed, in case of creditors not being able to come out with a concrete resolution
plan within the given timeframe.
Meanwhile, it was also perceived that attractive loan portfolios were sold by the NBFCs in order
to pay existing dues post default and this probably led to DTs being left with lower quality assets
Page 3 of 14
for security enforcement. In spite of periodic confirmation being sought by the DT in regard to
maintenance of adequate security cover, lot of issues were faced by the DT in enforcement of
security as they were unaware of the specificity of the underlying security which were known
only to the issuer since a floating charge was created on the entire assets, i.e. present and future
receivables of the NBFC. The floating charge in case of NBFCs gets crystallized only at the time
of default.
The recovery proceedings in the said default of the NBFC was filed in Debt Recovery Tribunal
(DRT) after following the process of seeking consent for joining ICA and then for going with
recovery, in issues where no consent for joining the ICA was received. The delay faced by the
debenture holders in receiving their due and absence of any identified security, led to the concern
whether the debentures were truly secured.
With the given challenges observed in charge creation, enforcement of security of the secured
debentures, ICA process and other related issues in the recent cases of default, SEBI intends to
review the regulatory framework for DTs and put in place provisions that would further secure
the interests of the debenture holders of listed debt issues, enable the DTs to perform their duties
in the interest of the investors more effectively and promptly. It is therefore proposed to seek
public comments on the following issues:
3. Proposals
3.1. Creation of Identified Charge by the NBFCs:
NBFCs, for every issue shall create charge on the identified assets that may include
identified receivables, investment and cash instead of floating charge on the entire books
of the NBFC. A debenture issued by an NBFC shall be treated as secured only on creation
of identified charge. A transition period of 3-5 years shall be provided to shift from floating
Pari-Passu charge to identified charge.
Rationale:
While the NBFCs are always required to maintain the prescribed asset cover during the
tenure of secured debentures, what assets lie under the given asset cover is known only
to the issuer (NBFCs) due to the floating charge. It is known neither to the lenders nor to
Page 4 of 14
the DTs, as the charge gets created on the entire assets/ receivables and the asset cover
submitted to DT certified by the independent CAs just mentions the value of the entire
assets and a statement that 100% of cover on the balance-sheet is maintained.
At the time of default, there is a possibility that good assets of NBFCs are enforced as
security by the banks and the debenture holders may be left with sub-par assets due to the
uncertainty and opacity of the floating charge subjecting debenture holders to the risk of
non-realization of the full value of the security. This opacity makes it difficult for the DT to
monitor the quality of the asset cover as well.
Accordingly, it is proposed to continue having Pari-Passu charge in case of manufacturing
concerns/ companies having fixed charge on the assets and creation of identified charge
in case of NBFCs/ companies having receivables as assets.
3.2. Enhanced due diligence of identified assets and Granular Asset cover certificate
3.2.1. The asset cover certificate duly certified by the statutory auditor shall be required to
be submitted on a half-yearly basis instead of annual basis. The asset cover
certificate format shall be more granular providing a list of identified
assets/receivables, identified investment or cash etc. as security. If the quality of one
or more of the identified receivables/ assets deteriorates or the receivable/ asset is
pre-paid, the issuer shall identify further receivables to replace the bad/ matured/ pre-
paid ones and maintain the asset cover in accordance with the terms of Trust Deed.
3.2.2. Further, for maintaining the quality of underlying assets, following parameters are
being proposed:
a) A delinquency rate benchmark shall be fixed by the DT at the time of signing of
Debenture Trust Deed (DTD). This delinquency rate in assets will be used by DT
as one of the factor for monitoring the asset quality.
b) If the delinquency rate in assets breaches the proposed threshold, issuer will be
asked to replace those assets with other standard assets within a given time
frame.
c) Issuer shall disclose the covenants of maintaining the quality of assets, conditions
of replacing the bad/ delinquent assets in Investment Memorandum (IM) and DTD
Page 5 of 14
to create transparency and reduce the information gap regarding the covenants
of the charge creation and the process thereafter.
d) The asset cover shall also certify the compliance with all the covenants mentioned
in the IM or DTD, as applicable.
Rationale:
Charge creation mechanism enables creditors to control credit risks and consequently
lowers the cost of credit to debtors. To ensure that the security interests of the lenders
remain more effective and enforceable in the insolvency/liquidation process, asset cover
certificates are currently provided by the issuer on a quarterly/ half-yearly basis.
Asset cover certificate is used for the purpose of monitoring the adequacy of assets
charged against the debt obligations of the issuer. Presently the asset cover certificate is
submitted to the Debenture Trustee duly certified by an independent auditor on a quarterly
basis by the issuer and duly certified by statutory auditor on a yearly basis.
It has been observed that the format of asset cover certificate varies from DT to DT. A few
debenture trustees ask for detailed list of assets on which charge is created along with CA
certificate whereas most of them receive only a statement that the 100% cover is
maintained along with the asset cover ratio, making it difficult for them to understand the
nature and quality of assets.
Accordingly, it is proposed to make the asset cover certificate more granular establishing
the above mentioned parameters to enhance the monitoring of the quality of the underlying
assets.
3.3. Calling of Event of Default (EoD) at ISIN level
DTs shall call EoD at ISIN level, which shall also include breach of any covenant mentioned
in the IM/ DTD.
Rationale:
It was observed that the practice of issuance of debenture in the market varies from issuer
to issuer. The debentures are sometimes issued in multiple tranches under an umbrella
Page 6 of 14
DTD. Often it is observed that there are multiple International Securities Identification
Numbers (ISINs) in an IM. With regard to the calling of EoD also, it was observed that the
current market practices are inconsistent and differ from DT to DT. Some DTs call EoD at
DTD level whereas some do it at ISIN level. Considering the fact that if a single investor is
invested in a debenture under an ISIN, he has full right to enforce the security under that
ISIN. Accordingly, it is proposed that EoD shall be called at ISIN level.
3.4. Mechanism/ Conditions of joining Inter-Creditor Agreement (ICA)
Debenture Trustees shall join ICA subject to approval of debenture holders and following
conditions:
i. Signing of ICA and agreeing to the Resolution Plan should be in best interest of the
investors.
ii. DTs shall ensure that the following conditions are part of ICA before signing the ICA:
a) If Resolution Plan imposes condition(s) on the DTs which are not in accordance
with the provisions of SEBI Regulations and circulars issued, then DTs shall be free
to exit ICA altogether with the same rights as it if never signed ICA. In such a
circumstance, Resolution Plan would not be binding on the DTs.
b) Resolution Plan shall be finalized within 180 days from the end of review period. If
not, the DTs shall be free to exit the ICA altogether with the same rights as it if never
signed the ICA. In such a circumstance, Resolution Plan would not be binding on
the DTs. However, If ICA extends beyond 180 days, DTs can take extension beyond
180 days’ subject to approval of debenture holders with total timeline not exceeding
1 year from commencement period of ICA.
c) If any of the terms of the approved Resolution Plan are contravened by any party
to the ICA, DTs shall be free to exit the ICA and take legal recourse or take any
other action as deemed fit in the interest of the debenture holders.
Further, a Debenture holder representative committee consisting of debenture holders
having majority investment may be formed after default by the issuer, to Fast Track the ICA
process and consent seeking by Debenture Trustee during the course of ICA.
Page 7 of 14
Rationale:
Corporates borrow by way of debentures and in many of the cases, the security offered on
that debenture is on pari-passu basis with the other lenders (banks). Recently, in the case
of default by DHFL, Debenture trustees have been approached by the consortium of banks
to sign the ICA to consider the resolution plan. However, there lie multiple challenges in
respect of the interest of the debenture holders in case of Debenture trustee joining the ICA
framework, which are as follows:
i. After the signing of the ICA during the review period, the resolution plan must be
finalized under the 180-day period provided under the RBI’s new rules. However,
there can be a further extension of 6 months for finalization of Resolution Plan,
resulting into delay for debenture holders in case no plan is finally agreed by
lenders.
ii. The notice period to receive the consent for further action in case of default has
been stipulated as 21 days, which makes it difficult to sign ICA within the review
period of 1 month.
iii. As part of the ICA, the lenders (including the dissenting lenders) are not allowed to
initiate any legal action or proceedings (including proceedings under Insolvency and
Bankruptcy Code, 2016) against the borrower or any other person that may
jeopardize the successful implementation of the Resolution Plan.
iv. The resolution plan in respect of the Facilities availed by the Borrower may involve,
amongst other, any action/plan/reorganization including without limitation the
following:
a) Infusion of additional money by all lenders.
b) Conversion of debt into equity.
c) Transfer of all or part of the assets of the Borrower to one or more persons.
d) Rollover of debt.
Most of the possible Resolution Plan listed above may not be acceptable to DTs as
most of the debenture holders are debt MF schemes.
v. The Resolution Plan provides for payment of “not less than liquidation value” to
dissenting lenders. The liquidation value will be decided by an independent valuer.
The dissenting lender can also agree to sell or transfer their loan facilities to any
other lender as part of the resolution plan at a mutually agreed-upon price. Since,
Page 8 of 14
debt holders have less probability of getting favourable Resolution Plan, the above
scenario might be the treated path for them in every case, which can be achieved
through DRT itself and without the delay of 6 months.
vi. The Resolution Plan approved by the majority lenders is final and binding on all the
lenders and each lender (including the dissenting lender) agrees and undertakes to
be bound by the Resolution Plan. Since it is a bank-led process, debenture holders
might be at a disadvantage most of the times.
While it is important that investors have an option to recover their entire money albeit with
a delay, however, dissenting lenders should be free to decide and take action in their best
interest rather than be forced to take liquidation value. Accordingly, it is proposed to allow
the DTs to join the ICA subject to the approval of the debenture holders and the conditions
proposed as above.
3.5. Voting mechanism
i. Time period sought for seeking consent shall be reduced to 15 days from 21 days.
ii. For public and private placement, DT shall enforce the security by taking negative
consent in the event of default (EoD).
iii. The consent of debenture holders for enforcement of security and for joining ICA
shall be taken simultaneously in the same letter
iv. Negative consent for enforcement of security and positive consent for joining ICA
shall be taken in the same letter.
v. Proof of dispatch and delivery shall be maintained by the Debenture Trustee.
vi. Providing E-Mail IDs shall be compulsory for Debenture holders in case of Private
Placement.
Rationale:
It was observed that the Debenture Trustees face various procedural problems in seeking
consent for future course of action which leads to delay in enforcing the security. In case
of an ICA formed under RBI guidelines, taking consent twice - first for joining ICA and then
for Enforcement of security can cause further delay in enforcement of security. Further, the
Page 9 of 14
notice period to receive the consent for further action in case of default has been stipulated
as 21 days, which makes it difficult to sign ICA within the review period of 1 month.
It is also observed that the contact details received from Registrar and Transfer Agents
(RTAs) are not updated most of the times, making it difficult for DTs to communicate with
debenture holders when needed. Since providing E-mail IDs is not mandatory for
Debenture holders, DTs face problem in conducting E-Voting as well.
Accordingly, it is proposed to reduce the timeline for seeking consent to 15 days. The
proposal on taking negative consent for enforcement of security will ensure prompt filing
for recovery by DT. Also, simultaneous approval in the same letter for joining ICA and
enforcement of security shall prevent repetition of the same consent seeking process and
will reduce the time lag for enforcement of security.
3.6. Creation of a recovery fund
i. A fund shall be created by the issuer at the time of issuance of debt that shall be
used by DT in the event of default towards recovery proceedings expenses.
ii. The value of such fund shall be 0.01% percentage of the issue subject to the cap
of 25 lakhs per issuer.
iii. The above shall not be applicable on AAA rated bonds. However, in case of rating
downgrade of a AAA rated bond, the issuer shall be obligated to create such fund
within a fixed timeframe.
iv. Disclosure to such affect shall also be made in the IM. Such fund shall be overseen
by the DT.
v. The amount shall be returned to the issuer at the time of maturity in case there is
no default by the company.
Rationale:
In the event of default, while the DTs are not able to recover their dues/ fees from the issuer,
they are still obligated to act in the interest of the investors and work towards enforcement
of security. Currently Debenture Trustees call for meeting of Debenture holders in case of
default to discuss the further course of action along with an estimate of cost to be borne by
debenture holders for the recovery proceedings. In most of the cases debenture holders
bear this cost. However, delays have been observed in the enforcement proceedings as the
Page 10 of 14
money is not always received on time. If the DTs are adequately funded in advance, then
the filing of recovery proceedings can be expedited.
Accordingly, in order to have a prompt enforcement of security, it is proposed to create a
fund beforehand towards recovery proceeds, which shall be used by Debenture Trustee in
case of default only.
3.7. Minimum Disclosures on the website by DTs
DT shall mandatorily make the following minimum disclosures on their website:
i. Quarterly Compliance Reports received from the issuers.
ii. Compliance status on the receipt of asset cover from the issuers, maintenance of
various funds by the issuers.
iii. Defaults by the company.
iv. Status of the proceedings of the cases under default.
v. Compliance status of each covenant- issue wise on a half yearly basis.
vi. Repayment schedule calendar/ calendar of interest and redemptions issuer wise
(already mandated)
Rationale:
Regulation 15 of SEBI (Debenture Trustees) Regulations, 1993 has mandated certain set
of duties on DTs which they are required to discharge throughout the maturity of the bond.
Based on the complaints received from the investors in the recent default cases, it appears
that the investors are not aware of the monitoring by the DTs and the compliance status of
the issuers regarding various covenants disclosed in the IM.
Accordingly, in order to enhance the transparency, it is proposed to mandate minimum
disclosures as above.
3.8. Disclosures regarding Performance of DTs
Disclosure on the following parameters may be made by DTs which would be reflective of
their promptness in discharging their duties:
i. Timeliness on action taken (adhering to the time-lines specified by regulations/
transaction documents).
Page 11 of 14
ii. Monitoring of covenants / security cover
iii. Timely intimation of a breach in covenants (if any).
iv. Timely raising of red-flags if the issuer response is unsatisfactory.
v. Effectiveness in enforcing security/ remedial actions in case of default.
vi. Promptness in convening debenture holder’s meeting and aiding in decision
making as and when requested or required.
Rationale:
Currently, there are no performance indicators of DTs that can enable/ allow the investors
to ascertain the performance of the particular DT.
While the disclosures are required for enhancing the transparency, few parameters are
also required to enable the investors to discern the performance of the DTs in expeditious
enforcement of the security and effective monitoring of the covenants. Accordingly, it is
proposed to have disclosures on certain parameters by DTs in order to enable the investors
to discern the performance of the DTs.
3.9. Public Disclosure of all covenants by the issuer in IM
All covenants including the accelerated payment covenants whether given by way of side
letter or otherwise shall be incorporated in the IM by the issuer at the time of issuance of
debentures and disclosed on the stock exchange. The issuer shall also be obligated to
inform the DT of such covenants for monitoring of the same by DT on behalf of the
investors.
Rationale:
SEBI (Issue and Listing of Debt Securities) Regulations, 2008 provide for disclosures to be
made in the offer document. The offer document shall contain all material disclosures which
are necessary for the subscribers of the debt securities to take an informed investment
decision.
However, it has been observed in the recent cases of defaults by Reliance Capital, Altico
and DHFL that issuers and investors at the time of issuance of debt securities sign specific
documents which contain certain covenants. These are generally called “side letters.” One
Page 12 of 14
of the common covenants that has been observed is an “accelerated payment clause”
which states that if the borrower violates the terms of the covenant(s), including default or
downgrade of debt, such lender is entitled to demand immediate repayment. This
accelerated repayment exercised by one lender may have a bearing on other lenders and
may have a cascading effect on the liquidity and operations of the borrower, leading to
insolvency. It was observed that in recent times, the use of such covenants by lenders has
become more frequent which may have pushed firms into financial difficulty increasing the
probability of default.
Accordingly, the use of such covenants affects the interest of all the other investors in that
issue. It is, therefore proposed that all such covenants shall be publicly disclosed in the IM
and on the stock exchanges.
3.10. Standardization of Debenture Trust Deed (DTD)
DTD shall be bifurcated into two parts:
i. Part A of DTD shall contain generic/standard clauses common to all DTDs.
ii. Part B of DTD shall contain specific and customized clauses/covenants relevant to
the particular issue for which the DTD is executed.
Rationale:
The DTD signed between the issuer and the DT includes standard covenants given in DT
Regulations and form SH12 of the Companies Act. Such DTDs also include customized
clauses specific to the issue. However, DTDs are lengthy, legal documents running into
hundreds of pages sometimes. Therefore, a need is felt to standardize the DTD to make it
more comprehensible and easy to read and understand by the debenture holders.
Accordingly, it is proposed to standardize the DTD and bifurcate it into two parts along the
lines of the offer document of the Mutual Funds.
3.11. Enhanced Disclosures
Following additional disclosures shall be made by the issuer in IM:
Page 13 of 14
i. A risk factor to state that while the debenture is secured against a charge to the tune
of 100% of the principal and interest amount in favour of DT, the possibility of recovery
of 100% of the amount shall depend on the market scenario prevalent at the time of
enforcement of the security.
ii. The issuer has no side letter with any bond holder except the one(s) disclosed in the
IM and on the stock exchange website where the debt is listed.
iii. About Pari-Passu charge and the entitlement of the investor in such cases.
iv. The rights and duties of the DT.
v. The detailed procedure to be followed at the time of default by the DT including
relevant procedures of ICA, DRT / National Company Law Tribunal (NCLT) and IBC.
vi. The procedure and manner of calling meeting of debenture holders.
Following additional disclosures shall be made by the issuer in DTD as well:
i. The rights and duties of the DT.
ii. The detailed procedure to be followed at the time of default by the DT including
relevant procedures of ICA, DRT / NCLT and IBC.
iii. The procedure and manner of calling of meeting of debenture holders, responsibility
of debenture holders in such situations etc.
iv. Bearing of recovery expenses in case of default.
Rationale:
The details about the terms of the debentures, duties of debenture trustees and redressal
mechanisms in case of default are not known to the investors. The investors, therefore, are
not fully aware of the risks undertaken while investing. In order to enhance transparency
about the roles of various players and the provisions of the market structure, it is proposed
to have the adequate disclosures in the IM and DTD.
3.12. A framework for imposing fines and Standard Operating Procedure (SOP) for the same
An SOP shall be prepared that shall list out the penalties for specific violations by the issuer
company for the listed debt.
Page 14 of 14
Rationale:
At the time of signing of DTD by the Debenture Trustee and issuer company, duties and
responsibilities of the issuer are laid out in detail in DTD which includes cooperation with
Debenture Trustee and dissemination of information to Debenture Trustee and Stock
exchanges on a timely basis. However, lot of cases of non-cooperation with the DT have
been noticed. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(LODR Regulations) also impose certain obligations upon the issuer with regard to the
submissions made to the debenture trustee. Adjudication proceedings are initiated against
such issuers which are in violation of the provisions of the LODR Regulations. However,
such actions usually take time, during which, the non-compliance may continue.
Accordingly, in order to improve compliance and discourage the non-cooperation it is
proposed to develop an SOP in this regard. This SOP shall act as a deterrent and instill
better cooperation and compliance by the issuers.
4. Public Comments:
Public comments are invited on the proposals contained in the Consultation Paper in the following
format:
Name of entity/ person/ intermediary/ organization: __________________
Sr. No. Pertains to Point No. Comments/ suggestions Rationale
Comments/ suggestions may be forwarded by email to [email protected] or sent by post to
the following address latest by March 17, 2020:
General Manager
Division of Policy & Inspection (CRA/DT)
Market Intermediaries Regulation and Supervision Department
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C7, "G" Block, Bandra Kurla Complex
Bandra (East), Mumbai - 400 051
Ph: 022 - 26441315
Issued on: February 25, 2020
Annexure II
Analysis of Public Comments received for Consultation Paper
This has been excised for the reasons of confidentiality