The Securities and Exchange Board of India (“SEBI”) has recently amended various regulations and also issued further guidelines pertaining to debt securities, primarily with a view to strengthen the role of debenture trustees (“DTs”) and protect the interests of the investors.
This note provides a brief overview of the recent amendments made in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“ILDS Regulations”), SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) and SEBI (Debenture Trustee) Regulations, 1993 (“DT Regulations”) as well as certain new guidelines issued by SEBI.
Amendments to SEBI ILDS Regulations
On October 8, 2020, SEBI vide the SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2020 (“Amendment Regulations”) amended the ILDS Regulations, inter alia, to align it with the provisions of the Companies Act, 2013 (“Act”).
The key amendments made to the ILDS Regulations are as follows:
Change in the definition of private placement
Prior to the amendment, the definition of private placement provided that the offer shall be made to less than 50 persons. Pursuant to the Amendment Regulations, the definition of private placement has been linked to the provisions of the Act. Currently, the maximum number of persons to whom a private placement offer can be made is 200 in aggregate in a financial year.
Contents of the debenture trust deed
The Amendment Regulations provide that the debenture trust deed (in case of a public issue) should contain the matters prescribed under Section 71 (Debentures) of the Act and Form No. SH-12 (Contents of debenture trust deed) of the Companies (Share Capital and Debentures) Rules, 2014. Further, such trust deed should consist of two parts, i.e., Part A containing statutory/ standard information pertaining to the debt issue and Part B containing details specific to the particular debt issue.
Creation of security
The issuer is now required to give an undertaking in the information memorandum (“IM”) that the assets on which charge is created are free from any encumbrances and in case 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 lender.
Schedule I of the ILDS Regulations, which sets out the disclosures required to be made in the disclosure document for listing of debt securities issued by way of private placement, has been amended to include the following additional information which should be incorporated in the summary term sheet for the issue:
Additionally, a note has been inserted in Schedule I which provides that it is the duty of the DT to monitor that the security is maintained, however, the recovery of 100% of the amount will depend on the market scenario prevalent at the time of enforcement of the security.
Amendments to SEBI LODR Regulations
SEBI also notified the SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2020 (“LODR Amendment Regulations”) amending the LODR Regulations, on October 8, 2020.
The key amendments made to the LODR Regulations are as follows:
By way of the LODR Amendment Regulations, SEBI has now removed regulation 54(3) of the LODR Regulations, which provided an exemption from maintenance of asset cover to regulated financial sector entities issuing unsecured debt securities for meeting capital requirements as specified by their respective regulators.
Documents and Intimation to Debenture Trustees
Listed entities are now additionally required to promptly forward to the DT, intimation regarding all covenants of the issue (including side letters, accelerated payment clause, etc.).
Earlier, the LODR Regulations required listed entities to submit a half-yearly certificate regarding maintenance of 100% asset cover by either a practicing company secretary or a practicing chartered accountant. Pursuant to the LODR Amendment Regulations, the aforesaid half-yearly certificate must now be provided by the statutory auditor and is also required to incorporate compliance with all covenants in respect of the listed debt securities.
Further, earlier, the submission of such half-yearly certificates was not applicable to banks or non-banking financial companies (“NBFCs”) or where bonds were secured by a government guarantee. This exemption for banks and NBFCs has been withdrawn pursuant to the LODR Amendment Regulations.
By way of the LODR Amendment Regulations, SEBI has specified that in case of initiation of forensic audit, the following disclosures should be made to the stock exchanges by listed entities:
Amendments to SEBI Debenture Trustee Regulations
SEBI has, on October 8, 2020, also notified SEBI (Debenture Trustees) (Amendment) Regulations, 2020 (“DT Amendment Regulations”) amending the DT Regulations.
The key amendments made to the DT Regulations are as follows:
Form and manner of Trust Deed
Regulation 14 of the DT Regulations has been substituted to provide that a DT is required to accept the trust deeds which contain the matters as specified in section 71 of the Act and Form No. SH.12 specified under the Companies (Share Capital and Debentures) Rules, 2014, where such trust deed has to now consist of the following 2 parts:
Listed debt securities secured by way of receivables/ book debts
Regulation 15(t) of the DT Regulations specifies duties of the DTs, in cases where listed debt securities are secured by way of receivables/ book debts. Regulation 15(t) has now been substituted to widen the duties of the DT to provide that in such cases the DT is required to:
Meeting of Debenture Holders on breach/ default
Pursuant to regulation 15(2)(b) of the DT Regulations, the DT is required to call/ cause to be called a meeting of the debenture holders, upon happening of any event which constitutes a default. By way of the DT Amendment Regulations, Regulation 15(2)(b) of the DT Regulations has been amended to broaden the requirement to convene a meeting of the debenture holders, even where there is any breach of covenants under the OD/ IM/ debenture trust deed or on the occurrence of an event which in the opinion of the DT affects the interest of the debenture holders.
Independent due diligence by debenture trustee
By way of the DT Amendment Regulations, Regulation 15(6) of the DT Regulations has been added, specifying additional duties of the DT to exercise independent due diligence, before creation of a charge on the security for the debentures, to ensure that such security is free from any encumbrance or that necessary consent from other charge holders, if any, has been obtained, in the manner as may be specified by SEBI from time to time.
Inter-creditor agreements by debenture trustee
The DT has been empowered to enter into ICAs, on behalf of the debenture holders, as provided under the framework specified by the Reserve Bank of India (“RBI”), subject to the approval of the debenture holders and the conditions as may be specified by SEBI from time to time.
Role of Debenture Trustee in Investor Protection
In furtherance to the abovementioned amendments in the ILDS Regulations and the DT Regulations, SEBI vide its circular, dated November 3, 2020, has issued guidelines on creation of security in respect of listed debt securities and due diligence to be undertaken by DTs. These guidelines will come into force with effect from January 1, 2021 for new issuances proposed to be listed post January 1, 2021.
Creation of security
Issuers are required to provide the DT with certain information while entering into the debenture trustee agreement (“DTA”) in order to enable the DT to exercise due diligence with respect to creation of security, including the following:
Due diligence by debenture trustee
The DT is required to independently carry out due diligence with respect to the security and prepare all the requisite reports and certificates. Further, the DT is required to independently assess whether the assets for creation of security are adequate for the proposed issue.
The DT is also required to perform certain checks to verify that the assets provided by the issuer for creation of security are free from encumbrances and that necessary consents have been obtained from existing charge holders, if any. In case a conditional consent has been issued by existing charge holders, the DT should intimate them via e-mail about the proposal to create further charge and seek their comments/ objections, which should be communicated to the DT within 5 working days.
Further, in respect of guarantees, the DT is required to verify the relevant filings made on websites of Ministry of Corporate Affairs, stock exchange(s), CIBIL, information utilities etc. and also obtain necessary appraisal reports and financial certificates in respect of the guarantor.
The DT is required to issue a due diligence certificate addressed to the stock exchange, as per the format specified, provided that:
Where the issuer is filing the draft OD or PPM/ IM through electronic book mechanism or serially printing PPM/ IM, it should submit the due diligence certificate as mentioned above to the stock exchange.
The records and documents pertaining to due diligence are required to be maintained by the DT for a minimum period of 5 years from redemption of the debt securities.
Disclosures in the offer document/ private placement memorandum/ information memorandum
The following disclosures should be made in addition to those required under the ILDS Regulations:
Creation and registration of charge
The issuer should create the charge as specified in the OD or PPM/ IM in favour of the DT and execute a debenture trust deed with the DT, before making an application for listing of the debt securities. The stock exchange will list the debt securities only upon receipt of the due diligence certificate from the DT in the format specified. The charge must be registered with the relevant authorities, within 30 days of creation of such charge.
Timelines for Listing
On October 5, 2020, SEBI by way of its circular standardised timelines for listing of securities issued on a private placement basis under the: (a) ILDS Regulations; (b) SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013; (c) SEBI (Public Offer and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008; and (d) SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015. This circular will come into force with effect from December 1, 2020.
The following timelines have been stipulated by SEBI:
Details of Activities
Closure of issue
Receipt of funds
To be completed by T + 2 trading day
Allotment of securities
To be completed by T + 2 trading day
Issuer to make listing application to stock exchange(s)
To be completed by T + 4 trading day
Listing permission from stock exchange(s)
To be completed by T + 4 trading day
In case of delay in listing of securities beyond the timelines stipulated above, the issuer will be required to pay penal interest of 1% per annum over the coupon rate for the period of delay to the investor. Further, the issuer will be permitted to utilize the issue proceeds of its subsequent privately placed issuances of securities only after receiving final listing approval from stock exchange(s).
Standardised Procedure in Case of Default
On October 13, 2020, SEBI introduced the standardised procedure to be followed by DTs in case of default by issuers of listed debt securities which is applicable to all issuers who have/ propose to have their debt securities listed, as well as all DTs registered with SEBI.
Event of default to be reckoned at the International Securities Identification Number level
Under the LODR Regulations, a ‘default’ has been defined as non-payment of the interest or principal amount in full on the pre-agreed date, which will be recognized at the first instance of delay in the servicing of any interest or principal on debt.
In view of the fact that multiple International Securities Identification Number (“ISIN”) may have been issued under the same IM or a single ISIN may have been split across multiple IMs, SEBI has clarified that an ‘event of default’ will be reckoned at the ISIN level since all terms and conditions of issuance of security are same under a single ISIN even though they may have been issued under multiple IMs.
Consent of investors for enforcement of security and for signing the inter creditor agreement
RBI had, on June 7, 2019, issued the RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019 (“RBI Directions”). In terms of the RBI Directions, investors in debt securities, being financial creditors, may be approached by other lenders of the issuer to sign ICA in line with the RBI Directions.
As the resolution plan (“RP”) under the ICA may involve restructuring, including roll-over of debt securities requiring consent of investors, the following process for seeking consent for enforcement of security/ entering into the ICA has been specified:
Conditions for signing the inter creditor agreement
The DTs may sign the ICA and consider the RP on behalf of the investors upon compliance of the following:
The DTs are required to ensure that the conditions pertaining to exiting the ICA as aforesaid are suitably incorporated in the ICA before signing the ICA.
Recovery Expense Fund
Regulation 26 of the ILDS Regulations has been amended to provide that the issuer is required to create a REF in the manner as maybe specified by SEBI from time to time and inform the DT of the same. In furtherance to the said amendment, SEBI vide its circular dated October 22, 2020 outlined the manner of creation, operation and utilisation of the REF. The provisions of this circular will come into force with effect from January 1, 2021 and all the applications for listing of debt securities made on or after January 1, 2021 are required to comply with the condition of creation of the REF. For existing issuers, whose debt securities are already listed on stock exchange(s), SEBI has given an additional time period of 90 days to comply with the terms of this circular for creation of the REF.
Deposit of amounts
An issuer proposing to list debt securities is required to deposit an amount equal to 0.01% of the issue size subject to a maximum of Rs. 25,00,000 per issuer towards the REF, with the designated stock exchange.
Manner of creation and maintenance of the Recovery Expense Fund
At the time of making the application for listing of debt securities, the issuer is required to deposit cash or cash equivalent(s) (including bank guarantees) towards contribution to the REF.
In case of bank guarantee provided by the issuer, the following conditions would be appliable:
Where the contribution is received from the issuer in the form of cash, the designated stock exchange is required to invest the same in Government Securities, treasury bills or fixed deposit with a Scheduled Commercial Bank, gilt / debt mutual / debt exchange trade funds. The income/interest earned from the same will be added to the REF.
Manner of utilization of the Recovery Expense Fund
On the occurrence of an event of default:
Refund of balance in the Recovery Expense Fund to the issuer
The balance in the REF will be refunded to the issuer on repayment to the holders of debt securities on their maturity or at the time of the exercise of call or put option, for which a no-objection certificate shall be issued by the DT to the designated stock exchange. However, the DT should be satisfied that there is no default on any other listed debt securities of the issuer before issuing the aforesaid no-objection certificate.
This update has been contributed by Aastha (Partner), Swaraj Singh Narula and Ashwarya Bhargava (Associates).Download Pdf
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