The Securities and Exchange Board of India (“SEBI”) had vide the SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2020 (“Amendment Regulations”) amended the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“Regulations”), inter alia, to align it with the provisions of the Companies Act, 2013. By way of the Amendment Regulations, Regulation 26 of the Regulations was amended to provide that the issuer shall create a recovery expense fund (“REF”) in the manner as maybe specified by SEBI from time to time and inform the debenture trustee of the same.
In furtherance to the said amendment, SEBI vide its circular dated October 22, 2020 (“REF Circular”) has outlined the manner of creation, operation and utilisation of the REF, which is as follows:
a) Deposit of amounts:
An issuer proposing to list debt securities is required to deposit an amount equal to 0.01% (point zero one percent) of the issue size subject to maximum of Rs. 25,00,000 (Rupees twenty five lac) per issuer towards the REF, with the designated stock exchange.
b) Manner of creation and maintenance of the REF:
i) Contribution to REF:
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.
ii) Particulars for bank guarantee provided by Issuer:
a) It shall remain valid for 6 (six) months post the maturity date of the listed debt security;
b) It shall be renewed at least 7 (seven) working days before its expiry date; and
c) On failure to renew/ maintain validity of the bank guarantee, the stock exchange shall invoke such bank guarantee.
iii) Income/ interest earned to be added to the REF:
Where the contribution is received from the issuer in the form of cash, the designated stock exchange shall 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 shall be added to the REF.
c) Corporate restructuring:
In the event of change in status of the issuer on account of corporate restructuring, the designated stock exchange shall ensure that the requisite amount is maintained in the REF, before issuing the ‘Observation Letter’ in that regard.
d) Manner of utilization of the REF:
On the occurrence of an event of default:
i) the debenture trustee or the lead debenture trustee (as the case maybe) shall obtain the consent of the holders of debt securities for enforcement of security and shall inform the same to the designated stock exchange;
ii) within 5 (five) working days of receipt of such intimation, the designated stock exchange shall release the amount lying in the REF to the debenture trustee/ lead debenture trustee (as the case maybe); and
iii) the debenture trustee shall keep a proper account of all expenses incurred out of the funds received from the REF towards legal expenses cost for hosting meeting etc. towards enforcement of security.
e) The ‘Lead Debenture Trustee’ means:
i) a debenture trustee who has been chosen to be the ‘Lead Debenture Trustee’ by other debenture trustees; or
ii) debenture trustee who is debenture trustee of more than 50% (fifty percent) of the outstanding value of debt securities.
f) Refund of REF to the issuer and issue of NOC by the Trustee:
The balance in the REF shall 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 debenture trustee to the designated stock exchange. However, the debenture trustee is required to be satisfied that there is no default on any other listed debt securities of the issuer before issuing the aforesaid no-objection certificate.
g) Applicability:
The provisions of the REF Circular shall 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 (ninety) days to comply with the REF Circular for creation of the REF.
Please find a copy of the REF Circular here.
This update has been contributed by Aastha (Partner) and Swaraj Narula (Associate).
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