In October 2020, the Securities and Exchange Board of India (SEBI) amended the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations), and SEBI (Debenture Trustees) Regulations, 1993 (DT Regulations), to further secure the interests of investors in listed debt securities, (collectively, the recent amendments). The recent amendments were followed by two enabling circulars dated 3 November 2020 and 12 November 2020, respectively, (enabling circulars), prescribing the details and procedures to be followed by entities issuing debt securities (issuers) and debenture trustees (DT), in relation to listed debt securities.
Both the recent amendments and the enabling circulars impose new obligations and duties on DTs, and require them to take a more proactive role in protecting the interests of the debenture holders and beneficiaries at the various stages of the life of listed debt securities. This article briefly touches on these new duties and obligations that have been placed on DTs.
Under the previous regulations, DTs were already required to ensure that, at all times, the security provided by the issuer was sufficient to discharge the outstanding amount of debenture and interest. Under the enabling circulars, DTs will now additionally be required to undertake independent due diligence exercises and assessments of these assets and the terms under which such exercises will be carried out must now be incorporated within the debenture trustee agreement.
The aim of the due diligence of DTs is to verify whether the assets in question are free from any encumbrances, or, where such assets are encumbered, that necessary consent letters or equal footing letters from existing charge holders accepting further charge creation, have been procured prior to the issuance of debt securities. DTs must also notify existing charge holders of the proposal to create further security on the assets and must ascertain if they have any objections.
If guarantees are provided as security, DTs are additionally required to verify the relevant filings made on regulators’ websites and information utilities’ websites, to obtain appraisal reports, and to check the certification of the net worth and financial statements of guarantors and issuers.
When the DTs are satisfied that the issuers’ assets provide adequate cover for the proposed issue of debt securities, they shall issue due diligence certificates, subject to confirming also that the information relating to the consents required for the creation of any further charge, and all covenants proposed to be included in the debenture trustee agreement have been included in the offer document.
Additionally, there has been a reworking of the continuous monitoring and disclosure obligations of DTs, who must now incorporate within the debenture trust deed the terms under which issuers must provide relevant information that would enable the DTs to submit their reports on certifications to the necessary stock exchanges. DTs are also required to maintain records and documents pertaining to their due diligence exercises for a minimum period of five years from the redemption of the debt securities concerned.
In the case of breach of covenants or terms of the issue by the issuer, DTs are obliged to send a notice within three days of such default to the investors, and convene a meeting of all investors and debenture holders within 30 days of such default, so that appropriate action can be determined. In the case of existing debt securities, issuers and DTs have been directed to enter into supplemental or amended debenture trust deeds that incorporate the relevant changes by 12 March 2021.
While the enabling circulars explicitly deal only with listed debt issues in the context of the recent amendments, the actual amendments to the DT Regulations do not distinguish between listed and unlisted debt issues. Further, the enabling circulars shall apply from January 2021.
However, since the recent amendments are said to apply from the date of their publication in the official gazette, it has led to a dichotomy as to how issues up to the end of 2020 will be treated.
Jyotika Bajaj is a senior associate and Shivendra Shukla is an associate at SNG & Partners
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