SEBI’s awkward two-step on recent changes

The Securities and Exchange Board of India (SEBI) recently introduced a series of changes to protect investors in listed issuance debt securities. The precursor to these changes was a little noticed amendment to the regulations on the issuance of listed non-convertible preference shares by banks for the purposes of regulatory capital. These instruments contain features such as the write-down of the principal. In the light of recent controversies relating to the impact of such features on retail investors, SEBI’s changes allow only qualified institutional buyers to participate in the issue of such instruments. The minimum offer for such instruments must be ₹10 million (US$135,000).

On 13 October 2020, SEBI issued further directions to debenture trustees on procedures in cases of default by issuers of listed debt securities. These prescribe higher reporting and compliance requirements for issuers, and heightened responsibilities of debenture trustees. For instance, when a default occurs, a debenture trustee must give debenture holders notice within three days of occurrence and convene a meeting within 30 days. In such a meeting, all decisions would require the consent of 75% of the debenture holders by value and 60% of the debenture holders by number.

Further, the amended SEBI (Debenture Trustees) Regulations, 1993, require debenture trustees to conduct independent due diligence assessments of the secured assets to ensure that these are free of encumbrances and that consents from other charge holders have been obtained. The amended debenture trustee regulations and SEBI’s 13 October circular permit debenture trustees to enter into intercreditor agreements with other lenders on behalf of debenture holders in respect of any resolution plan under the resolution framework prescribed by the Reserve Bank of India (RBI). The SEBI circular also contains language enabling debenture trustees to subsequently exit the intercreditor agreement on the occurrence of certain events.

The SEBI (Issue and Listing of Debt Securities) Regulations, 2008, have been amended to prescribe additional disclosure requirements for issuers in offer documents for listed debt securities. Commencing from 1 January 2021, it is mandatory for issuers of listed debt securities to contribute an amount equal to 0.01% of the issue size, with a cap of ₹2.5 million, by way of cash or cash equivalents to a recovery expense fund with the designated stock exchange. This will be refunded on redemption of the debt securities. When a default occurs, the debenture trustee can utilize these amounts on the instructions of the debenture holders towards legal expenses and other enforcement costs. Additional reporting and compliance requirements for issuers have also been prescribed under the amended SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

The amended debenture trustee regulations and the debt listing regulations require a debenture trust deed to be organized in two parts – part A, for statutory and standard information on the debt issue, and part B, for commercial and transaction specific details. While these changes give the impression of being introduced to improve investor protections and disclosures, this is a form-related change, which appears to have been tacked on to SEBI’s other changes. This provides no apparent substantive benefit and perhaps would need to be reassessed.

The intent behind the changes introduced by SEBI is laudable. However, these appear to be reactive rather than proactive and appear to be broad-based rather than targeted. For instance, the recovery expense fund will increase the costs of issuance of listed debt capital markets, and would likely hamper the government’s measures to deepen debt capital markets and to encourage the shift of borrowing from banks to the capital markets. It would have been more useful had this measure been directed at issuers with a record of credit weakness. Applying it to all issuers has the effect of penalizing compliant issuers for the errors of a few. SEBI’s 13 October circular also reflects a possible misalignment of understanding or a lack of consultation with the RBI, as the RBI’s resolution framework requires decisions taken under an intercreditor agreement to bind all lenders, and does not appear to give lenders the right to unilaterally exit. This means that the participation of debenture trustees in the RBI’s resolution framework would need to be evaluated, and additional directions guiding its application would need to be provided.

Sawant Singh and Aditya Bhargava are partners at Phoenix Legal. Sristi Yadav, an associate, also contributed to the article.

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