Role of retail debenture holders in insolvency resolution

Often regarded as a lucrative investment opportunity, debentures are associated with attractive high rates of return, risk mitigation and a diversified portfolio to retail investors. Listed debentures are required to be rated by well-reputed rating agencies and are predominantly backed by assets of the corporate offering such debentures.

The investments made by retail debenture holders constitute a significant source of funding for corporate debtors. Therefore, it is imperative that debenture holders are encouraged to participate more in debt raising by corporate entities through various stimuli for investment and have an empowered role in the event of stress and recovery.

Financial debt under the Insolvency and Bankruptcy Code of India includes any amount raised pursuant to the issue of bonds, notes and debentures. The code empowers the retail debenture holders in the corporate insolvency resolution process (CIRP) as they also are financial creditors and form part of the committee of creditors (CoC).

The retail debenture holders are represented by the debenture trustee in meetings of the CoC but hold the power to vote in the CIRP. Therefore, the retail debenture holders must understand their rights vis-à-vis the CIRP and take an informed decision before voting on any resolution. Under section 25A (3A) of the code, the authorised representative (including a debenture trustee) is required to cast his vote on behalf of the financial creditors they represent, with the decision taken by a vote of more than 50% of the financial creditors who have cast their vote.

In a particular series of debentures, if holders with more than 50% of the voting share have cast their vote, the same shall be binding on the other holders in the same series. If no debenture holders cast their vote on an agenda pertaining to approval of resolution plans, the treatment accorded to such debenture holders is as of a dissenting financial creditor, which may entail receiving only a liquidation value against their investment after approval of the resolution plan, in consonance with the provisions of the code.

Retail debenture holders constitute part of the CoC along with banks and financial institutions in the CIRP. The CoC (including debenture holders) is required to exercise their commercial wisdom in resolving a corporate debtor under insolvency on matters such as determining the feasibility and viability of resolution plans, determining the eligibility of the resolution applicant, and ensuring that the interests of all the stakeholders remain protected.

It is necessary that retail debenture holders exercise caution and cast their votes in the CIRP prudentially.

There are various support systems available to debenture holders to perform their role. The CoC appoints legal advisers, and processes advisers and other consultants to aid them in a CIRP. Retail debenture holders can benefit from such expert advise on the CIRP, which they may access through their respective debenture trustees.

Before casting a vote in favour of or against a resolution plan, retail debenture holders must examine the contours and understand the details of such a plan with the aid of such consultants and advisers. The retail debenture holders should also examine and understand the discussions held by the CoC by seeking minutes of their meetings from their respective trustees.

The debenture trustees should also engage with debenture holders on a regular basis, ensuring that all documents and information are provided in a timely manner. While the CIRP is in progress, debenture trustees should hold regular meetings to educate retail debenture holders on the nuances of the insolvency resolution process, and various complexities that would lead to a potential delay.

In such meetings, debenture trustees should explain the contours of various resolution plans, and allow the debenture holders to seek clarifications on the CIRP and resolution plans, including the financial proposal, the treatment of each stakeholder, implementation steps, conditions (if any) provided in a resolution plan, any clauses that may adversely affect the rights of the retail debenture holders, and the overall feasibility and viability of the plan.

In several CIRPs, the retail debenture holders constitute the majority of the overall admitted debt of the corporate debtors. This implies that the retail debenture holders collectively hold (along with other members of the CoC) the responsibility of applying their commercial wisdom for resolution of the corporate debtor. In such cases, it becomes critical that the fragmented group of retail debenture holders undertake a collective endeavour towards successful resolution.

Anoop Rawat and Saurav Panda are partners, and Arushi Asheesh Chandra is a senior associate at Shardul Amarchand Mangaldas & Co

Shardul Amarchand Mangaldas & Co

Amarchand Towers 216
Okhla Industrial Estate Phase III
New Delhi 110 020, India
www.amsshardul.com

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