Overview Of Key Amendments Proposed By SEBI In Its Consultation Paper Dated 4 November, 2024

The introduction of a cross-default definition, aggregation of decision-making among ISIN holders in cases of shared security, and standardization of Debenture Trust Deeds (DTDs) could prove advantageous for Debenture Trustees (DTs)

Introduction

The Securities and Exchange Board of India (“SEBI”) vide its consultation paper “Measures for Reforms to Debenture Trustee Regulations Including towards Ease of Doing Business” dated 4 November 2024¹ (“Consultation Paper”) has proposed to undertake amendments to some of its material regulations, including but not limited to the SEBI (Debenture Trustee) Regulations, 1993 (“DT Regulations”), SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) and SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS Regulations”). The Consultation Paper is open for public comments till 18 November, 2024.

This article will provide an overview of key amendments proposed by SEBI in the Consultation Paper.

Proposed Amendments

Following is an overview of the amendments proposed by SEBI for public comments:

1. Specifying Activity Based Regulations for Debenture Trustees

SEBI observed that the Debenture Trustees (“DTs”) regulated by the DT Regulations not only provided the services which are regulated by SEBI under the DT Regulations but also many other services which were not under the purview of DT Regulations such as trusteeship activities (securitisation trustee, security trustee, public deposit trustee), trusteeship services (share pledge, escrow agent, facility agent, monitoring agent), trustee for unlisted non-convertible debentures (NCDs), etc.

It was further observed by SEBI that the revenue received by the DTs for the activities falling under the purview of SEBI aggregated to approximately only 30% of the total revenue of the trustee business. Thus, a significant amount of revenue was generated by the DTs from activities not under the purview of SEBI, because of which SEBI was not able to deal with many investor grievance complaints, since such activities were not in its purview. Furthermore, it was not clear that such activities would fall under which financial authority or financial regulator’s purview.

SEBI has thus proposed that DT activities, other than those regulated by any financial authority or financial regulator as may be specified by SEBI need to be transferred to a separate legal entity and such entity shall use the brand or corporate name of the regulated entity only for a sunset period of 1 year. The hived off entity may share resources with the DT while segregating its legal liability.

2. Inclusion of definition of “cross-default” and aggregation of debenture holders across International Securities Identification Numbers (“ISINs”) for voting and decisions in case of shared security interests

In the current scenario “cross default” is not defined under any of SEBI’s regulatory framework but there are several scenarios where the security issued by an issuer is common across multiple facilities availed by it (whether under a single ISIN or multiple ISINs).

Regulation 17(2) of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 states that:

“Any default committed by the issuer shall be reckoned at the International Securities Identification Number level notwithstanding the debt securities and/or non-convertible redeemable preference shares being issued under different offer documents.”

Furthermore, Clause 1.2 of Chapter X of on “Breach of Covenants, Default and Remedies” in the Master Circular for DTs dated May 16, 2024 states that:

“In the manner of calling ‘event of default’, due to the presence of multiple ISINs which may have been issued under the same offer document or a single ISIN which may have been split across multiple offer documents, it is clarified that ‘event of default’ shall be reckoned at the ISIN level, as all terms and conditions of issuance of security are same under a single ISIN even though it might have been issued under multiple offer documents.”

Thus, in accordance with the above, the DTs face multiple issues to obtain relevant approvals where the security is shared across various ISINs. The working group of SEBI recommended that where the security is shared across multiple ISINs or there are shared rights, decisions and voting shall be done across all such ISIN-holders. The recommendations of the corporate bonds and securitization advisory committee were also sought, and they further recommended that proposal of the working group be made applicable on prospective basis and choice maybe given for legacy/ outstanding cases to the debenture holders to choose the method to be followed for reckoning of default and decisions to be taken thereof. However, in case of presence of cross default clauses in the debenture trust deeds, the legal implications need to be tested. Additionally, it was suggested that “cross-default” may be defined in the SEBI regulations.

Basis, the above, SEBI proposed that:

(a) When security is shared across multiple ISINs on pari-passu basis, the decisions and voting can be aggregated across all such ISIN-holders. If multiple DTs are involved, they can coordinate amongst each other to facilitate voting and decisions to be taken thereof. Otherwise, since all the terms and conditions are same at the ISIN level, the determination of the event of default and the voting and decisions thereafter shall continue to be done at the ISIN level.

(b) The above proposal shall apply on prospective basis and choice shall be provided in case of outstanding issuances to the debenture holders to choose the method to be followed for reckoning of default and decisions to be taken thereof.

(c) In cases where the security is not pari-passu, the same shall not be implemented since the debenture holders do not have the same rights and interest in the security.

(d) The following definition of “cross default” be inserted under the LODR Regulations:

“‘Cross default’ shall mean specification in a debt security that default in another debt security triggers default in the first mentioned debt security, and therefore in the said ISIN.”

3. Insertion of provisions in DT Regulations specifying Rights of DTs exercisable to aid in performance of their fiduciary duties, obligations, roles and responsibilities and corresponding obligations on the issuer under LODR Regulations to enable timely fulfilment of duties by DTs

At present. there is no distinction between the duties of the DTs and the rights of DTs exercisable to aid in performance of their fiduciary duties, obligations, roles and responsibilities under Regulation 15 of the DT Regulations.

Therefore, on account of the absence of separate provisions in the DT Regulations, the working group of SEBI, recommended that certain provisions of Regulation 15 of the DT Regulations be omitted and be inserted in a separate provision named ‘Rights of DTs’.

Furthermore, Regulations 30 and 56 of the LODR Regulations provide a list of various disclosures to be made by the issuer in relation to the issue of debentures, in relation to which the working group of SEBI had recommended the alignment of the post-issue related duties of DTs with Regulation 30 and Regulation 56 of LODR Regulations such that the responsibility of submitting the documents and intimations falls primarily on the issuer. The same would further enforce the present obligations on the part of the issuer to provide the requisite documentation to DTs in a timely manner thereby enabling the DTs to perform their functions efficiently. Such change will also enable the DTs to keep a track of the status of compliances by the issuer and would also be in the interest of the debenture holders.

In accordance with the above, SEBI proposed the following:

(a) The introduction of the following regulation:

“Rights of the debenture trustee

(1) A debenture trustee may inspect books of accounts, records, and registers of the issuer and the trust property to the extent necessary for discharging its obligations.

(2) A debenture trustee:

(a) may call for information/ documents from the issuer with respect to the issuance.

(b) may call for documents from various intermediaries, as may be specified by the Board from time to time.

(c) may call for and utilize Recovery Expense Fund, with the consent of the debenture holders, in the manner as specified by the Board.”

(b) Depositories and Stock Exchanges may be mandated to provide the information/documents as specified in para 4.2.3 of the Consultation Paper.

(c) Regulation 56(1) of the LODR Regulations may be modified to the extent that the phrase “promptly” may be replaced with ‘unless otherwise specified, as soon as reasonably possible and in any case not later than twenty-four hours from the occurrence of the event or information’.

(d) In the table at para 4.2.4 of the Consultation Paper, the periodicity for submission of information by issuer to the DTs may be specified as 60 days and 75 days, respectively, instead of 45 days and 60 days.

4. Standardisation of Debenture Trust Deed (DTD)

In accordance with the Regulation 18(4) of the NCS Regulations read with Regulation 18 of the DT Regulations, every DT shall accept the trust deeds which shall contain the matters as provided in Section 71 of the Companies Act, 2013 and Form SH-12 as specified under the Companies (Share Capital and Debenture) Rules, 2014 and such deed shall be divided in two parts being:

(a) Part A – containing statutory/ standard information pertaining to the debt; and

(b) Part B – containing specific details particular to the issue.

The NCS Regulation only provides for broader principles of the debenture trust deed and it does not provide for a standard draft of the debenture trust deed. In view of the above, the Industry Body - Industry Standards Forum – Debt (ISF-Debt) was constituted for the purpose of standardizing the contents and form of the debenture trust deeds in line with the matters specified in the SEBI Regulations, Section 71 of the Companies Act, 2013 and Form SH-12 specified under the Companies (Share Capital and Debentures) Rules, 2014.

A model debenture trust deed was prepared by the ISF-Debt for secured NCDs and is provided as Annex-1 to the consultation paper. This debenture trust deed is divided in the following parts:

(a) Part A – comprising the terms that could be standardized across all issuances.

(b) Part B – comprising the representations and warranties.

(c) Part C – comprising all commercial terms such as coupon, security, tenure, etc.

(d) Part D – comprising exceptions/ deviations from Part A and Part B of model debenture trust deed.

SEBI permits issuer to deviate from model debenture trust deed, provided that a summary of key deviations along with rationale are summarised and disclosed in the General Information Document (GID)/ Key Information Document (KID) or Shelf Prospectus.

Thus, in accordance with the above, Regulation 18(4) of NCS Regulations and Regulation 14 of the DT Regulations is proposed to be amended as under:

“Every debenture trustee shall, amongst other matters, accept the trust deeds which shall contain the matters as specified in section 71 of Companies Act, 2013 and, Form No.SH.12 specified under the Companies (Share Capital and Debentures) Rules, 2014 and as specified by SEBI from time to time.”

Conclusion

If implemented, the amendments proposed by SEBI in the Consultation Paper could have a significant impact on the issuance of debentures by issuers. The introduction of a cross-default definition, the aggregation of decision-making among ISIN holders in cases of shared security, and the standardization of Debenture Trust Deeds (DTDs) could prove advantageous for Debenture Trustees (DTs), simplifying their role in representing multiple debenture holders.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.