SEBI has amended the Listing Regulations on October 8, 2020 in relation to (a) asset cover requirements for non-convertible debentures; and (b) documentation to be provided to debenture trustees. Some of the key aspects of these amendments are highlighted below:

1.     Asset Cover for NCDs

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) require entities with listed non-convertible debentures (NCDs) to maintain a 100% asset cover that is sufficient to discharge the principal amount. The Securities and Exchange Board of India (SEBI) has now changed this to provide that such entity may maintain: (a) 100% asset cover; or (b) asset cover as per the terms of the offer document or information memorandum and/or the debenture trust deed, such that it is sufficient to discharge the principal amount at all times for the listed NCDs issued.

Such minimum asset cover requirement is now also applicable to unsecured debt securities issued by financial sector entities for meeting capital requirements (as specified by their respective regulators).

2.     Documents and Intimations to Debenture Trustees

Entities which have issued listed NCDs are now required to intimate the debenture trustee about all covenants of the issue (including side letters, accelerated payment clauses etc.).

Earlier, entities with listed NCDs were required to provide the debenture trustee with a half-yearly certificate, regarding compliance with the asset cover requirement, from a practicing company secretary or a practicing chartered accountant. This certificate is now required from the statutory auditor and has been extended to cover compliance with all covenants related to the issue.

Additionally, entities with listed NCDs which are banks or non-banking financial companies registered with the Reserve Bank of India are now also required to comply with this requirement.

Way Forward

•      Entities with listed NCDs should take note of the amendments pertaining to maintenance of asset cover and additional obligations towards the debenture trustee.

•     SEBI has taken away exemptions to financial sector entities and such entities are now subject to a higher level of compliance, perhaps to increase accountability and bring in more transparency in the dealings of financial sector entities.

•    SEBI has also left some questions unanswered by its recent amendments on the certifications by the statutory auditor in relation to compliance by the listed entity with all covenants relating to the issue. Statutory auditors do not issue, and perhaps may not be competent to issue, certificates on secretarial and procedural matters which are outside the realm of accounting and taxation, and it remains to be seen whether SEBI will supplement these changes with any further clarifications.

•     This measure is also likely to increase costs for issuers as they would be required to engage statutory auditors on a half-yearly basis to comply with these requirements, in addition to engaging them for their annual audit requirements.