With a view to ensuring greater transparency of disclosures by issuers, strengthening the role of debenture trustees, and protecting the interests of investors, the Indian capital markets regulator, Securities and Exchange Board of India (‘SEBI’), has, over the course of the past two months issued several amendments and clarificatory circulars in respect of debentures issuances in India. These changes reflect a paradigm shift in the role envisaged for debenture trustees who will now be required to undertake independent verification of security, on-going enhanced due diligence, monitoring of asset cover compliance, etc. Issuers too are now put to a much stricter regime. We list below some of these critical changes across regulation. Do note that not all these changes are effective immediately.

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’), the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (‘ILDS Regulations’) and the SEBI (Debenture Trustees) Regulations, 1993 (‘Debenture Trustee Regulations’) are some of the recently amended regulations in this regard. To lend support to these amendments SEBI has also issued several additional clarificatory circulars[1]. We have focused our note on the changes brought about by these regulatory amendments and circulars.

PRE-ISSUE ACTIONS

A. Independent Due Diligence by Debenture Trustee (“DT”) prior to executing Debenture Trustee Agreement (“DTA”)

1. Effective January 01, 2021 (i.e. for new issues proposed to be listed on or after January 01, 2021) a DT will be required to conduct an independent due diligence (itself or through professional advisors / experts) including on the assets to be secured, to ensure the assets are free from encumbrances/ necessary consents from existing charge-holders are in place. The DTA is to specify the terms of the due diligence and the diligence must include the following:

a. Verification by the DT that the assets are unencumbered or have all necessary existing lender and other approvals – Where conditional consent is received, the DT is to verify that the conditions are as per the existing transaction documents and intimate such charge holders via email of the proposed creation of charge.

b. Verification of filings with MCA, stock exchanges, CIBIL, IU – If personal guarantee, corporate guarantee or any other guarantee/ form of security is offered by the issuer, the debenture trustee is to verify the relevant filings (with the MCA, stock exchanges, CIBIL, IU).

c. Certifications for Corporate / Personal Guarantees -The DT must obtain necessary net-worth certifications from the statutory auditor (of the corporate guarantor) / chartered accountant (of the personal guarantor).

d. Independent assessment that assets are adequate for security – DT (either itself or through appointed chartered accountant firm, registered valuer, legal counsel) to prepare one or more reports (valuation report, ROC search report, title search report/ appraisal report, asset cover certificate, any other report/ certificate as applicable) as part of the independent assessment.

e. Due Diligence Certificate – DT is required to issue due diligence certificate in the specified format confirming the creation of the security and that relevant disclosures (including covenants proposed to be included in the debenture trust deed, side letters etc.are in line with and have been disclosed in the offer document (‘OD’)/information memorandum (‘IM’).

f. Records of the diligence to be maintained by the DT for at least 5 years from redemption.

2. Issuer to provide necessary information to DT to enable the due diligence – With effect from January 01, 2021 the issuer, at the time of entering into the Debenture Trustee Agreement, will be required to provide the Debenture Trustee with all relevant information for the purpose of the diligence, including:

a. Details of assets, on which charge is proposed, (including title deeds  or title reports, agreements/ MoU, evidence of registration with Sub-registrar, RoC, CERSAI etc.)

b. If the relevant assets are unencumbered, an undertaking to that effect.
c. For encumbered assets, :

(i) Details of existing charges with details of charge holders, value/ amount, evidence of registration with the sub-registrars, CERSAI or the IUs, as applicable;
(ii) Consent/ No-objection certificate (NOC) from existing charge holders for creation of further charge;
(iii) Consent/ NOC from existing unsecured lenders, where a negative lien exists in favour of existing unsecured lenders.

d. For personal guarantee or any other document / letter with similar intent:

(i) Relationship of the personal guarantor with the issuer;
(ii) Net worth statement (not older than 6 months from the date of debenture trustee agreement) certified by a chartered accountant of the guarantor;
(iii)   List of assets of the guarantor including undertakings/ consent/ NOC;
(iv)  Conditions of invocation of guarantee including details of put options or any other terms and conditions which may impact the security created;
(v) Executed copies of prior agreements to guarantee any other person.

e. For corporate guarantee or any other document / letter with similar intent:

(i) Audited financial statements of guarantor (not older than 6 months prior to the date of debenture trustee agreement) including details of contingent liabilities;
(ii) Undertaking by the guarantor that the guarantee shall be disclosed as “contingent liability” in the “notes to accounts” of financial statement of the guarantor;
(iii) Executed copies of prior agreements to guarantee any other person, if any;
(iv)  List of assets of the guarantor along-with undertakings/ consent/ NOC;
(v) Conditions of invocation of guarantee (including put options or other terms which may impact the security created);
(vi)  Impact on the security in case of restructuring of the guarantor;

f. In case securities (equity shares etc.) are being offered as security, a holding statement from the depository participant along with an undertaking that these securities shall be pledged in favour of debenture trustee(s) in the depository system.

g. Details of any other security being offered and any other document or information required by debenture trustee with regard to creation/perfection of security.

The above information may have to be expressly legislated in the Debenture Trustee Agreement.

B. Recovery Expense Fund (‘REF’) – Obligations of Issuer, Debenture Trustee and Stock Exchange – SEBI has introduced an obligation on the issuer to create a REF to enable debenture trustees to take prompt action for enforcement of security in case of default in listed debt securities.

1. Any issuer proposing to list debt securities is required to deposit an amount equal to 0.01% of the issue size subject to maximum of INR 25 lakhs per issuer towards REF with the designated stock exchange’, as identified and disclosed in its OD/IM. Details of the REF, post creation must be disclosed in the OD/IM and to debenture trustee.

2. The REF is to be created at the time of making the application for listing by way of deposit of cash or cash equivalents including bank guarantees. The issuer shall ensure that any bank guarantee remains valid for a period of 6 months post the maturity date of the listed debt security. The issuer shall keep the bank guarantee in force and renew the bank guarantee at least 7 working days before its expiry, failing which the designated stock exchange shall invoke such bank guarantee. The Debenture Trustee must ensure the REF conditions are met and implemented.

3. The balance in the REF will be refunded to the issuer upon redemption / payment of all outstandings under the debentures for which a “No Objection Certificate” will be issued by the debenture trustee to the designated stock exchange. The DT must satisfy itself that there are no other ensuing “defaults” on any other listed debt securities of the issuer before issuing the No Objection Certificate.

4. On the occurrence of an event of default, the debenture trustee/lead debenture trustee[2] to obtain debenture holder consent for enforcement of security and inform the same to the designated stock exchange. The designated stock exchange is to release the amount lying in the REF to the debenture trustee/ lead debenture trustee within 5 working days of receipt of such intimation.

5. We note that the capped amount of the REF is INR 25 lakhs per issuer. It remains to be seen how this capped amount will be implemented across the several stock exchanges utilised by the same issuer. Further, details on the quantum of the refund where the REF is at the INR 25 lakh cap in light of multiple debenture issuances, may also need to be considered to ensure that sufficient REF (to cover the outstanding debenture issuances) remains at all times with the stock exchanges.

6. While the SEBI circular on the REF comes into force with effect from January 01, 2021 for all the applications for listing of debt securities made on or after January 01, 2021, it is pertinent to note that existing issuers whose debt securities are already listed on Stock Exchange(s) as at January 01, 2021 are also required to meet the REF requirements and have been provided an additional 90 days to create the REF.

C. Disclosures in Offer Document/ Information Memorandum

1. For issuances post October 08, 2020:

a. Issuer undertaking in the IM that the assets on which charge is created are free from any encumbrances and in cases where the assets are encumbered, the permission or consent to create a second or pari-passu charge on the assets of the issuer has been obtained from the existing creditors.

b. The following disclosures in the summary term sheet in the OD/IM:

(i) Security Description to provide details on type of security, date of creation/likely creation of security, minimum security cover, revaluation, replacement of security.
(ii) Interest to the debenture holder over and above the coupon rate as specified in the debenture trust deed and disclosed in the OD/IM.
(iii) Disclosure of all covenants regarding the issue items. This section should specifically clarify that no side letters are being executed / disclose details of any side letters.
(iv) Creation of REF including details and purpose of the REF.
(v) Manner of voting and conditions of joining inter creditor agreement.
(vi)  Conditions for breach of covenants (as specified in Debenture Trust Deed)
(vii) Risk factors pertaining to the issue.

2. For issuances to be listed on or post January 01, 2021

The issuer shall also make the following additional disclosures in the OD/IM:

a. Perfection compulsory – Debt securities shall be considered as secured only if the charged asset is registered with Sub-registrar and Registrar of Companies or CERSAI or Depository etc., as applicable, or is independently verifiable by the debenture trustee;

b. Terms and conditions of debenture trustee agreement including fees charged by debenture trustees(s), details of security to be created and process of due diligence carried out by the debenture trustee; and
c. Due diligence certificate as per the specified format.

POST-ISSUE ACTIONS

D. Debenture Trust Deed (“DTD”) and Creation of Charge

1. Execution of DTD and creation of charge prior to listing application – While under the Companies (Share Capital and Debentures) Rules issuers have three months to execute the DTD, with effect from January 1, 2021, issuers will be required to ensure that the DTD is executed and security is created as specified in the OD/IM prior to the listing application. The new timelines prescribed for listing applications are set out below. Clarification may be required from SEBI to reconcile these diverging timelines.

2. Listing approval only upon diligence certificate – The stock exchange(s) is permitted to list the debt securities only upon receipt of the duly completed due diligence certificate from the debenture trustee which must reflect that security has been duly created and the DTD has been executed. To this extent, the amendment brings in heightened due diligence on the part of the stock exchange as well.

3. Form of Debenture Trustee Deed – For issuances post October 8, 2020, the debenture trustee shall accept only such debenture trust deeds that contain the matters as specified in section 71 of Companies Act, 2013 and Form No. SH.12. Such DTD must consist of two parts:

a. Part A containing statutory/standard information pertaining to the debt issue (While clarity is awaited from SEBI, we understand from market participants that the items specified in the SH12 will likely included in Part A);

b. Part B containing details specific to the particular debt issue.

This change has been introduced in both the SEBI (ILDS) Regulations and the SEBI (Debenture Trustee) Regulations. While the former clarifies that this form is required only for public issuances, the latter does not distinguish between a public issue or a private placement and it would therefore appear that this form requirement will also be applicable to debentures issued by private placement.

4. Timeline for listing on a private placement basis – Effective December 01, 2020, privately placed debentures must be listed within the following time lines, post allotment.

We note that the T+4 timeline is a deviation from regulation 19 of the SEBI (ILDS) Regulations which provides a fifteen day timeline for listing applications in case of a private placement. It remains to be seen whether a further clarification will be issued to reconcile this divergence.

5. Penalties for delay in listing

In case of a delay in listing beyond these timelines (i.e. T+4) the issuer shall:

a. pay to the debenture holders penal interest of 1% per annum over the coupon rate from the date of allotment to the date of listing;

b. be permitted to utilize issue proceeds of its subsequent two privately placed issues only after receiving final listing approval from stock exchanges.

We note that the penal interest under the earlier SEBI circular[3] (now superseded) was payable from the expiry of 30th day from the deemed date of allotment till the actual listing. The above circular imposes penal interest from the date of allotment till actual listing.

6. ISIN and freeze on trading till listing approval – With effect from December 01, 2020, depositories are directed to activate the ISIN for debt securities issued on private placement basis only after the listing approval has been accorded by the stock exchange. To facilitate re-issuances of new debt securities in an existing ISIN, depositories can allot such new debt securities under a new temporary ISIN which shall be kept frozen. Upon receipt of listing approval, the debt securities credited in the new temporary ISIN shall be debited and the same shall be credited in the pre-existing ISIN of the existing debt securities, before they become available for trading.

7. Registration of Charge – With effect from January 01, 2021, charges created for the issue shall be registered with the Sub-registrar, Registrar of Companies, CERSAI, Depository etc., as applicable, within 30 days of creation of such charge. In case the charge is not registered anywhere or is not independently verifiable, then the same shall be considered a breach of covenants/ terms of the issue by the issuer. Note that the debt securities shall be considered as secured only if the charged asset are registered or independently verifiable by the debenture trustee.

8. Periodical Monitoring – Debenture trustees shall incorporate the terms and conditions of periodical monitoring in the DTD to ensure the listed entity is liable to provide relevant documents/ information to enable the debenture trustee to submit the following reports/ certification to Stock Exchange(s) within the timelines mentioned below.

The requirement for these reports / certificates become effective from quarter ended December 31, 2020 for listed debt securities. For existing debt securities, listed entities and debenture trustee(s) are required to enter into supplemental/amended debenture trust deeds within 120 days from November 12, 2020 incorporating these changes in their debenture trust deeds.

POST LISTING ACTIONS

With effect from October 08, 2020, the following additional post listing obligations have been imposed on issuers and debenture trustees.

E. Additional post issue obligations of the Issuer

1. Issuer to maintain 100% asset cover or asset cover as per the terms of the IM/OD/DTD (at least sufficient to discharge the principal amount at all times of the debentures).

2. Provide a half-yearly certificate from a statutory auditor regarding maintenance of 100% asset cover or asset cover as per the terms of OD/IM and DTD, including compliance with all the covenants, to debenture trustee along with the half –yearly financial results.

3. Intimate the debenture trustee on all covenants of the issue including side letters, accelerated payment clauses.

4. Disclosure of initiation of forensic audit including following details:

a. The fact of initiation of forensic audit along-with name of entity initiating the audit and reasons for the same, if available;

b. Final forensic audit report (other than forensic audit initiated by regulatory / enforcement agencies) on receipt by the listed entity along with comments of the management, if any.

F. Additional Obligations of Debenture Trustees

1. Further diligence if security is receivables/book debts – It is the duty of the Debenture Trustee to monitor that the security and the security cover is maintained. Where the listed debentures are secured by receivables/ book debts, the debenture trustee is obligated to:

a. conduct due diligence and monitor asset cover on a quarterly basis, in the manner as may be prescribed; and

b. obtain, on a half-yearly basis, a certificate from the statutory auditor of the issuer certifying the value of receivables/book debts including compliance with the covenants of the OD/IM.

2. Actions by Debenture Trustee on event of default –

a. The debenture trustee is now mandated to call a meeting of all the debenture holders in the event of any breach of covenants specified in its offer document/information memorandum/debenture trust deed.

b. An “event of default” is to be recognized at the ISIN level, as all terms and conditions of issuance of security would be the same when issued under a single ISIN even though it might have been issued under multiple information memoranda.

c. In case of ‘Default’ by issuers DT to seek consent from the investors for enforcement of security and/or entering into an inter-creditor agreement under the RBI framework[4], which may include involve restructuring including roll-over of debt securities, as follows:

(i) DT to send notice to investors within 3 days of event of default

(ii) Such notice is to contain provisions for –

>  negative consent for proceeding with the enforcement of security;
>  positive consent for signing the inter-creditor agreement;
>  the time period within which consent needs to be provided viz. consent to be given within 15 days from the date of notice, and
>  the date of the meeting to be convened.

While all the above will apply for issues by private placement, in case of public issues, the notice will not contain a negative consent provision and the requirement to convene a meeting for enforcement of security will not be applicable.

(iii)   Meeting to be held within 30 days of the event of default, provided meeting may be dispensed if the default is cured between the date of notice and the date of meeting.

(iv)  Enforce security or ICA – DT to take action to enforce security or enter into the inter-creditor agreement as decided in the meeting of investors, subject to the following:

>  In case(s) where the majority investors expressed their dissent against enforcement of the security, the debenture trustee(s) shall not enforce security.
>  In case(s) where majority of investors expressed their consent to enter into the inter-creditor agreement, DT shall enter into the inter-creditor agreement.
>  In case(s) consents are not received for enforcement of security and for signing the inter-creditor agreement, DT shall take further action, if any, as per the decision taken in the meeting of the investors.
>  The DT may form a representative committee of the investors to participate in the inter-creditor agreement or to enforce the security or as may be decided in the meeting.

(v) Consent – Consent of the majority of investors shall mean the approval of not less than 75% of the investors by value of the outstanding debt and 60% of the investors by number at the ISIN level. One may need to consider existing DTDs that already contain provisions for a lower voting threshold of debenture holders.

(vi)  Exit from ICA – A debenture trustee may sign an inter-creditor agreement and consider the resolution plan on behalf of the investors. However, the debenture trustee shall be free to exit the inter-creditor agreement with the same rights as if it had never signed the inter-creditor agreement and the resolution plan shall not be binding on the debenture trustee if:

>  the resolution plan imposes condition(s) on the Debenture Trustee(s) that are not in accordance with the provisions of Companies Act, 2013 and the rules made thereunder, the Securities Contracts (Regulations) Act, 1956 and the Securities and Exchange Board of India Act, 1992; (The implications of this provision will need to be analysed carefully on a case by case basis.)

>  If the resolution plan is not finalised within 180 days from the end of the review period. Note that the debenture trustee(s) may consent to an extension beyond 180 days subject to the approval of the investors regarding the total timeline, provided this does not exceed 365 days from the date of commencement of the review period;

>  If any of the terms of the approved resolution plan are contravened by any of the signatories to the inter-creditor agreement.

The debenture trustee(s) must ensure that these conditions (for exit) are suitably incorporated in the inter-creditor agreement, prior to signing the inter-creditor agreement.

From the above it is evident that SEBI is seeking to ensure that the debenture market is more investor friendly while at the same time ensuring investor protection through transparency. For issuers and debenture trustees, teething issues in respect of this transition are inevitable. We do hope however, that the above gist helps as a guide to focus on the key changes across regulation. Please do not hesitate to reach out to the authors, Anand Shah, Senior Partner (anand.shah@azbpartners.com), Hufriz Wadia, Partner (hufriz.wadia@azbpartners.com) and Neeraj Nainani, Associate (neeraj.nainani@azbpartners.com) for any clarifications.

Authors:

Anand Shah, Senior Partner
Hufriz Wadia, Partner 
Neeraj Nainani, Associate

Footnotes:

[1] This note covers the following clarificatory circulars:
· Standardisation of timeline for listing of securities issued on a private placement basis. (SEBI Circular No. SEBI/HO/DDHS/CIR/P/2020/198 dated October 05, 2020, effective from December 1, 2020);
· Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities (SEBI Circular No. SEBI/HO/MIRSD/CRADT/CIR/P/2020/203 dated October 13, 2020, effective from October 13, 2020) (‘Circular on standard procedure in case of ‘Default’);
· Contribution by Issuers of listed or proposed to be listed debt securities towards creation of “Recovery Expense Fund”(SEBI Circular No. SEBI/HO/MIRSD/CRADT/CIR/P/2020/207 dated October 22, 2020 effective from January 1, 2021) (‘Circular for creation of REF’);
· Creation of Security in issuance of listed debt securities and ‘due diligence’ by debenture trustee(s) (SEBI Circular No. SEBI/HO/MIRSD/CRADT/CIR/P/2020/218 dated November 3, 2020 effective from January 1, 2021) (‘Creation of Security and Due Diligence Circular’); and
·  Monitoring and Disclosures by Debenture Trustee(s) (SEBI Circular No. SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2020/230 dated November 12, 2020, effective from quarter ended December 31, 2020 for listed debt securities).
[2] Lead Debenture Trustee means: A Debenture Trustee who has been chosen to be the Lead Debenture Trustee by other Debenture Trustees or a Debenture Trustee who is the Debenture Trustee of more than 50% of the outstanding value of debt securities
[3] SEBI Circular on Enhanced disclosure in case of listed debt securities bearing no. SEBI/ HO/ MIRSD/ DOS3/CIR/P/2019/68 and dated May 27, 2019
[4] Under the RBI June 07, 2019 circular.