DIP (Compendium)Circular No.  4

September 6, 2000

TO

ALL MERCHANT BANKERS/DEBENTURE TRUSTEES

Amendments to the SEBI (Disclosure and Investor Protection Guidelines), 2000.

The captioned Guidelines came into effect from January 27, 2000. The Guidelines for issue of debt instruments are contained in Chapter X thereof. SEBI had constituted a working group of Debenture Trustees which made certain suggestions to improve the effectiveness of the trustees. SEBI has considered these recommendations and has decided to implement the same by making certain amendments to the DIP Guidelines as given in Section A of the annexure.

As per the extant guidelines, debt instruments with maturity over 18 months are compulsorily to be secured. SEBI has received representations to allow issue of unsecured/subordinated debt instruments in the nature of mezannine capital. In order to provide a variety of debt instruments and to help the development of the debt market it has been decided to allow the issue of unsecured/subordinated debt instruments as per Guidelines given in Section B of the Annexure.

This circular shall come into force with immediate effect. Please acknowledge receipt.

Yours faithfully,

P. GAHROTRA Sr. Executive Director

ANNEXURE

SECTION A

1.In title of Clause 10.6 words “Disclosure and” before the words “Creation of Charge” shall be added.

2.Before the existing clause 10.6.1, a new clause shall be added :-

“10.6.1 – The offer document shall specifically state the assets on which security shall be created and shall also state the ranking of the charge/s. In case of second or residual charge or subordinated obligation, the offer document shall clearly state the risks associated with such subsequent charge. The relevant consent for creation of security such as pari passu letter, consent of the lessor of the land in case of leasehold land etc. shall be obtained and submitted to the debenture trustee before opening of issue of debenture.”

3. A new sub-clause 10.6.2 shall be inserted as follows :

“10.6.2 – The offer document shall state the security / asset cover to be maintained. The basis for computation of the security / asset cover, the valuation methods and periodicity of such valuation shall also be disclosed. The security / asset cover shall be arrived at after reduction of the liabilities having a first / prior charge, in case the debentures are secured by a second or subsequent charge.”

4. The existing clause 10.6.1 shall be numbered as 10.6.3.

5. After existing clause 10.6.3, a new sub-clause 10.6.4 shall be added :

” 10.6.4 – The issue proceeds shall be kept in an escrow account until the documents for creation of security as stated in the offer document, are executed.”

The other sub-clauses under clause 10.6 shall be renumbered accordingly.

6. Existing clause 10.6.2 shall be renumbered as 10.6.5.

7. Existing clause 10.6.3 shall be renumbered as 10.6.6

SECTION B :

A new clause 10.7.2 shall be inserted as follows :-

“Companies may issue unsecured / subordinated debt instruments / obligations (which are not ‘public deposits’ as per the provisions of Section 58 A of the Companies Act, 1956 or such other notifications, guidelines, Circular etc. issued by RBI, DCA or other authorities).

Provided that such issue shall be subscribed by Qualified Institutional Buyers or other investor who has given positive consent for subscribing to such unsecured / sub-ordinated debt instruments / obligation. ”

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