The Securities and Exchange Board of India (SEBI) has issued the Master Circular for Debenture Trustees in March 2023, with updates as of July 2023. Debenture Trustees play a crucial role in the corporate bond market, and SEBI has laid down the broad framework for their regulation through the Debenture Trustees Regulations. This Master Circular consolidates relevant circulars, procedural requirements, and disclosure obligations to provide a comprehensive reference for Debenture Trustees and market stakeholders. This article presents an analysis of the Master Circular’s significance and its implications for Debenture Trustees.
Analysis: SEBI’s Master Circular for Debenture Trustees serves as a vital regulatory document, streamlining the provisions and guidelines for the corporate bond market. It brings together the applicable circulars, providing a single point of reference for Debenture Trustees. The circular supersedes previous circulars mentioned in Annex-1 Part-A, and the applicability of provisions mentioned in Annex-1 Part-B to Debenture Trustees has been rescinded. Actions taken under rescinded circulars shall be deemed to have been taken under the corresponding provisions of this Master Circular. Debenture Trustees are directed to comply with the conditions laid down and ensure the necessary systems and infrastructure are in place.
Conclusion: SEBI’s Master Circular for Debenture Trustees is a significant regulatory document that consolidates and simplifies the guidelines and provisions for Debenture Trustees in the corporate bond market. It provides clarity and uniformity in compliance requirements, ensuring investor protection and market development. Debenture Trustees and market stakeholders are encouraged to review the circular and ensure compliance with its provisions. The issuance of this Master Circular reflects SEBI’s commitment to maintaining the integrity and efficiency of the corporate bond market. The full text of the Master Circular can be accessed on the SEBI website, offering comprehensive guidance for Debenture Trustees.
Securities and Exchange Board of India1
Master Circular No. SEBI/HO/DDHS-PoD1/P/CIR/2023/109 Dated: March 31, 2023
(updated as on July 06, 2023)
To
All Registered Debenture Trustees,
Trustees Association of India (TAI)
All Registered Credit Rating Agencies,
Issuers who have listed and/ or propose to list Debt Securities and Municipal Debt Securities Recognized Stock Exchanges and Recognized Depositories
Madam/ Sir,
Sub: Master Circular for Debenture Trustees
1. Debenture Trustees are regulated under the provisions of Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 (‘DT Regulations’). While the broad framework for Debenture Trustees has been laid down in the DT Regulations, over the years, procedural/ disclosure requirements and obligations have been specified by SEBI through circulars.
2. For effective regulation of the corporate bond market and to enable the Debenture Trustees and other market stakeholders to get access to all the applicable circulars at one place, this Master Circular has been prepared.
3. This Master Circular is a compilation of the relevant existing circulars, with consequent changes. The stipulations contained in these circulars have been detailed chapter-wise in this circular. Accordingly, the circulars listed in Part-A of Annex-1 stand superseded by this Master Circular. Further, the applicability of provisions of the circulars listed in Part-B of Annex-1, to the extent they pertain to Debenture Trustees, has been rescinded.
4. For ease of reference, each chapter of this Master Circular contains footnotes corresponding to the respective erstwhile circulars. The terms ‘Issuer’ and ‘listed entity’ have been used interchangeably in this Master Circular.
5. Notwithstanding the supersession as mentioned in Clause 3 of this circular2, –
5.1 anything done or any action taken or purported to have been done or taken under the rescinded circulars, prior to such rescission, shall be deemed to have been done or taken under the corresponding provisions of this Master Circular; and
5.2 any application made to the Board under the rescinded circulars, prior to such rescission, and pending before it shall be deemed to have been made under the corresponding provisions of these regulations;
6. Debenture Trustees are directed to comply with the conditions laid down in this Master Circular and it is reiterated that Debenture Trustees shall have necessary systems and infrastructure in place for implementation of this circular. The Board of Directors of the Debenture Trustee shall be responsible for ensuring compliance with these provisions
7. This Circular is issued in exercise of powers conferred under:
1.1 Section 11(1) of Securities and Exchange Board of India Act, 1992;
1.2 Regulation 2A of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993
1.3 Regulation 55 of the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021; (‘SEBI NCS Regulations’)
1.4 Regulation 29 of Securities and Exchange Board of India (Issue and Listing of Municipal Debt Securities) Regulations 2015;
1.5 Regulation 101 (1) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (‘SEBI LODR Regulations’)
to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market.
2. Applicability: The provisions of the Master Circular shall come into force with effect from April 01, 2023, unless specifically mentioned otherwise in this circular3.
3. This Circular is available on SEBI website at www.sebi.gov.in under “Legal Framework”.
Yours faithfully,
Pradeep Ramakrishnan
General Manager
Department of Debt and Hybrid Securities
+91 – 022 2644 9246
pradeepr@sebi.gov.in
Chapter I: Terms of Registration
1. Online Registration Mechanism for Debenture Trustees4
1.1. The SEBI Intermediary Portal is available at https://siportal.sebi.gov.in for SEBI registered intermediaries including Debenture Trustees to submit registration applications online. SEBI Intermediary Portal shall inter-alia include online application for registration, processing of application, grant of final registration, application for surrender/ cancellation, submission of periodical reports, requests for change of name/ address/ other details, etc. The Link for SEBI Intermediary Portal is also available on SEBI website – www.sebi.gov.in.
1.2. All applications for registration/ surrender/ other requests will be made through SEBI Intermediary Portal only. The applicants will be separately required to submit relevant documents viz. declarations/ undertakings required as a part of application forms prescribed in relevant regulations, in physical form, only for records without impacting the online processing of applications for registration.
1.3. In case of any queries and clarifications with regard to the SEBI Intermediary Portal, Debenture Trustees may contact on 022-26449364 or may write at portalhelp@sebi.gov.in.
2. Digital Mode of Payment5
2.1. SEBI has enabled digital mode of payment (RTGS/ NEFT/ IMPS etc.) for fees/ penalties/ remittance/ other payments etc.
2.2. In order to identify and account for such direct credit in the SEBI account, Debenture Trustee shall provide the information to SEBI once the payment is made as per the format specified below:
|
Date |
|
| Department of SEBI | |
| Name of Intermediary/ Other Entities | |
| Type of Intermediary | |
| SEBI Registration Number (if any) | |
| PAN | |
| Amount (INR) |
–
|
Purpose of Payment (including the period for which payment was made e.g. quarterly, annually) |
|
| Bank name and Account number from which payment is remitted | |
| UTR No |
2.3. The above information should be emailed to the respective department(s) as well as to the Treasury & Accounts division at tad@sebi.gov.in.
3. Grant of prior approval to Debenture Trustee for change in control6
3.1. Debenture Trustee is required to obtain prior approval of SEBI in case of change in control. With a view to expedite the process of granting prior approval, SEBI has adopted a ‘single window clearance at SEBI’, for the Debenture Trustees in case of their having multiple registrations with SEBI.
3.2. Therefore, in case a Debenture Trustee holds multiple registrations with SEBI, it shall make only one application addressed to “Chief General Manager, Department of Debt and Hybrid Securities, SEBI” accompanied by the following information:
a) Whether any application was made in the past to SEBI seeking registration in any capacity but it was not granted? If yes, details thereof.
b) Whether any action has been initiated/ taken under SCRA/ SEBI Act or rules and regulations made thereunder? If yes, status thereof along with corrective action taken to avoid such violations in the future.
c) The acquirer shall also confirm that it shall honour all past liabilities/ obligations of the applicant, if any.
d) Whether any investor complaint is pending? If yes, steps taken and confirmation that the acquirer shall resolve the same.
e) Details of litigation, if any.
f) That all the fees due to SEBI have been paid.
g) That there will not be any change in the Board of Directors of incumbent or in its management team, till the time prior approval is granted.
h) That the incumbent shall inform all its existing investors/ clients in order to enable them to take informed decisions regarding their continuance or otherwise with the entity with new management.
3.3. Further, in case the incumbent is a registered stock broker and/ or depository participant, in addition to the above, it shall obtain approval/ NOC from all the Stock Exchanges/ Depositories, where the incumbent is a member/ Depository Participant and forward a self-attested copy of the same to SEBI.
3.4. The prior approval granted by SEBI shall be valid for a period of 180 days from the date of communication.
4. Effect on change in control in case of transfer of shareholdings among immediate relatives and transmission of shareholdings in case of a Debenture Trustee being an unlisted body corporate7
In the following scenarios, change in shareholdings of a Debenture Trustee will not be construed as change in control:
4.1. Transfer of shareholding among immediate relatives shall not be treated as resulting in change in control;
4.2. Transfer of shareholding by way of transmission to immediate relative or not, shall not be treated as resulting in change in control
Immediate relative shall be construed as defined under Regulation 2(l) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 which inter-alia includes any spouse of that person, or any parent, brother, sister or child of the person or of the spouse
4.3. Incoming shareholders in the Debenture Trustee, pursuant to transfer of shares from immediate relative/ transmission of shares (immediate relative or not), need to satisfy the fit and proper person criteria stipulated in Schedule II of SEBI (Intermediaries) Regulations, 2008.
5. Transfer of business by SEBI registered intermediaries to other legal entity8
SEBI has been receiving registration applications pursuant to transfer of business (SEBI regulated business activity) from one legal entity which is a SEBI registered Intermediary (transferor) to other legal entity (transferee). In this regard, following is clarified:
5.1. The transferee shall obtain fresh registration from SEBI in the same capacity before the transfer of business if it is not registered with SEBI in the same capacity. SEBI shall issue new registration number to transferee different from transferor’s registration number in the following scenario:
a) “Business is transferred through regulatory process (pursuant to merger/ amalgamation/ corporate restructuring by way of order of primary regulator/ govt./ NCLT, etc.) or non-regulatory process (as per private agreement/ MOU pursuant to commercial dealing/ private arrangement) irrespective of transferor continues to exist or ceases to exist after the said transfer.
b) In case of change in control pursuant to both regulatory process and non-regulatory process, prior approval and fresh registration shall be obtained. While granting fresh registration to same legal entity pursuant to change in control, same registration number shall be retained.
c) If the transferor ceases to exist, its certificate of registration shall be surrendered.
d) In case of complete transfer of business by transferor, it shall surrender its certificate of registration.
e) In case of partial transfer of business by transferor, it can continue to hold certificate of registration.
6. Surrender of Certificate of Registration9
6.1. If a Debenture Trustee wishes to surrender the certificate of registration voluntarily, it shall transfer, wherever relevant, its existing business/ client accounts to another SEBI registered Debenture Trustee, before making such request to SEBI in the format specified in Annex-IA of this Master Circular.
6.2. The Debenture Trustee may, if it so desires, make a representation for dispensing with the procedure, along with the application, for surrender in terms of the first proviso to Regulation 33B of SEBI (Intermediaries) Regulations, 2008.
6.3. In all cases of transfer of business or client accounts to another registered Debenture Trustee, the clients shall not be subjected to any additional cost.
7. Designated e-mail ID for regulatory communication with SEBI10
7.1. In order to facilitate the issuance of digitally signed circulars, Debenture Trustees are required to create a designated email-id for regulatory communications. This email-id shall be exclusively for the above purpose and should not be person centric.
7.2. The designated email-id shall be communicated to SEBI by emailing a file to dt@sebi.gov.in, as prescribed below:
a) The file should be an excel file;
b) The name of the file and the subject of the email shall specify the type of Debenture Trustee and the name of the Debenture Trustee. For example – “Debenture Trustee – ABC co. Ltd – communication of designated email-id.”
c) The file shall contain the following details:
|
Name |
Address | Category | Registration No. | Designated email id | Name of compliance officer |
Annex-IA
Application form for surrender of certificate of registration by Debenture Trustee
To
Securities and Exchange Board of India
Sir/ Ma’am,
Sub: Surrender of Certificate of Registration as Debenture Trustee, Registration No. __.
1. We hereby surrender our certificate of registration as Debenture Trustee.
2. We enclose the original certificate of registration (or indemnity in case the certificate is lost or stolen) for cancellation.
3. We hereby confirm that:
a. no complaint/ disciplinary proceeding is pending against us;
b. no investigation/ inquiry by SEBI is pending against us with respect to our activities as a Debenture Trustee;
c. as on date of application, we have paid all fees;
d. we shall continue to be liable for all liabilities/ obligations (including monetary penalties, if any) for violations, if any, of the provisions of the SEBI Act, Rules and the SEBI (Debenture Trustee) Regulations, 1993 that have taken place before our surrender of certificate of registration;
e. all our current assignments as a Debenture Trustee have been either duly terminated or transferred to another registered Debenture Trustee _____ with registration no.___;
f. we have issued a public notice in a widely circulated national and a regional daily dated_______ informing surrender of our registration as Debenture Trustee (Please enclose a clipping of the said public notice);
g. We have notified the Depositories and all the Stock Exchanges where our client companies are listed about the surrender of our registration.
4. *We hereby request SEBI to dispense with the procedure laid down in Regulation 33B of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 while processing our request for surrender of certificate of registration.
Thanking you,
Yours faithfully,
Name:
(Whole time/ Managing Director/ Principal Officer)
*Please strike off, if not applicable.
Chapter II: Due Diligence by Debenture Trustees
1. Appointment of Debenture Trustee
A Debenture Trustee shall ensure compliance with the provisions of the regulations 13 and 13A of DT Regulations with regard to being appointed as a Debenture Trustee in relation to an issue.
2. Due Diligence in respect of Secured Debt Securities11
The Debenture Trustee shall ensure the following with regard to due diligence at the time of creation of security:
2.1. Documents/ Consents required at the time of entering into debenture trustee agreement
In order to enable the Debenture Trustee to exercise due diligence with respect to creation of security, the Issuer at the time of entering into debenture trustee agreement shall provide the following information/ documents to the Debenture Trustee:
a) Details of assets, movable property and immovable property on which charge is proposed to be created including title deeds (original/ certified true copy by issuers/ certified true copy by existing charge holders, as available) or title reports issued by a legal counsel/ advocates, copies of the relevant agreements/ Memorandum of Understanding, copy of evidence of registration with Sub-registrar, Registrar of Companies, Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) etc.
b) For unencumbered assets, an undertaking that the assets on which charge is proposed to be created are free from any encumbrances.
c) For encumbered assets, on which charge is proposed to be created, the following consents along-with their validity as on date of their submission:
i. Details of existing charge over the assets along with details of charge holders, value/ amount, copy of evidence of registration with Sub-registrar, Registrar of Companies, CERSAI, Information Utility (IU) registered with Insolvency and Bankruptcy Board of India (IBBI) etc. as applicable;
ii. Consent/ No-objection certificate (NOC) from existing charge holders for further creation of charge on the assets or relevant transaction documents wherein existing charge holders have given conditional consent/ permission to the Issuer to create further charge on the assets, along-with terms of such conditional consent/ permission, if any; and
iii. Consent/ NOC from existing unsecured lenders, in case, negative lien is created by Issuer in favour of unsecured lenders.
d) In case of personal guarantee or any other document/ letter with similar intent is offered as security or a part of security:
i. Details of guarantor viz. relationship with the Issuer; and
ii. Net worth statement (not older than 6 months from the date of debenture trustee agreement) certified by a chartered accountant of the guarantor; and
iii. List of assets of the guarantor including undertakings/ consent/ NOC as per para 2.1(b) and 2.1(c) above; and
iv. Conditions of invocation of guarantee including details of put options or any other terms and conditions which may impact the security created; and
v. List of previously entered agreements for providing guarantee to any other person along with an undertaking that there are no agreements other than those provided in the list, if any.
e) In case of corporate guarantee or any other document/ letter with similar intent is offered as security or a part of security:
i. Details of guarantor viz. holding/ subsidiary/ associate company etc.;
ii. Audited financial statements (not older than 6 months from the date of debenture trustee agreement) of guarantor including details of all contingent liabilities;
iii. List of assets of the guarantor along-with undertakings/ consent/ NOC as per para 2.1(b) and 2.1(c) above;
iv. Conditions of invocation of guarantee including details of put options or any other terms and conditions which may impact the security created;
v. Impact on the security in case of restructuring activity of the guarantor;
vi. Undertaking by the guarantor that the guarantee shall be disclosed as
vii. “contingent liability” in the “notes to accounts” forming part of the financial statements of the guarantor;
viii. Copy of Board resolution of the guarantor for the guarantee provided in respect of the debt securities of the Issuer;
ix. List of previously entered agreements for providing guarantee to any other person along with an undertaking that there are no agreements other than those provided in the list, if any.
f) In case of any other contractual comforts/ credit enhancements provided for or on behalf of the issuer, it shall be required to be legal, valid and enforceable at all times, as affirmed by the issuer. In all other respects, it shall be dealt with as specified above with respect to guarantees.
g) In case securities (equity shares, etc.) are being offered as security then a holding statement from the depository participant along with due pledge of such securities in favour of Debenture Trustee in the depository system shall be ensured.
h) Details of any other form of security being offered viz. Debt Service Reserve Account, etc.
i) Any other information, documents or records required by the Debenture Trustee with regard to creation of security and perfection of security.
2.2. Due diligence by a Debenture Trustee for creation of security
2.2.1. Regulation 15(6) of DT Regulations inter-alia requires a Debenture Trustee, to exercise independent due diligence to ensure that security is free from encumbrances, adequate consent has been taken from existing charge holders, if any, etc. Regulation 15(1)(i) of DT Regulations places obligations on the Debenture Trustee to ensure that the assets of the Issuer are sufficient to discharge the interest and principal amount with respect to debt securities of the Issuer at all times.
2.2.2. A Debenture Trustee, by itself or through professionals appointed and compensated/ remunerated by the Debenture Trustee viz., practicing chartered accountant, practicing company secretary, registered valuer, or legal counsel shall independently carry out due diligence. The terms and conditions with respect to exercising due diligence shall also be included in the debenture trustee agreement. The due diligence to be exercised by Debenture Trustee with respect to creation of security shall inter-alia include the following:
(a) Debenture Trustee shall verify that the assets provided by Issuer for creation of security are free from any encumbrances or necessary permissions or consents has been obtained from existing charge holders by carrying out the following checks:
(i) Verify from Registrar of Companies, Sub-registrar, CERSAI, IU or other sources where charge is registered/ disclosed as per terms.
(ii) In case of conditional consent/ permission received as per para 2.1(c)(ii) above:
(A) Verify whether such conditional consent/ permission given to Issuer by existing charge holders is valid as per terms of transaction documents; and
(B) Intimate existing charge holders through necessary and appropriate means (including via e-mail) about the proposal to create further charge on assets by Issuer seeking their comments/ objections, if any, to be communicated to the Debenture Trustee within next five working days.
(b) In case of personal guarantee, corporate guarantee and any other guarantees/ form of security, the Debenture Trustee shall verify the relevant filings made on websites of Ministry of Corporate Affairs, Stock Exchange(s), CIBIL, IU etc. and obtain appraisal report, necessary financial certificates from professionals as referred earlier in this Chapter.
2.2.3. A Debenture Trustee, by itself or by engaging professionals, shall prepare one or more reports viz. valuation report, ROC search report, title search report/ appraisal report, security cover certificate, any other report/ certificate as applicable etc. and shall independently assess that the assets for creation of security are adequate for the proposed issue of debt securities.
2.2.4. A Debenture trustee shall issue ‘due-diligence certificate’ to the Issuer, as per format specified in Annex-IIA of this Master Circular, subject to the following:
(a) Information on consents/ permissions required for creation of further charge on assets is adequately disclosed in Offer Document (‘OD’)/ Placement Memorandum (‘PM’).
(b) All disclosures made in the OD/PM with respect to creation of security are in conformity with the clauses of debenture trustee agreement.
(c) All covenants proposed to be included in debenture trust deed (including any side letter, accelerated payment clause etc.) are disclosed in OD/PM.
2.2.5. A Debenture Trustee shall maintain records and documents pertaining to due diligence exercised for a period of five years from redemption of the debt securities unless required by law, or on account of any enquiries or proceedings to retain such records.
2.3. Due Diligence Certificate in case of Shelf Prospectus/ Placement Memorandum:
2.3.1. In case security details have not been finalized at the time of filing of a draft shelf prospectus/ placement memorandum by an issuer, then the Debenture Trustee shall undertake due diligence as under:
(a) The Debenture Trustee may furnish a due diligence certificate, confirming that it has carried out due diligence for the clauses other than that related to security creation [clauses are specified in the formats prescribed under regulations 40(a) and 44(3) of the SEBI NCS Regulations and Annex-IIA of this Master Circular].
(b) At the time of the issuance of the tranche prospectus/ placement memorandum when the issue structure including terms related to security has been determined and finalized, the Debenture Trustee shall issue a due diligence certificate covering all clauses of formats prescribed under regulations 40(a) and 44(3) of the SEBI NCS Regulations and Annex-IIA of this Master Circular.
2.4. Encumbrance on securities for issuance of listed debt securities:
2.4.1. Creation of encumbrance on the securities for securing the listed debt securities shall be through the depository system only in accordance with the Depositories Act, 1996, the SEBI (Depositories and Participants) Regulations, 2018, Depository bye laws and other applicable regulations and circulars.
2.4.2. Encumbrance for the above shall mean the following:
(a) Pledge, hypothecation, mortgage, lien, negative lien, non-disposal undertaking or non-disposal agreement;
(b) Any restriction on the free and marketable title to the asset, by whatever name called, whether executed directly or indirectly;
(c) Any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.
2.5. Disclosures in the OD/PM and filing of OD/ PM by the Issuer
2.5.1. The Issuer, in addition to disclosures made under Schedule I of SEBI NCS Regulations and circulars issued thereunder, shall also disclose the following in the OD/PM:
(a) “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.”; and
(b) Terms and conditions of debenture trustee agreement including fees charged by Debenture Trustee, 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 format specified in Annex-IIA of this Master Circular.
2.5.2. An Issuer proposing to make an issue of debt securities by way of a public issue or offer debt securities by way of a private placement, shall submit to the Stock Exchange, a due diligence certificate from the Debenture Trustee as per the format specified in Annex-IIA and update the same into the Security and Covenant Monitoring System operated by a recognised Depository, which the Debenture Trustee shall validate/ confirm on such system as detailed in Chapter III of this circular.
2.6. Creation and registration of charge of security by the Issuer
2.6.1. Before making the application for listing of debt securities, the Issuer shall create charge as specified in the OD/ PM, in favour of the Debenture Trustee and also execute a debenture trust deed12 with the Debenture Trustee.
2.6.2. The Stock Exchange shall list the debt securities only upon receipt of a due diligence certificate as per format specified in Annex-IIB of this Master Circular from the Debenture Trustee confirming creation of charge and execution of the debenture trust deed.
2.6.3. The charge created by Issuer shall be registered with 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.
2.7. Manner of change in security/ creation of additional security/ conversion of unsecured to secured in case of already listed debt securities:
2.7.1. Regulation 59 of SEBI LODR Regulations provides for a change in terms of listed debt securities. A change in the structure of debt listed debt securities, inter-alia, may include:
a) A change in security,
b) Creation of additional security in case of already secured listed debt securities or
c) Creation of security in case of unsecured listed debt securities.
2.7.2. In order to harmonize the process of creation of security pursuant to listing, the following directions are issued:
a) Before initiating due diligence, the Debenture Trustee and the Issuer shall ensure compliance with the paras 2.1 and 2.2 of this Chapter.
b) Pursuant to carrying out of due diligence as per paras 2.1 and 2.2 of this Chapter, the Debenture Trustee shall issue a no-objection certificate (NOC) to the issuer for going ahead with proposed change in the structure/ creation of security.
c) Thereafter, the issuer shall create the proposed security and the charge in favour of Debenture Trustee and the same 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 as a breach of the covenants/ terms of the issue by the Issuer.
d) Pursuant to the creation and registration of charge, the issuer and Debenture Trustee shall enter into a supplemental/ amended debenture trust deed including all the terms and conditions arising out of the due diligence carried out by the Debenture Trustee as well as of the security created by Issuer.
e) The issuer, pursuant to execution of supplemental/ amended debenture trust deed, shall submit the following to the Depositories and Stock Exchanges:
i. NOC by Debenture Trustee for change in security or creation of security.
ii. Executed supplemental/ amended debenture trust deed;
iii. An undertaking from the Debenture Trustee that the security has been created and registered.
iv. Other documents/ consents required to be submitted to Stock Exchanges and Depositories in terms of Regulation 59 of SEBI LODR Regulations, circulars issued thereunder and bye-laws of Stock Exchanges and Depository, as applicable.
f) The Depository shall assign a new ISIN to the listed debt securities pursuant to submission of documents mentioned above only and shall share the information with respect to change in ISIN of listed debt securities, with the recognized Stock Exchanges.
g) It may be noted that none of the cases mentioned in para 2.7.1 would constitute a change in the structure of the listed debt securities, provided there are no other changes to the terms/ nature of issue of the listed debt securities such as maturity date, coupon rate, face value, redemption schedule, nature of the debt securities (secured/ unsecured), etc. Accordingly, the Depository shall not assign a new ISIN in such cases. However, where there is a change in the underlying security, the Debenture Trustee shall ensure compliance with the provisions of Regulation 15(1)(i) of DT Regulations.
2.8. Engagement of Independent professionals by Debenture Trustee:
2.8.1. For the purpose of availing the services of an independent professional for carrying out due diligence and continuous monitoring under the provisions of this Master Circular, the Debenture Trustee shall:
a) Put in place a criterion/ policy for engagement of an independent professional/ availing the services of an independent professional as approved by its board of Directors and shall disclose the same on its website
b) Formulate a policy on mitigating conflict of interest and shall disclose the same on its website; the policy shall, inter-alia, include a requirement that the independent professional should not have had pecuniary relationship with the issuer three years prior to the date of opening of the issue.
c) The Debenture Trustee shall directly compensate/ remunerate the professional who is engaged.
2.8.2. While a Debenture Trustee may avail the services of independent professionals, the responsibility shall rest with the Debenture Trustee.
Annex-IIA
FORMAT OF DUE DILIGENCE CERTIFICATE TO BE GIVEN BY THE DEBENTURE TRUSTEE AT THE TIME OF FILING THE DRAFT OFFER DOCUMENT/ PLACEMENT MEMORANDUM
To,
Stock Exchange
Dear Sir / Madam,
SUB.: ISSUE OF _______________ BY ______________________LTD.
We, the debenture trustee(s) to the above mentioned forthcoming issue state as follows:
1) We have examined documents pertaining to the said issue and other such relevant documents, reports and certifications.
2) On the basis of such examination and of the discussions with the Issuer, its directors
and other officers, other agencies and on independent verification of the various relevant documents, reports and certifications, WE CONFIRM that:
a) The Issuer has made adequate provisions for and/or has taken steps to provide for adequate security for the debt securities to be issued and listed.
b) The Issuer has obtained the permissions / consents necessary for creating security on the said property(ies).
c) The Issuer has made all the relevant disclosures about the security and also its continued obligations towards the holders of debt securities.
d) Issuer has adequately disclosed all consents/ permissions required for creation of further charge on assets in offer document/ placement memorandum and all disclosures made in the offer document/ placement memorandum with respect to creation of security are in confirmation with the clauses of debenture trustee agreement.
e) Issuer has disclosed all covenants proposed to be included in debenture trust deed (including any side letter, accelerated payment clause etc.), offer document/ placement memorandum.
f) Issuer has given an undertaking that charge shall be created in favour of debenture trustee as per terms of issue before filing of listing application.
We have satisfied ourselves about the ability of the Issuer to service the debt securities.
PLACE:
DATE:
DEBENTURE TRUSTEE TO THE ISSUE WITH HIS STAMP
Annex-IIB
FORMAT OF DUE DILIGENCE CERTIFICATE TO BE GIVEN BY THE DEBENTURE TRUSTEE AT THE TIME OF FILING OF LISTING APPLICATION BY ISSUER
To,
Stock Exchange
Dear Sir / Madam,
SUB.: ISSUE OF _______________ BY ______________________LTD.
We, the debenture trustee(s) to the above mentioned forthcoming issue state as follows:
1) We have examined documents pertaining to the creation of charge over assets of Issuer.
2) On the basis of such examination and of the discussions with the Issuer, its directors
and other officers, other agencies and of independent verification of the various relevant documents, WE CONFIRM that:
(a) The Issuer has created charge over its assets in favour of debenture trustee as per terms of offer document/ placement memorandum and debenture trustee agreement.
(b) Issuer has executed the debenture trust deed as per terms of offer document/ placement memorandum and debenture trustee agreement.
(c) The Issuer has given an undertaking that charge shall be registered with Sub-registrar, Registrar of Companies, Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI), Depository etc., as applicable, within 30 days of creation of charge.
We have satisfied ourselves about the ability of the Issuer to service the debt securities.
PLACE:
DATE:
DEBENTURE TRUSTEE TO THE ISSUE WITH HIS STAMP
Chapter III: Security and Covenant Monitoring System13
1. In order to strengthen the process of security creation, monitoring of security created, monitoring of security cover and covenants of the debt securities, a platform for ‘Security and Covenant Monitoring System’ (‘system’) hosted by Depositories has been introduced.
2. The system shall be used for recording and monitoring of the security created and monitoring of covenants of debt securities. The system shall, inter alia, capture:
2.1. the process of creation of security (viz. due diligence, charge creation etc.);
2.2. continuous monitoring of covenants by Debenture Trustees (as applicable);
2.3. credit rating of the debt securities by the Credit Rating Agencies (CRAs).
3. Depositories shall create, host, maintain and disseminate the system for security and covenant monitoring using distributed ledger technology (or similar such technologies). Further, the depositories shall:
3.1. Provide secure login credentials to Issuers, CRAs, Debenture Trustees etc. for recording and/or verifying and/or viewing requisite information on the system.
3.2. Put in place adequate safeguards to ensure the integrity and security of the data on the system.
3.3. Share information with the other Depository for integrating and maintaining a compatible system.
3.4. Develop an alert mechanism to be sent to the stakeholders on submission, acceptance and rejection of information, and alerts for periodic and event based compliances.
3.5. Wherever necessary, provide the feature of document upload by the various stakeholders on the system.
3.6. Provide functionality of maintaining a trail/ log of all the communication/ interaction amongst various stakeholders viz. CRAs, Debenture Trustees, Issuers, Depositories etc. and also in the system on account of recording and/or verification and/or viewing of information by the stakeholders.
3.7. Provide functionality in the system to make changes in already recorded information by stakeholders (in case a change is required to be made for rectifying any discrepancy or recording additional information) and verification of same by responsible stakeholder (as applicable) and due logs/trail and prior versions of such changes.
3.8. Be responsible for the effective and smooth functioning of the system and shall develop a mechanism to establish accountability/ responsibility for the rectification of various issues and glitches that may hamper the effective functioning of the system.
3.9. Have in place operational guidelines for the system after consultation with various stakeholders.
4. In line with current market practices, related to issuance of debt securities, the system, as per the nature of the debt securities, shall enable various stakeholders to record information for the following aspects:
4.1. Security creation, security cover and covenants;
4.2. Periodical monitoring of security cover and covenants;
4.3. Interest and redemption payment (part and full) of debt securities;
4.4. Credit Rating information
5. Accordingly, the role and responsibilities of various stakeholders in the system have been defined below.
A. Recording of information related to security creation, security cover and covenants
5.1. Information regarding assets offered as security (Security creation/ Security Cover):
a) Issuer shall record relevant details regarding proposed ‘Security creation/ Security Cover’ (if applicable) including asset details, other related documents in the system based on the type of asset offered for security creation as per Annex-IIIA of this Master Circular. Issuers shall fill all the requisite fields in the system at the time of creation of temporary ISIN/ ISIN.
b) The assets offered as security by an Issuer shall be recorded in the system pursuant to validation/ verification by the Debenture Trustee in terms of provisions of Chapter II.
c) In case the value and details of assets recorded are not in line with the terms of proposed issue of debt securities, the Debenture Trustee shall not validate the same and shall reject the same on the system and make due remarks explaining the same. The system shall send an intimation to the Issuer to rectify any discrepancy or record additional details regarding assets offered as security before initiating issuance of temporary ISIN/ ISIN which shall also require being validated and verified by the Debenture Trustee.
d) The Debenture Trustee shall also upload the reports/ documents viz. valuation report, ROC search report, title search report/ appraisal report, security cover certificate, due diligence certificate as per Annex-IIA of this Master Circular and other related reports/ certificates as applicable etc. on the system.
5.2. Recording of charge creation and charge registration details on the system:
a) Pursuant to creation of charge in favour of Debenture Trustee (as per provisions of Chapter II), the Issuer shall upload the details of the charge created on the system as per Annex-IIIB of this Master Circular. The Issuer shall also upload all the relevant documents supporting the charge such as Pledge Master Report etc.
b) The Debenture Trustee shall then validate the details of the charge entered in the system from Sub Registrar, ROC, CERSAI, Information Utility of IBBI or any other independently verifiable source and shall confirm the same on the system and update any subsequent changes, in case of any discrepancy.
c) Pursuant to the issuance of due diligence certificate by the Debenture Trustee to the Stock exchange as per Annex-IIB of this Master Circular, the same shall be uploaded on the system by the Issuer.
5.3. Modification in the information recorded on the system:
Any change in already recorded information on the system related to charge creation, registration details etc. due to any discrepancy or any modification in the value or details of the security provided on account of provision of additional security by the Issuer or reduction or substitution of existing security provided by the Issuer, shall be made after verification and validation by Debenture Trustee and information regarding requisite documents and permission/ consent obtained shall also be recorded on the system.
5.4. Recording of covenants in the system:
a) The Issuer shall enter the covenants of the issuance in the system and upload the debenture trust deed within five working days of signing of debenture trust deed, including but not limited to the following:
i. Covenants as to title of Security
ii. Covenants as to Security Cover as per terms of Issue
iii. Covenant as to further borrowing/ issues
iv. Covenant as to creation of further encumbrances on the security
v. Financial covenants including any restrictions on payment of dividends, maintaining Debt/ equity ratio, Gross Debt to EBITDA, Debt to Value Ratio etc.
vi. Covenants as to any change in nature and conduct of business or disposal of assets
vii. Covenants with respect to changes in the composition of its Board of Directors
viii. Covenants with respect to related party transactions by the issuer
ix. Monitoring of Debenture Redemption Reserve, Debenture Redemption Fund, Recovery Expense Fund
x. Other non-financial covenants such as credit rating, negative lien undertaking, etc.
b) Debenture Trustee shall validate the covenants so entered by the Issuer within seven working days of signing the Debenture Trust Deed.
B. Periodic monitoring of Security Cover and Covenants
5.5. The Issuer shall provide the half yearly certificate by the statutory auditor certifying the security cover and upload the same on the system in the format as per Annex-VA of this Master Circular. The periodicity of filing this certificate on the system shall be co-terminus with that of the financial results as per regulation 52 of the SEBI LODR Regulations.
5.6. The Issuer shall, on a periodic basis, upload the necessary and applicable documents, information within stipulated time so as to enable the Debenture Trustee to exercise its functions in relation to monitoring of Security cover and covenants.
5.7. In order to carry out periodical monitoring on security created/ covenants, the Debenture Trustee shall:
a) Validate and upload the security cover certificate
b) Update the value of the assets in the system based on the periodic valuation carried out by the Debenture Trustee, by itself or through professionals in terms of provisions of Chapter II of this Master Circular
c) Upload the title search reports, valuation reports etc., in terms of provisions of Chapter II of this Master Circular
d) The Debenture Trustee shall release charges in case any debt is repaid and update/ validate the same in the platform.
C. Interest and redemption payment
5.8. Interest and principal payment:
a) The Issuer shall record information pertaining to payment of interest and repayment of principal on the system at the time of creation of ISIN/ temporary ISIN. The issuer shall also record the status of such payment/ repayment within one working day of payment/ redemption due date after taking requisite details from Registrar and Transfer Agent. The format for the same is as specified in Annex-IIIC of this Master Circular.
b) Once such information is recorded on the system, the Debenture Trustee shall validate the status of such payment/ repayment in the system after receiving the requisite details from the Registrar and Transfer Agent including file prepared for payment of interest and repayment of principal, Bank confirmation etc. Such status shall be validated within two working days on the basis of the documentary evidence submitted by the Issuer and the Registrar and Transfer Agent.
5.9. Non-receipt of information on the system:
a) In case of non-receipt of information in the system viz. the Issuer fails to intimate the status of payment of interest or repayment of principal, the Debenture Trustee shall seek status of such payment/ repayment from the Issuer and/ or conduct independent assessment (from banks, investors, etc.) to determine the same.
b) Based on such assessment, the Debenture Trustee shall update in the system the status of such payment/ repayment, within seven working days of the interest payment becoming due or nine working days of the maturity/ redemption date.
c) The Debenture Trustee shall update the details in the system and initiate necessary action as per provisions of Chapter IX to this Master Circular.
5.10. Redemption of debt securities:
a) Issuer shall initiate the release of charges and update the system with the relevant documents including but not limited to Statutory Certificate, No dues from the holders of debt securities (applicable only in case of private placement), ISINs Extinguishment letter, ROC Charge Satisfaction forms/ certificate.
b) The Debenture Trustee shall release charges in case any debt is repaid and update/ validate the same in the platform.
D. Credit Rating information
5.11. The Issuer shall upload all the credit rating information for debt securities including rating action, date of press release and hyperlink for press release of credit rating. CRAs shall access the system to validate the rating information uploaded by the Issuer. In case of discrepancy, Issuer and/ or CRAs shall notify the same on system and update the correct information in the system within two working days of such notification.
5.12. Any subsequent rating actions carried out by CRAs shall be recorded in the system by the Issuer within one working day of the press release, which shall inter-alia comprise rating action including rating outlook, date of press release and hyperlink for press release of credit rating. In case of discrepancy, Issuer and/ or CRAs shall notify the same on system and CRAs shall update the correct information in the system within two working days of such notification.
6. Unique asset identifier:
6.1. As the backbone of the system is the uniqueness of the record of assets, a system generated unique identifier (Asset ID) shall be allotted for each asset offered by the Issuer as security for the debt securities. For data exchange and verification across Depositories, format for unique Asset ID shall be a 12 digit alphanumeric string, which will be generated as provided in Annex-IIID of this Master Circular.
6.2. To ensure that there is only one unique asset ID assigned to an asset of the issuer for effective asset creation as well as tracking, the system will provide an alert to the Issuer and the Debenture Trustee by having appropriate validation/ duplicate checks in the system for identifying possible duplicate entries for assets of an issuer and this validation/ duplication check shall be based on the parameters as per Annex-IIIE of this Master Circular. Issuers shall ensure that the entry of the asset is made only once in the system for generation of the unique Asset ID, which shall be verified by the Debenture Trustee.
7. The following assets shall be tracked at portfolio level and no specific parameters for the underlying assets would be captured:
7.1. movable assets viz furniture, equipment, inventory etc.
7.2. current assets viz portfolio of advances/ receivables, etc.
7.3. any other asset of similar nature.
8. On detection of a duplicate asset, an alert shall be generated and sent to the Issuer and Debenture Trustee to cross check and verify the details entered into the system for recording the details of asset. The Issuer and the Debenture Trustee should verify and address the alert before overriding the same.
9. Monitoring/ Trigger events:
9.1. While the Depository shall ensure that there is only one unique asset ID assigned to an asset of the issuer, Debenture Trustee, on a yearly basis, shall reconcile the list of assets recorded in the system for an Issuer and in case any duplicate entry is found for an asset, shall take necessary steps to eliminate such duplicate entries in the system and verify security cover thereof and take remedial action, if required.
9.2. Any event which reduces the security cover below the mandated/ stipulated limit, as per regulation 54 of SEBI LODR Regulations, shall be updated by the issuer in the system immediately. Such event shall be termed as ‘trigger event’ and Depository shall send such trigger events’ alerts to all the concerned stakeholders.
10. All issuers of debt securities shall ensure that the details are recorded in the system before activation of ISIN14. Depositories shall allot or defreeze an existing ISIN (in case of re-issuance), as applicable, only after confirming recording of information in the system.
11. For existing outstanding debt securities, issuers were required to enter the details
in the system on or before January 31, 2023 and Debenture Trustees were required to verify the same by February 28, 2023.
12. Issuers, Debenture Trustees, CRAs, etc. shall have such mechanism to execute such functions as required for the system.
Annex-IIIA
Registration of assets for initial due diligence
1. Type and nature of security offered
a. Immovable Property
b. Movable Fixed Assets
c. Current Assets viz., receivables, book debts
d. Intangible viz., IPRs, etc.,
e. Securities/ Other Financial Asset
f. Assignment of rights
g. Guarantee viz personal corporate, corporate guarantee, government guarantee etc.
2. Details related to security offered – The required data to be to be filled along with supporting documents, wherever applicable:
a. Asset description
i. Asset name
ii. Asset Details (in case of shares, it shall also include ISIN, Quantity, Pledgee Demat ID, Pledgee Instrument ID)
iii. Asset Location (including address of the asset)
iv. Asset ownership details
b. Value of security offered: Issuer shall submit documents as required under Chapter II of this Master Circular and other documents given by Issuer for ascertaining the existence, veracity and value of assets.
c. Documents related to existing encumbrance on assets/ security offered: Issuer shall record following details in the system and/or submit documents:
i. For unencumbered assets, an undertaking that the assets on which charge is proposed to be created are free from any encumbrances.
ii. For encumbered assets, on which charge is proposed to be created, the Issuer shall submit documents in system as per para 2.1. (c) of Chapter II of this Master Circular and any other document required to be given by the Issuer to the Debenture Trustee.
Annex-IIIB
Manner of updation of charge creation details on System:
1. Issuer shall enter the following details related to charge created on system as and when applicable:
1.1. Asset details
1.2. Type of Charge Creation
1.3. Charge holder
1.4. Amount
1.5. Date on which charge is created
1.6. Modification date
1.7. Charge Closure date i.e. redemption date.
2. System shall ensure every charge details recorded in the system shall have a unique number. Therefore, an asset with a unique asset ID shall be mapped against multiple charge IDs.
3. After registering the charge creation details on ROC, CERSAI and IU or any other independent agency, Issuer, shall update the same on depository platform wherein Issuer will enter the following details:
3.1. Date of application/ filing with statutory/ government authority
3.2. Details of any receipt or challan obtained by Issuer after filing.
3.3. List of documents submitted to Agency
3.4. Certificate/ document obtained from statutory/ government authority after successful registration of charge.
4. An individual charge created maybe required to be registered with more than one agency, hence depository may enable Issuer to upload the above mentioned information for more than one agency.
Annex-IIIC
Interest and principal payment details
1. Issuers shall fill all the requisite fields in at the time of creation of ISIN/ temporary ISIN as specified by filling in the following details:
|
Item |
Details |
| Interest Payment | • Name of Instrument |
| • Date of Information Memorandum | |
| • Issue Size | |
| • No. of Instrument | |
| • Face Value (Rs.) | |
| • Rate of Interest | |
| • Interest Amount to be paid on due date | |
| • Record Date | |
| • Frequency | |
| • Due date for Interest Payment | |
| Redemption payment | • Name of Instrument |
| • Date of Information Memorandum | |
| • Record Date | |
| • Frequency | |
| • Type of Redemption | |
| • If Partial Redemption, then
– By Face Value Redemption – By Quantity Redemption |
|
| • If Redemption is based on Quantity, specify whether on:
– Lot Basis – Pro-rata basis |
|
| • Reason for redemption | |
| • Redemption due to PUT option (if any) | |
| • Redemption due to CALL option (if any) | |
| • Quantity and Amount Redeemed | |
| • Due date for Redemption/ Maturity | |
| • Date of early Redemption (if any) |
2. Issuers shall fill all the following requisite fields to update the status of payment within one working day of payment/ redemption date or a change in the due date of interest payment/ redemption payment as under:
|
Updation by Issue on continuous basis – Payment of Interest |
• Actual Date for Interest Payment
• Amount of interest paid • Date of last Interest Payment |
| • Reason for non-payment/ delay in payment | |
| • Change in Frequency of payment (if any) | |
| • Date of Change | |
| • Details of such change | |
| • Change in Record Date | |
| Updation by Issue on continuous basis – Redemption payment | • Actual Date for Redemption
• Amount Redeemed • Outstanding Amount (Rs.) |
| • Reason for non-payment/ delay in payment | |
| • Date of previous redemption (part redemption), if applicable | |
| • Change in Record Date |
Annex-IIID
Asset ID = System Code + Asset Type + Asset Sub Type + Unique Number + Check Digit
|
System Code |
2 characters (‘IN’ – for all asset types and sub-types) |
| Asset type | 2 character Alphanumeric |
| Asset sub-type | 2 character Alphanumeric |
| Unique Number | 5 character alphanumeric sequential (start with 00001 to 99999.
Post full utilization of numbering then prefix will start from A-Z.) |
| Check Digit | 1 digit |
Annex-IIIE
1. Common parameters across asset types: The following is an indicative list of parameters which shall be captured for all categories of asset types and subtypes to assign Asset ID:
a) Asset name
b) Short description of Asset
c) Asset type & sub-type
d) Address details of the assets including PIN Code for assets located in India, wherever available.
e) Ownership details of the asset
f) Valuation details of the asset
g) Unique Identification Number, if any, provided by regulator/agencies and the agency identifier.
h) Code along with Code Description in ERP (Enterprise Resource Planning) system of the issuer, wherever available.
i) Code along with Code Description in FAR (Fixed Asset Register) of the issuer, wherever available.
j) Validity/ Expiry date, if any.
k) Encumbrance/ lien details, if any.
2. Specific additional parameters for certain asset types: In addition to the above, following parameters shall also be captured for these specific asset types and subtypes.
|
Sr. No. |
Asset Type |
Asset Sub Type | Parameters to compare for Duplicate check |
| 1. | Immovable Property | All (Residential, Commercial Industrial, Agriculture, etc.) | a. Area of the property
b. Geographical Coordinates (Latitude/ , Longitude). |
| 2. | Current Assets | Specific accounts maintained (DSRA, DRR, MRR etc.) | a. Details related to account maintained such as Bank Name, account number, IFSC code etc.
b. Mode of maintenance of account (Current account/ Fixed Deposit/ Bank Guarantee etc.) and details thereof. |
| 3. | Securities/ other financial assets | Securities in Demat form | a. Demat Account Number
b. ISIN Number c. Quantity c. Pledgee and pledger details |
| 4. | Guarantees | Government | a. Issuing Authority
b. Government order number c. Government order date d. Guarantee Amount |
| Corporate | a. Guarantor details such as Name of the company, address, net worth etc.
b. PAN/CIN No. for guarantors in India c. For guarantors outside India i. Unique Identification Number provided by Regulator/ Authority of the host country ii. Issuing Regulator/ Authority d. Guarantee Amount |
||
| Personal | a. Guarantor details such as Name of the company, address, net worth etc.
b. PAN No for guarantors in India c. For guarantors outside India i. Passport Number ii. Passport Issuing Country d. Any other Unique Number provided by regulator of the host country along with name of the regulator. e. Guarantee Amount |
Chapter IV: Recovery Expenses Fund15
In order to enable the Debenture Trustee to take prompt action for enforcement/legal proceedings in case of ‘default’ in listed debt securities, a ‘Recovery Expense Fund’ (REF) shall be created which shall be used in the manner as decided in the meeting of the holders of debt securities.
1. Manner of creation and operation of REF
1.1. The issuer proposing to list debt securities shall deposit an amount equal to 0.01% of the issue size subject to maximum of Rs. 25 lakhs per issuer towards REF with the ‘Designated Stock Exchange’, as identified and disclosed in its Offer Document.
1.2. The REF shall be created and maintained in the following form:
a. The issuer shall deposit cash or cash equivalent(s) including Bank Guarantees towards contribution to this fund at the time of making the application for listing of debt securities.
b. The Designated Stock Exchange shall invest such cash in the REF in Government Securities or Treasury Bills or Fixed Deposits with a Scheduled commercial bank or gilt or overnight mutual fund schemes and the income/interest earned thereof shall be added to the REF of the issuer.
c. The issuer shall ensure that the Bank Guarantee remains valid for a period of six 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 seven working days before its expiry, failing which the Designated Stock Exchange shall invoke such Bank Guarantee.
1.3. In case of any change in status of issuer of the listed debt securities on account of corporate restructuring by way of Scheme of Arrangement etc., the Designated Stock Exchange shall ensure that the amount maintained in the REF is available as per paragraph 1.1 before issuing the ‘No-objection letter’ in that regard.
Manner of utilization of Recovery Expense Fund:
2.1. In the event of default, the Debenture Trustee/ Lead Debenture Trustee shall obtain the consent of holders of debt securities for enforcement/ legal proceedings and shall inform the same to the Designated Stock Exchange. The Designated Stock Exchange shall release the amount lying in the REF to the Debenture Trustee/ Lead Debenture Trustee within five working days of receipt of such intimation.
2.2. For the purpose of the provisions of this Chapter, Lead Debenture Trustee shall mean:
1. A Debenture Trustee who is chosen as the Lead Debenture Trustee by other Debenture Trustees; or
2. A Debenture Trustee who represents holders of more than 50% of the outstanding value of debt securities.
2.3. The Debenture Trustee shall keep a proper account of all expenses incurred out of the funds received from REF towards Legal expenses, cost for hosting meetings etc. towards enforcement/ legal proceedings in relation to the Debt securities.
3. Refund of REF to the Issuer
3.1. The balance in the REF shall be refunded to the issuer on repayment to holders of debt securities on their maturity or at the time of the exercise of call or put option, upon a ‘No Objection Certificate (NOC)’ being issued by the Debenture Trustee to the Designated Stock Exchange.
3.2. The Debenture Trustee shall satisfy that there is no ‘default’ on any other listed debt securities of the issuer before issuing the NOC.
4. Verification of creation of REF
4.1. In order to ensure independent verification by a Debenture Trustee regarding creation of REF by issuer, Debenture Trustee shall take confirmation from Designated Stock Exchange or any other independent source in writing regarding the creation of REF by the issuer and shall not rely solely upon the communication by the issuer.
4.2. The Stock Exchange shall disclose on their websites, the amount of REFs created by the issuers on a half yearly basis. Such disclosure shall also include the details of the Debenture Trustee for the debt securities.
Chapter V: Security Cover Certificate16
In terms of regulation 54 read with regulation 56(1)(d) of SEBI LODR Regulations, Issuers are required to disclose security cover to Stock Exchange and Debenture Trustee. The obligations of the Issuer and the Debenture Trustee with respect to preparation and submission of security cover certificate are given as under:
1. Manner of preparation of security cover certificate by the Issuer:
1.1 The Issuer shall be required to prepare the security cover certificate on quarterly basis and the statutory auditor of the Issuer shall certify the book values of the assets provided in such certificate.
1.2 The Issuer shall provide the values in the format under the market values column including the reference date based on which the market value has been arrived at and the certificate shall be submitted to the Debenture Trustee. In case of loans/ receivables or any other asset offered as security and the market value is not ascertainable in the specific quarter, then the Issuer may provide the carrying value/ book value as per the format for security cover is enclosed at Annex-VA of this Master Circular. However, the Issuer shall provide the justification for not providing the market value along with the certificate in that quarter.
1.3 The frequency of valuation for asset classes offered as security by the Issuer shall be as under:
a) In case of asset classes wherein frequency of valuation has been prescribed by SEBI, the market value shall be provided, accordingly, in the security cover certificate.
b) For the asset classes wherein there is no regulatory guideline on frequency of the valuation of a specific asset class then it shall be on quarterly basis.
1.4 In case, the issuer has more than one Debenture Trustee for its listed debt securities, then the Issuer shall prepare such certificate separately for each Debenture Trustee.
1.5 The assets that are not paid for shall not be included as part of any security cover calculation.
1.6 In case security cover offered for the debt securities comprises the assets of the Issuer only, the security cover shall be prepared on standalone basis.
1.7 In case debt securities are secured by creation of charge on the assets of a third party/ subsidiary/ group/ holding company; or assets of the Issuer are offered for securing the debt securities issued by a third party/ subsidiary/ group/ holding company; or assets of the Issuer are offered for securing the other liabilities of third party/ subsidiary/ group/ holding company, the Issuer shall make disclosure in two separate tables on security cover as follows:
a) Table for security cover on standalone basis for the Issuer and;
b) Table on net summary basis on consolidated level in order to provide the overall/ holistic picture of the borrowings and security cover provided by the Issuer.
1.8 Obligations of the Issuer in case of third party/ subsidiary/ group/ holding company assets being offered as underlying security:
a) The book value for security cover shall be certified by the statutory auditor of the third party/ subsidiary/ group/ holding company with respect to third party/ subsidiary/ group/ holding company assets being offered as underlying security.
b) In case, security cover comprises exclusive charge on third party/ subsidiary/ group/ holding company assets, the security cover certified by the statutory auditor of the concerned third party/ subsidiary/ group/ holding company shall include details of such assets including the book value of such assets.
c) In case, security cover comprises pari-passu charge/ second/ third charge on third party/ subsidiary/ group/ holding company assets, the security cover certified by the statutory auditor of the concerned third party entity shall include the detail of all encumbrances on such assets.
1.9 Further, in order to adequately capture details regarding other debt securities, viz. unsecured debentures, subordinated debt, other debt issuances which fall in the lower priority order in the waterfall mechanism for liquidation/ resolution proceeds, an additional column named “Debt not backed by any assets offered as security” shall be incorporated in the security cover certificate and the same shall be covered under such column.
2. Manner of preparation and submission of security cover certificate by Debenture Trustee(s)
2.1 Debenture Trustee on a quarterly basis shall certify the market value of assets based on the due diligence carried out by it or through independent professionals and shall submit the security cover certificate as per Annex-VA of this Master Circular.
Debenture Trustee shall certify the security cover in respect of the secured debt securities, to the extent that the security is held by it.
2.2 In case the Issuer has more than one Debenture Trustee for its listed debt securities, then Debenture Trustees may choose a common independent professional for preparation of security cover certificate.
2.3 In case of reduction in the computed value of security cover in comparison to the previous quarter or previously calculated security cover, the Debenture Trustee shall record the reason for such variation in the security cover certificate. Clarification, if any, in this regard, may be obtained by Debenture Trustee from the Issuer.
3. Calculation of Security Cover Ratios
In order to standardize calculation of security cover ratio as prescribed in Annex-VA of this Master Circular, the following formulas shall be used:
3.1 Exclusive security cover shall be calculated in the following manner:
Value of assets having Exclusive charge
Exclusive Security cover= ___________________________________
outstanding value of corresponding debt + Interest accrued
3.2 Pari-passu security cover shall be calculated in the following manner:
Value of assets having Exclusive charge
Exclusive Security cover= ___________________________________
outstanding value of corresponding debt + Interest accrued
4. Affixing Unique Document Identification Number (UDIN) to the security cover certificates:
The security cover certificates as required under the provisions of this Master Circular shall contain, as applicable, the UDIN generated in the manner prescribed by the relevant regulatory authority.
5. Qualifications/ disclaimers in security cover certificates:
The Debenture Trustee shall ensure that the qualifications/ disclaimer (by whatever name called), does not impair the rights of holders of debt securities in terms of security provided. Further, if the Debenture Trustee is of the opinion that such qualifications/ disclaimer are affecting the rights of holders of debt securities, the Debenture Trustee shall take corrective action in this regard.
Notes:
1 Earlier called as ‘Operational Circular’; renamed as ‘Master Circular’ from July 06, 2023
2 Inserted on July 06, 2023
3 Phrase “unless specifically mentioned otherwise in this circular” inserted on July 06, 2023
4 SEBI/HO/MIRSD/MIRSD1/CIR/P/2017/38 dated May 02, 2017;
5 SEBI/HO/GSD/T&A/CIR/P/2017/42 dated May 16, 2017;
6 CIR/MIRSD/14/2011 dated August 02, 2011;
7 SEBI/HO/MIRSD/DOR/CIR/P/2021/42 dated March 25, 2021;
8 SEBI/HO/MIRSD/DOR/CIR/P/2021/46 dated March 26, 2021;
9 SEBI/MIRSD/DR-2/SRP/Cir – 2/ 2005 dated January 4, 2005;
10 MIRSD/ DPSIII/ Cir-21/ 08 dated July 7, 2008;
11 SEBI/HO/MIRSD/CRADT/CIR/P/2020/218 dated November 03, 2020, SEBI/HO/DDHS/DDHS_Div1/P/CIR/2022/106 dated August 04, 2022 and SEBI/HO/DDHS/DDHS-RACPOD1/P/CIR/2022/176 dated December 19, 2022
12 Form SH 12 of Companies (Share Capital and Debentures) Rules, 2014
13 SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2022/ 38 dated March, 29 2022 and SEBI/HO/MIRSD/MIRSD/CRADT/CIR/P/2021/618 dated August 13, 2021
14 Applicable for all issues made on or after April 01, 2022
15 SEBI/HO/MIRSD/CRADT/CIR/P/2020/207 dated October 22, 2020 and SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P/2022/67 dated May 19, 2022
16 SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P/2022/67 dated May 19, 2022
