The SEBI Board at its meeting held on September 29, 2020 has approved certain changes in its Debenture Trustee (DTs) regulations for strengthening the role of DTs so as to protect the interest of debenture holders. Pratapsingh Nathani, Chairman and Managing Director, Beacon Trusteeship Ltd, shares his view on SEBI’s decision to strengthen the role of a debenture trustee (DT)

The DT(s) shall exercise independent due diligence of the assets on which charge is being created. DT(s) shall also carry out continuous monitoring of the asset cover including obtaining mandatory certificate from the statutory auditor on half yearly basis.

Uptil now the DTs were relying on the Due Diligence carried out by Legal Counsel appointed by the issuer itself with DT having little say.  The change approved now would empower DT to appoint their own Legal Counsel for carrying out DD/title search etc.  Further half yearly certificate from Statutory Auditors shall enable DTs to assess the adequacy of security cover. 

However in case the borrower does not agree to top up the security, as and when insisted upon by the DTs in the event of security shortfall, the DTs have no other power but to convene a meeting of DHs to take further course of action.  DTs need to have sufficient powers to treat the same as an event of default and take appropriate remedial measures including seeking premature redemption.  

The DT(s) shall   take required action  by   convening   the   meeting   of   debenture holders for enforcement of security, joining the intercreditor agreement (under the framework specified by RBI), etc.

Mere signing of Inter Creditor Agreement (ICA) shall not be adequate.  In all such proposals requiring the DTs to sign the ICA, there are bound to be sacrifices to be made by all the creditors and it is expected that the DHs shall also reconcile for taking haircut.  The extent of haircut in each case would depend upon various factors including the value of security, time and cost involved in realizing the value through enforcement action etc. 

Generally DTs are not empowered to take a call on the haircuts while attending the meeting of Committee of Creditors (including other creditors of the borrowers).  It would be expedient for SEBI to allow constitution of a small committee of DHs on the lines of CoC, who could take quick decision about the sacrifices rather than making the DTs to convene meeting of DHs each time the decision on the sacrifices is to be taken.

The issuer company shall create recovery expense fund at the time of issuance of debt securities that may be utilised by DT(s) in the event of default, for taking appropriate legal action to enforce the security

After initial reluctance, SEBI has finally agreed for such stipulation. Barring few exceptions, the DTs are always reluctant to initiate enforcement action primarily due to huge cost involved plus it being time consuming to realize the proceeds thru litigation.  Going by the available data, DTs initiated enforcement action only in 35% of defaulted cases.  This amendment would encourage the DT to take enforcement action quickly.  SEBI had earlier circulated the draft guidelines for public comments wherein it proposed to exclude AAA rated companies from this requirement and this was required to be complied with at the time of rating downgrade. 

However going by the past evidence where AAA rated companies defaulted in making payment of dues and rating agencies were slow to downgrade, it would be desirable to apply these guidelines without any distinction.  In any case the proposal is to set aside miniscule part of just 0.01% of the issue proceed, that too with a cap of Rs.25 lakhs, for such purposes.   

By Manoj

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