University of Petroleum and Energy Studies

School of Law

Corporate Finance

BBA LLB CL (BATCH – I)

Semester VIII

Topic: An analysis of
Debenture Trustee
Regulation

Submitted to: Mr. Mayank Mishra

Submitted by: Parth Sabharwal

500070578
R760218047
 INTRODUCTION

The Securities Exchange Board of India (SEBI) has reviewed its regulatory framework for
listed / "to be" listed debt securities, public issue of debt securities, and debenture trustees to
plug certain loopholes as a result of increased defaults by a few financial institutions and the
difficulties faced by debenture trustees in expeditious enforcement of collateral for debt
securities. In order to achieve this goal, and in light of the comments made in the SEBI
Consultation Paper on the Review of the Regulatory Framework for Corporate Bonds and
Debenture Trustees dated 25 February 2020.

In support of the above amendments, SEBI has issued a series of circulars in recent time that
significantly alter the regulatory framework for debenture trustees and debt issuances –

(a) Standardization of the procedure to be followed by debenture trustee in the event of a

"default" by issuers of listed debt securities, dated 13 October, 2020. (ICA Circular)
(b) Circular dated 22 October, 2020, inviting issuers of listed or proposed to be listed debt
securities to contribute to the creation of a "recovery expense fund" (REF Circular)
(c) Debenture trustee 'due diligence' and creation of security in the issuance of listed debt
securities dated 3 November 2020.
(d) Monitoring and Disclosures by Debenture trustee dated 12 November 2020.
(e) Non-compliance with provisions especially with regard to ongoing disclosure (13
November Circular).

The impact of the SEBI Amendments and modifications made through SEBI circulars on
disclosures and procedures for listed/to be listed debt issuances and public issue of debt
securities, as well as increased roles and duties of debenture trustees in relation to such
issuances, are examined in this project.

Issue and Listing of Debt Securities Regulations: Amendments Made Recently

Introduce Framework of Disclosures that is Robust

For the purpose of issuing listed debt securities, the ILDS Regulations and the DT
Regulations must be interpreted together, and we have analysed the concurrent amendments
made in both regulations to provide a complete picture. SEBI notified significant
amendments to SEBI ILDS (ILDS Amendment) on 8 October, 2020, which are effective
immediately and are detailed below1:
1
https://www.mondaq.com/india/commoditiesderivativesstock-exchanges/1010838/paradigm-shift-in-the-
role-of-debenture-trustees-analysing-recent-regulatory-changes-for-listed-debt-issuances
Disclosures regime tightened for listed private placements: To ensure complete disclosure of
all critical covenants and documents, Schedule I of the ILDS has been amended, and it is now
required to disclose the following information in the "issue details" section of the disclosure
document:

1. all issue covenants, including any accelerated payment clause or other covenants
disclosed in side letters
2. the details and purpose of the recovery expense fund
3. all covenant breach conditions stated in the debenture trust deed
4. risk factors relating to the issue
5. details of event of default, including manner of voting/ conditions of joining an inter
creditor agreement and
6. details of security, which shall state, among other things, the type of security
(movable/immovable/tangible, etc.), type of charge (pledge/ hypothecation/ mortgage,
etc.), minimum security cover, revaluation/replacement of security, and date of
creation of security to include likely date

Undertaking from issuers with respect to no-objection certificates to be obtained in case of

non-exclusive charges: A new regulation 21B has been added to the ILDS Regulations,
which requires issuers to provide an undertaking prior to the issue stating that the assets on
which the charge is proposed to be created are free of any encumbrances and that, if there are
existing encumbrances on the secured assets, permission or consent to create a second or
pari-passu charge has been obtained from the existing creditors. The disclosure document for
listed debentures will include this issuer undertaking.

Creation of recovery expense fund (REF) mandatory for debt securities which are proposed
to be listed: Prior to making a listing application for debt securities issued after January 1,
2021, issuers must deposit 0.01 percent of the issue size (up to a maximum of INR 25 lakhs)
with the designated stock exchanges in the form of cash, cash equivalents, or bank
guarantees. The establishment of REF will assist debenture trustees in enforcing security in
the event of a 'default' and in meeting recovery proceeding expenses. The REF Circular,
issued by SEBI, provides a detailed framework for REF. Existing issuers have been given a
90-day grace period in which to meet the REF requirements.

Standard Format of Trust Deed: The bifurcation of the trust deed into two parts is now
required. Part A of the trust deed must include statutory/standard provisions, while Part B
must include issue-specific clauses and covenants. The separation of trust deeds will now
help standardize the format of trust deeds and ensure that debenture holders can understand
commercial covenants more easily.

EBI (Debenture Trustees) Regulations, 1993 An Overview of Notified Amendments

Another SEBI notification, dated 8 October 2020, introduced significant amendments to the
DT Regulations (DT Regulations Amendments), which are effective from the date of
notification and are primarily intended to bring the DT Regulations in line with the ILDS
Regulations amendments2.

War chest for enforcement and stricter Assets Cover monitoring: Prior to this amendment, it
was the responsibility of the debenture trustee to ensure that the conditions for the creation of
security and the debenture redemption reserve were followed. Debenture trustees will now be
required to ensure the creation of a new fund called REF, which will be created by issuers of
listed debt securities prior to filing an application for the securities to be listed. In the event
that the issuer defaults, the REF will only be used to enforce the security.

Monitoring of asset cover: SEBI has now imposed an additional duty on debenture trustees to
conduct quarterly diligence to monitor the issuer's asset cover through amendments to the DT
Regulation. Furthermore, according to the 12 November Circular, the debenture trustee must
include terms on periodic monitoring in the DTD, and the issuer must adhere to such
timelines, including quarterly submission of an asset cover certificate in the format provided
in Annexure A of the 12 November Circular within 60 days of the end of each quarter. If a
listed entity has multiple debenture trustees for its listed debt securities, the debenture trustees
may choose a common asset cover certificate preparation agency.

Independent due diligence by debenture trustee increased manifold: The SEBI Amendments,
the 3 November Circular, and the 12 November Circular have increased the requirement for
independent due diligence by debenture trustees by a factor of ten, and will take effect on 1
January, 2021. The debenture trustee will be required to conduct independent due diligence
on any proposed secured to ensure that the security proposed by the issuer is free of
encumbrances or that the issuer has obtained necessary consent from other charge-holders if
the security already has one.

2
http://www.lawstreetindia.com/experts/column?sid=508
The debenture trustee shall include the terms of periodic monitoring of the security proposed
to be offered in the DTD and shall provide relevant information to the stock exchange(s) in
the following manner, according to the 12 November Circular:

1. Quarterly within 60 days of the end of each quarter: asset cover certificate, statement
of value of pledged securities, and debt service reserve account
2. Net worth guarantor certificates (secured by a personal guarantee): On a six-monthly
basis, within 60 days of the end of each six-month period
3. Guarantor value prepared on the basis of the guarantor's audited financial statements,
etc. (secured by way of corporate guarantee) and title search or valuation report of the
movable/immovable assets: Each financial year, within 75 days of the end of the
fiscal year.

Debenture trustee as 'financial creditor' under IBC framework: Guidelines for entering into
Inter-Creditor Agreements (ICAs): Investors in debt securities who are 'financial creditors'
are approached by lenders to sign an ICA under the Reserve Bank of India's (RBI) 7 June
2019 circular (which specifies the mechanism for resolution of stressed assets). Under the
ICA Circular, the debenture trustee, on behalf of the debenture holders, may enter into ICAs
in accordance with the RBI's prevailing norms, subject to debenture holders' approval and
any other conditions imposed by SEBI from time to time. In this regard, the ICA Circular
lays out the steps that debenture trustees must take to obtain consent from debenture holders
to enforce security and enter into an ICA. The ICA Circular is in effect as of the date of
publication. The ICA Circular mandates that investors be notified within two days of the
event of default (EOD), and that a meeting of investors be held within 30 days of the EOD
(not applicable in case of public issue of debentures). If a majority of investors (75 percent by
value of outstanding debt and 60 percent by number of ISIN levels) consent, the debenture
trustee can take necessary action to enforce the security or enter into an ICA as decided in the
investor meeting. If no consents are received, the debenture trustee will act in accordance
with the decision made at the investors' meeting.

Forms of debenture trust deed (DTD) prescribed: The trust deed must now be bifurcated into
two parts, in accordance with the ILDS Regulations.

Modifications to the LODR Regulations have been announced, including the

requirement to maintain and certify asset cover for debt issuances on a continuous basis
Amendments consistent with other SEBI Amendments were notified in the LODR
Regulations on the same date as amendments to the ILDS Regulations and DT Regulations,
and are effective from the date of notification. The following are the most significant changes
made in terms of asset coverage monitoring: 3

Maintenance of minimum 100% asset cover made compulsory: The existing LODR
Regulation 54(1) has been replaced, requiring debt listed entities to maintain 100 percent
asset cover or more, as specified in the OD/IM and/or DTD, such that the asset cover is
sufficient to discharge the principal amount of the debt securities issued at all times.
Furthermore, Regulation 54(3) of the LODR Regulations has been removed, which exempted
certain issuers of unsecured debt securities issued by regulated financial sector entities
eligible to meet capital requirements as specified by respective regulators from asset cover
requirements.

Statutory Auditor certification mandated for asset cover maintenance: The previous
requirement that a practicing company secretary or a practicing-chartered accountant submit
a half-yearly certificate regarding the maintenance of 100 percent asset cover in respect of
listed debt securities, along with the half-yearly financial results, has now been amended to
ensure that such an Asset Cover Certificate is provided by the issuer's statutory auditor. In
addition, the statutory auditor must certify that all covenants in respect of the listed debt
security in the Asset Cover Certificate have been met. When bonds are backed by a
government guarantee, such certification is not required. In addition, in accordance with other
SEBI Amendments, regulation 56(1) has been amended to require issuers to notify the
debenture trustee of all covenants of the issue (including side letters, accelerated payment
clauses, and so on). Another requirement has been added to notify stock exchanges when any
forensic audit on listed issuers is initiated (along with reasons).

Circulars dated 3 November and 12 November elaborate on the nuances of due

diligence and monitoring by debenture trustees-

The 3 November Circular clarified -

(i) issuers' obligations to submit documents to the debenture trustee for due diligence;
(ii) the debenture trustee's due diligence obligations; and
(iii) disclosures required by issuers under Schedule I of the ILDS Regulations.

3
https://www.azbpartners.com/bank/revamping-the-debenture-regime-sebis-latest-amendments/
The Circulars of 3 November and 12 November will apply to all debt issuances proposed to
be listed on or after 1 January, 2021. Before applying for securities listing, issuers must create
the charges specified in the OD/IM and also execute the security documents. The debt
securities will be listed on stock exchanges only after the debenture trustee issues a due
diligence certificate and confirms the creation of a charge4.

Extensive documents/ consents required to be given by issuer prior to any issue: The SEBI
Amendments also added Regulation 15(6) to the DT Regulations, which requires all
debenture trustees to conduct independent due diligence to ensure that

(i) the security is free of encumbrances; or

(ii) in the case of an existing charge, the issuer has obtained the necessary consents
from other charge-holders. To facilitate the due diligence required for security
creation, the 3 November Circular states that all issuers must submit the
documents listed below (based on the type of asset and charge) to the debenture
trustee prior to the issue opening and at the time of entering into the DTA. The
following are examples of such documents:

a. Assets, movable property, and immovable property on which a charge is proposed to be

created, including title deeds or title reports, copies of evidence of registration with the
Sub-registrar, the Registrar of Companies (ROC), the Central Registry of Securitization
Asset Reconstruction and Security Interest (CERSAI), and so on;

b. For the creation of a charge on unencumbered assets, an assurance that the assets on
which the charge is proposed are free of encumbrances;

c. The following consents, along with their validity as of the date of their submission, are
required for encumbered assets on which a charge is proposed to be created:

 Existing charge over assets, including charge holders' information, value/amount,

copy of evidence of registration with Sub-registrar, ROC, CERSAI, Information
Utility (IU) registered with the Insolvency and Bankruptcy Board of India (IBBI),
and other relevant information;
 Existing charge holders' consent/NOC/conditional NOC for the issuer to create
additional charges on the assets, as well as the terms of such conditional
consent/permission, if any;
4
http://bwlegalworld.businessworld.in/article/Revised-Timelines-for-Pre-Issue-and-Post-Issue-Actions-Under-
Revamped-Listed-Debenture-Regime/14-12-2020-353492/
  Consent/NOC from existing unsecured lenders in the event that the issuer creates
a negative lien in their favour.

d. If a personal guarantee or other document/letter with a similar purpose is offered as

security:

 Information about the guarantor, such as his or her relationship with the issuer;
 A net worth statement certified by a chartered accountant of the guarantor (not
older than 6 months from the date of DTA);
 A list of the guarantor's assets, including undertakings/consent/NOC (as described
in paragraphs b and c above);
 Guarantee invocation conditions, including put option details;
 Copies of previously signed guarantee agreements that have been executed.

e. If a corporate guarantee or other document/letter with a similar purpose is offered as

security:

 Information about the guarantor, such as its holding, subsidiary, or associate

company;
 Guarantor's audited financial statements, including details of all contingent
liabilities (not older than 6 months from DTA date);
 Additional documents, as in d. above;
 The impact of the guarantor's restructuring activity on the security;
 The guarantor's promise that the guarantee will be disclosed as a "contingent
liability" in the guarantor's financial statement's "notes to accounts";
 A copy of the guarantor's Board resolution and signed copies of the agreements.

f. If securities (equity shares, etc.) are being offered as security, the depository
participant must provide a holding statement as well as an undertaking that these
securities will be pledged in favour of the depository system's debenture trustee(s).

g. Information about any other type of security being offered, such as a Debt Service
Reserve Account.

CONCLUSION
The recent SEBI Amendments show SEBI's proactive approach to empowering debenture
trustees, ensuring market transparency, and protecting investors. Debenture trustees now have
due diligence obligations, which were previously only required of issuers, for both public and
listed private placements. SEBI had never prescribed such detailed requirements in relation to
independent due diligence or security creation in relation to a listed private placement prior to
the recent amendments, and these changes will put debenture holders on par with other
lenders (banks and financial institutions) in enforcement situations. With the SEBI
Amendments, any debenture security will be watertight, and strict periodic certified asset
cover monitoring will ensure that in the event of default, collateral will be available for
successful recovery and repayment to debenture holders. Monitoring will ensure that the risk
of default is identified as early as possible. It's worth noting that the aforementioned changes
have the potential to not only bridge investor information asymmetry, but also to significantly
boost investor confidence and strengthen India's debt capital markets. However, procedural
impediments to coordination between debenture trustees and issuers, debenture trustees and
their appointed experts, agencies, and submission of due diligence certificates will need to be
ironed out in the coming months and will necessitate a more disciplined approach overall.
The restrictions placed on issuers' flexibility in terms of security creation and DTD execution
are set to change. Further, based on feedback from market participants, potential obstacles
such as debenture trustee due diligence, receipt of NOCs, and timelines for regulatory
authority NOCs may need to be tested and addressed.

Furthermore, since the Indian Stamp Act, 1899 (Act) was amended by Part I of Chapter IV of
the Finance Act 2019 (No. 7 of 2019), immovable property security is no longer required for
stamp duty benefits. Given the need for a NOC from the tax authority, title search reports,
lender/government consents, and registration with the sub-registrar for immovable property
as security, one likely consequence of these amendments is that issuers will no longer offer
immovable property as collateral for debentures to save time, money, and procedural
formalities.

Due to the lack of similar requirements for unlisted debt issuances and bank/NBFC financing,
these requirements may signal a shift away from listed debt securities and toward traditional
financing options. In order to meet the debt market requirements, large borrower entities that
are required to obtain at least 25% of their incremental borrowings from the debt market will
likely prefer unsecured issuances at higher costs. While the SEBI Amendments are a
welcome step, it remains to be seen whether various stakeholders will be able to adapt and
adopt the policy changes.