Recognising that existing investor protection norms are biased against holders of debentures, a working group appointed by the Securities and Exchange Board of India has recommended sweeping changes in the rights and obligations of debenture trustees (DTs).
To start with, DTs may now be required to have a minimum net worth of Rs 1 crore. The logic here is that DTs need to be adequtely capitalised if they are to discharge their duties as "eyes and ears" of the debenture holders.
The existing trustees will have to comply with this requirement within a period of two years. At present, no minimum net worth is specified for DTs.
More From This Section
In line with the groups overall approach, it has recommended that trustees will also need to have at least one person with a legal background in their organisation. The group has also recommended a detailed code of conduct for trustees.
The group has also recommended harmonising Sebis Disclosure and Investor Protection (DIP) Guidelines for the issue of debt instruments with that of the provisions of the Companies Act.
As regards the existing provisions relating to the letter of option or rollover, the group has recommended that the company may be allowed to roll over debentures subject to getting a resolution passed by 75 per cent of the debentureholders, using a postal ballot.
The company will not be required to obtain the consent of all the debenture holders, as required at present. But the company shall redeem the debentures of all the dissenting debenture holders who have not agreed to this resolution. All other existing provisions will continue.
Similarly, a company in default may be allowed to roll over the debentures subject to receiving the consent of 75 per cent of the debenture holders, using a postal ballot. The group says there should be no mandatory requirement for a fresh trust deed in case of rollover.
The debenture trustee may take a view on this and instead of obtaining a fresh rating may incorporate the auditors certificate regarding the cash flow and its comment on the companys liquidity position.
Sebi has put the recommendations of the group on its website. It will decide on the changes in the nine-year old debenture issue norms after getting industry feedback on the recommendations of the working group.
The Sebi group has also recommended that the existing rule stipulating that the trustees should not act for associate or group companies may not be made applicable to sick companies or those against whom recovery proceedings have already been initiated in respect of the debenture issue.
With regard to the appointment of nominee directors in the event of default in interest payment or creation of security, the group has suggested that the matter should be taken up with the Department of Company Affairs (DCA) since it is difficult to get "good nominee directors", and nominee directors of banks and financial institutions are granted immunity from this section.
While sending out communications to debenture holders, the group has also recommended that Sebi may consider publishing the list of defaulters on its website as the Reserve Bank of India does. The RBI publishes a list of wilful defaulters.
The group has made it mandatory for half-yearly statements to be sent to debenture holders and that this condition should be incorporated in the listing agreement itself.
However, incorporating it as an obligation of the issuer company in the Companies Act may be taken up with DCA, the group recommends. The balance sheets of companies should also contain all the relevant information on the debentures issued.
The group has also recommended that an additional regulation may be incorporated, stipulating that the trustee should not retire from any assignment without the appointment of an alternate trustee.
DTs power to inspect books of accounts shall remain as it is, acording to the group. Further, it is the responsiblity of the trustees to ensure on a continuous basis that the securities created covering the debentures are adequate and available at all times and remain free from any encumbrances till the redemption of the debentures. In doing so, the trustee may examine any record required for this purpose.
The group has recommended that it is the DTs responsibility to ascertain and satisfy themselves that the company has complied with the refund of application and despatch of certificates.