Sebi mulls larger role for debenture trustees, proposes new norms

Market regulator points out challenges in case of defaulting NBFCs

The Securities and Exchange Board of India (Sebi) on Tuesday proposed new norms for debenture trustees (DTs), to give the latter a larger role in protecting interests of debenture holders in case of defaults from the bond-issuing company.  

The market regulator pointed out that only in ten per cent of defaulting secured issues, DTs were able to successfully enforce the security.

Further, the regulator pointed out DTs found it easier to enforce securities in the case of manufacturing companies as there was a fixed charge, but "the same is not true in the case of NBFCs due to floating charge and absence of identified security".

Further, market watchdog pointed out various issues pertaining to recovery of dues and also cited the case of Dewan Housing Finance Corporation to highlight the concerns. It said that the DTs were unable to get clarity on maintenance of adequate security cover as due to floating charge only issuer was aware of the security.

With NBFCs, regulator said that there was also concern that attractive loan portfolios will get monetised to pay for existing loans, leaving DTs with lower quality assets for enforcing security.

Among the dozen proposals, the market regulator mulled a creation of identified charge by the NBFCs. This would require NBFCs to create charge on the identified assets for every issue. This may include identified receivables, investment and cash instead of floating charge on the entire books of the NBFC.

"A debenture issued by an NBFC shall be treated as secured only on creation of identified charge. A transition period of 3-5 years shall be provided to shift from floating pari-pasu to identified charge," the consultation paper said.

The regulator is also considering putting in place a framework that allows DTs to monitor the quality of underlying assets in a more efficient manner.

One of the proposals involve a delinquency rate benchmark at the time of signing the debenture trustee deed. If the delinquency rate in assets breaches the proposed threshold, issuer would be required to replace those assets with other standard assets within a given time frame.  

In-line with conditions laid down for mutual funds (MFs), the regulator said DTs can also participate in the inter-creditor agreement (ICA). One of the proposals said that that if the resolution plan is not finalised within 180 days from end of review period, DTs shall be free to exit the ICA and retain their rights.

Similar to MFs, DTs can take extension (subject to approval of debenture holders), but the timeline cannot exceed 365 days from commencement period of ICA.

Regulator also specified manner in which DTs will be required to take votes of debenture holders in the case of ICA or for enforcing security.

Market regulator has also proposed creation of a recovery fund by the issuer that gets downgraded from the AAA-grade. This is to cover the costs for the recovery proceedings that DTs or debenture holders are required to bear in the case of defaults.

As per the proposals, the DTs -- on their websites -- would have to put out quarterly compliance reports received from the issuers. Besides the minimum disclosures, DTs may also make disclosures regarding their performance.

This could involve timeliness in terms of action taken, monitoring of covenants/security cover, timely raising of red-flags if issuer response is unsatisfactory, etc.