The SEBI (Issue and Listing of Debt Securities) Regulations, 2008 ("Debt Regulations") provide the framework for issue and listing of debt securities in India ("NCDs"). SEBI as a proactive guardian of the capital markets has taken measures to assist market investors in debentures having a framework which integrates into any debt resolution process where an intercreditor agreement ("ICA") needs to be executed by all creditors under the RBI schemes for debt restructuring. With the view to improve and strengthen the debt markets SEBI issued circular Standardisation of procedure to be followed by Debenture Trustee(s) in case of 'Default' by Issuers of listed debt securities" dated 13 October 2020 ("SoP Circular") and also amended the Debt Regulations on 8 October 2020 ("Amendment Regulations") to increase disclosure to investors and enhance security related aspects.
Changes in relation to Debt Resolutions following Payment Default
The SoP Circular prescribes the process required by debenture trustees on payment default by issuers of listed debt securities, investor consent is required for enforcement of security and/or entering into an ICA. The 'event of default' is determined at the ISIN level, as all NCD terms under a single ISIN are the same even if issued under multiple information memorandum.
Following payment default by the issuer, and, in respect of any proposed or actual resolution plan for restructuring of the financial indebtedness of the issuer or an ICA:
- The debenture trustee must send a notice to all debenture holders within 3 days of default, by specified methods (e.g. courier, hand delivery or email) with proof of delivery;
- Notice must contain: (a) negative consent for proceeding with the enforcement of security; (b) positive consent for execution of the ICA; (c) time period within which the consent needs to be provided; and (d) date of the meeting to be convened. For a public issuance of NCDs, no consent is require for security enforcement or for any meeting to be convened;
- The meeting must be convened within 30 days of the occurrence of default. If a default is cured between the date of the notice and the date of the relevant meeting, then no such meeting is required;
- Where the majority debenture holders (75% by value of outstanding debentures and 60% by number of debentures) consent to enter into the ICA, a debenture trustee will enter into the ICA. Where consents are not received for entering into the ICA, the debenture trustee has to take any further action, as directed by debenture holders; and
- A committee of debenture holders may also be formed to participate in the ICA.
Changes for Listed Debt Issuances
- Debenture Trust Deed: Every debenture trust deed must now be split into 2 parts: (a) Part A with statutory/standard information on the issuance; and (b) Part B on NCD issuance specific details.
- Undertaking: An issuer for secured issuances must give an undertaking in the information memorandum that the assets to be secured are free from any prior encumbrances.
- Recovery Expense Fund: Establishment of a recovery expense fund or secured NCD issuances, the details of which will be specified by SEBI. Amounts will be utilised by trustees on event of default, for legal action to enforce security.
- Additional Disclosure in Summary Term Sheet: Additional investor disclosures are required in the summary term sheet: (a) details and purpose of recovery expense fund; (b) all covenants of any NCD issue (including side letters, accelerated payment clause) – this is relevant to structure transactions; (c) events of default (including manner of voting /conditions of joining ICA; (d) conditions for breach of covenants (as specified in the debenture trust deed); (e) description of security (as applicable); and (f) risk factors for the NCD issue.
Debenture Trustee Commercial Decision Making
Debenture trustee can now consider a resolution plan on behalf of debenture holders provided the execution of the ICA and agreeing to the resolution plan is in the interests of debenture holders and complies with all laws.
A debenture trustee can exit the ICA if: (a) the resolution plan imposes conditions on the debenture trustee which do not comply with law; (b) the resolution plan is not finalised within 180 days from the end of the review period1; and (c) ICA terms are breached by any other signatory.
SEBI's intention is to strengthen the role of debenture trustee – they need to independently evaluate and monitor asset cover to protect interests of debenture holders and obtain mandatory compliance certificate of asset cover from the statutory auditor every 6 months.
Timely information on defaults and holding of meetings is helpful for the market since it ensures some rigour in the timing of decision making and requires debenture trustee's to pro-actively monitor and manage this process. The quicker the decision making the less value erosion of the issuer company. The SoP circular mandates only physical meetings for debenture holders within 30 days of the occurrence of default. However, operationally, it would have been quicker and simpler to also enable debenture holders to instruct the debenture trustee by a written resolution - as opposed to having to convene a physical meeting. This would have saved time and cost. More importantly the SoP Circular implies that the debenture trustee will have the authority and ability to make commercial decisions on behalf of debenture holders in line with a lender bank once an ICA is executed. Whilst the speed of response for effective debt resolution is a must and was driving the policy to align SEBI framework with that of the RBI, debenture holders could feel toothless without being able to have a material say in negotiations.
The option of a committee of investors being able to represent the debenture holders does mitigate this issue. In our view, this option should have been made mandatory to ensure parity between different types of creditors. In addition, the ability of a debenture trustee to approve a resolution plan which by its very nature is entirely commercial, often involves principal haircuts, timing extensions for payments and viability and feasibility of business proposals over the longer term and which business will ultimately support principal repayment to debenture holders, are critical decisions that should be taken by investors directly.
1 Under RBI 7 June Circular, review period of 30 days starts when a borrower is in default with any lender (which includes only schedule commercial banks, NABARD, EXIM Bank, SIDBI, NHB and Small Finance Banks).
"Default" means non-payment of debt (as defined under the IBC) when whole or any part or instalment of the debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. For revolving facilities like cash credit, default would also mean, without prejudice to the above, the outstanding balance remaining continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than 30 days.
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