The Securities Exchange Board of India (SEBI) in furtherance of its objective to strengthen the process of security creation, enhance the monitoring of security created and covenants with respect to listed non-convertible securities (NCS), had constituted a working group comprising of officials from SEBI, depositories, stock exchanges and trustee association of India (TAI). Based on the recommendations of the working group, a platform for 'Security and Covenant Monitoring System' hosted by the depositories using the Distributed Ledger Technology has been developed (DLT Platform). The DLT Platform shall inter alia, capture the process of creation of security (viz. due diligence, charge creation etc.), continuous monitoring of covenants by debenture trustees, credit rating of the NCS by the credit rating agencies (CRAs) etc.

  1. Security Creation and Covenant Monitoring Using DLT

SEBI, vide its circulars dated 13 August 2021 and 29 March 2022 (DLT Circulars) has encapsulated the requirement of recording, validating, monitoring and disseminating information on secured assets and the covenants applicable to the issue, using the DLT Platform. The broad contours of such requirements and the operational guidelines are discussed herein below:

  1. Recording of information relating to security creation, asset cover and covenants
  • Information regarding assets forming part of the security for NCS: The issuer of NCS (Issuer) is required to enter details of the assets on which security is proposed to be created, and upload related documents (like title documents, benpos statement in case of pledge of shares, etc.) on the DLT Platform, at the time of creating temporary ISIN. The debenture trustee is required to validate the assets recorded by the Issuer in the DLT Platform in terms of SEBI circular dated 3 November 2020 ('Creation of Security in issuance of listed debt securities and 'due diligence' by debenture trustee(s)'). In case of inconsistency in value and details of assets, the debenture trustee shall invalidate and reject the assets recorded along with its remarks on the DLT Platform. The DLT Platform also provides for an intimation to the Issuer for rectification of discrepancy or to record additional information. Further, the debenture trustee is also required to upload on the DLT Platform, all the reports received from the Issuer and/or security provider inter alia, including valuation report, register of charges from ministry of corporate affairs (MCA) search report, title search report and/or appraisal report, periodic security cover certificate, due diligence certificate (in the format provided in Annexure A of SEBI circular dated 3 November 2020) and such other required certificates or information relating to security received by it.
  • Recording of charge creation and registration: The Issuer is required to upload charge creation details on the DLT Platform and upload relevant documents supporting creation of the charge like pledge master report, etc. Thereafter, the debenture trustee must validate the details of the charge entered into the DLT Platform by the Issuer from other public charge filing repositories such as Registrar of Companies (ROC), Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) established under SARFAESI Act 2002, Information Utility (NeSL- National E-Governance Services Ltd) registered with Insolvency and Bankruptcy Board of India under the Insolvency and Bankruptcy Code 2016, sub-registrar office (SRO) in case of immovable properties, and other independent sources. The due diligence certificate issued by the debenture trustee to the Issuer as per Annexure B of SEBI Circular dated November 3, 2020, is also required to be uploaded on the DLT Platform.
  • Modification of charge and registration details: Modification of information already recorded on DLT Platform on account of any discrepancy or modification in value or details due to additional security or reduction or substitution of existing security will require prior consent of the debenture trustee, which consent is also required to be recorded on the DLT Platform.
  • Recording of covenants: The details of the covenants inter alia, including title to the security, security cover, further borrowings, financial covenants, change in composition of directors, non-financial covenants (such as credit rating negative lien) etc., are required to be entered into the DLT Platform. The Issuer shall upload the debenture trust deed within 5 (five) working days from date of execution of the same. The debenture trustee is also required to validate the covenants recorded by the Issuer on DLT Platform, within 7 (seven) working days from the date of execution of the debenture trust deed.
  1. Periodic & continuous monitoring of security cover, asset cover and covenants
    • The Issuer is required to upload on the DLT Platform half yearly certificate of the statutory auditor specifying the security cover within 45/60 days as specified by SEBI. The debenture trustee is required to upload other necessary documents and information as set out in SEBI circular dated 12 November 2020 ('Monitoring and Disclosures by Debenture Trustee(s)', as updated and/or amended by 19 May 2022 circular on 'Revised format of security cover certificate, monitoring and revision in timelines') on the DLT Platform.
  1. Interest and Redemption Payment Monitoring
    • The Issuer is required to record information on payment of principal and interest on the DLT Platform at the time of creation of ISIN and/or temporary ISIN. Further, the Issuer shall update the status of payment and/or redemption within 1 (one) working day of the due date based on details received from registrar and transfer agent.
    • The debenture trustee shall validate the information on payments based on the information received from registrar and transfer agent, bank confirmation etc., within 2 (two) working days from its due date.
    • In case where Issuer fails to intimate payment details, the debenture trustee is required to seek status of payment from the Issuer and/or conduct independent assessment and update the same within 7 (seven) working days of interest payment becoming due and 9 (nine) working days in case of redemption date.
  1. Credit Rating Information & Modification
    • The Issuer shall, at the time of creation of temporary ISIN and/or ISIN, record the credit rating information, along with rating rationale, hyperlink to rating press release with date. The credit rating information so uploaded shall have to be verified by the CRAs and must be validated within 3 (three) working days by the debenture trustee on the DLT Platform.
    • Any subsequent rating actions carried out by CRAs shall be recorded in DLT Platform by the Issuer within 1 (one) working day of the press release, which shall include, inter-alia, rating action including rating outlook, date of press release and hyperlink for press release of such credit rating.
  1. Asset ID generation to Prevent Duplication of Assets
    • The operational guidelines circular dated 29 March 2022 issued by SEBI, provides that a system generated unique identifier (Asset ID) shall be allotted for each asset offered by the Issuer as security for the NCS.
    • To ensure that there is only one unique Asset ID assigned to an asset of the Issuer for effective asset creation as well as tracking, the DLT Platform shall provide an alert to the Issuer and the debenture trustee for identifying possible duplicate entries of assets of the Issuer. This validation check will be based on parameters such as inter alia, name, ownership, valuation, and address.
    • Each asset uploaded on DLT Platform will have unique Asset ID. However, with respect to charge created over the movable floating assets like furniture, equipment, inventory, receivables etc., the Asset ID will be on portfolio basis.
  1. Trigger Events for Asset Duplication & Security Cover Breaches
    • The debenture trustees are required, on a yearly basis, to reconcile the list of assets recorded in the DLT Platform. In case of duplication of the asset, the debenture trustee shall take necessary steps to eliminate duplicate entries in the DLT Platform and take remedial action, if required.
    • Any event which reduces the security cover below the stipulated limit, shall be updated by the Issuer in the DLT Platform Such event shall be termed as 'trigger event' and depositories shall send such trigger events' alerts to all the concerned stakeholders.
  1. Compliance Timelines for Uploading Details on DLT Platform by Debt Listed Issuer

New Issuances: The compliance with recording of assets on DLT Platform in line with the DLT Circulars is applicable to all the Issuers proposing to issue listed NCS on or after 1 April 2022. However, SEBI through its circular dated 18 April 2022, provided relaxations until 1 July 2022 to Issuers who are unable to record the details in the DLT Platform after providing explanation to depositories.

Existing Issuances: In respect to outstanding NCS the timeline to enter details into the DLT Platform is on or before 30 September 2022.

  1. Conclusion

Evidently, the DLT Circulars aim at better monitoring, and more transparent information dissemination to investors and other stakeholders of NCS. The adoption of DLT Platform by the depositories in relation to disclosures, covenants and recording of assets charged, ensues more stringent accountability of the Issuer in respect to such assets. While the requirement to upload a copy of the trust deed on the DLT Platform is a good step for greater transparency and disclosures, it may lead to the Issuers being driven to offer similar covenants to each of its lenders which may not be commercially viable. Nevertheless, recording of all the information on the assets charged and periodical monitoring of the same, would bring in its own set of challenges for the Issuer and the debenture trustee, i.e., timelines being very stringent, given assets description can be very detailed, there may be lot of duplications and accuracy may become a challenge. 

Presently, the depositories, have prepared the guidance module for secured debenture issuances and are in the process of preparing the same for unsecured debenture issuances as well. However, since the DLT Platform is still in the process of being developed by the depositories, certain nuances pertaining to security offered as conditions subsequent to the issuance have not yet been taken into the consideration for preparation of modules. Further, the introduction of the DLT Platform resulted in shift of the ISIN generation process as well and now the Issuers are required to apply for temporary ISIN at the very beginning of the transaction basis draft terms and conditions. ISIN generation has now become a pre-condition for procurement of Asset IDs, which in turn is a pre-condition to the issue of NCS.

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