SEBI's Enhanced Guidelines On Security Creation And Initial Due Diligence For Debenture Trustees

By - Smita Jha (Partner), Ananda Chakraverty (Senior Associate) & Subham Agarwal (Associate), Khaitan & Co

  1. Introduction

On 04 August 2022, the Securities and Exchange Board of India (SEBI) issued a circular providing for enhanced guidelines for debenture trustees and listed issuer companies on security creation and initial due diligence (Latest Circular)1. This is applicable to all issuers who have listed or propose to list their debt securities (Issuer(s)).

This is in furtherance of other existing circulars of 3 November 20202 (Circular 1), 12 November 20203 (Circular 2), and 19 May 20224 (Circular 3) for security creation and due diligence issued by the SEBI. The Circular 1 mandated the requirements for (i) creation of security for listed debt securities (as specified in the information memorandum); (ii) execution of debenture trust deed with the debenture trustee; and (iii) debenture trustees to carry out due diligence in relation to creation of such security, prior to listing of the secured debentures. In addition to Circular 1, SEBI issued Circular 2 and Circular 3 providing for guidelines on monitoring of security created / assets on which charge is created and disclosure and reporting requirements; and a revised format of security cover certificate, monitoring of covenants, etc.

With the Latest Circular, SEBI has further clarified and proposed the key changes:

  1. Key Changes
  1. Manner of change in security / creation of additional security / conversion of unsecured to secured in case of already listed non-convertible debt securities (NCDs)

1.1 The Latest Circular specifically recognizes that (i) change in security; (ii) creation of additional security in case of already secured debt securities; or (iii) creation of security in case of unsecured debt securities will amount to structural changes in the terms of listed debentures under Regulation 59 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR). For effecting any of these structural changes relating to security creation, SEBI has issued the following guidelines:

1.1.1 Prior to initiation of due diligence, the debenture trustee and listed entity must enter into an amended debenture trust agreement to incorporate (i) the obligations arising out of para 4 to 7 of Circular 1, (ii) relevant provisions related to continuous monitoring laid down in Circular 2 and Circular 3 and (iii) any other relevant stipulations of SEBI from time to time.

1.1.2 Debenture trustee must conduct its due diligence as per the provisions of Circular 1. Thereafter, the debenture trustee is required to issue a no-objection certificate to the Issuer for proceeding with the proposed changes in the structure / creation of security (NOC).

1.1.3 Thereon, the Issuer is required to create the security in favour of the debenture trustee. Within thirty days of creation of such security, the same must be registered with the sub-registrar, Registrar of Companies, Central Registry of Securitisation Asset Reconstruction and Security Interest of India, depository, etc., as applicable.

1.1.4 The Issuer and debenture trustee then must enter into a supplemental / amended debenture trust deed (Amended DTD) incorporating all the terms and conditions resulting from the due diligence conducted by the debenture trustee and security created by the Issuer.

1.1.5 Pursuant to execution of the Amended DTD, Issuer is required to submit the following documents to the depositories and stock exchange(s): (i) NOC; (ii) executed version of Amended DTD; (iii) an undertaking from the debenture trustee that the security has been created and registered; and (iv) any other document / consent required to be submitted under applicable laws.

  1. Encumbrance on securities for issuance of listed debt securities

2.1 The Latest Circular states that any encumbrance on the securities for securing the NCDs must be created through the depository system only as per the applicable regulations and circulars.

2.2 As per the Latest Circular, ‘encumbrance' includes the following: (i) pledge, hypothecation, lien, negative lien, non-disposal undertaking or non-disposal agreement; (ii) any restriction on the free and marketable title to securities, by whatever name called, whether executed directly or indirectly; and (iii) any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.

  1. Due diligence in case of Shelf Prospectus / Memorandum

3.1 In situations where the security details have not been finalized at the time of filing of a draft shelf prospectus, then the debenture trustee must undertake due diligence in the following manner:

3.1.1 A due diligence certificate may be issued by the debenture trustee, stating that it has carried out due diligence for the provisions other than those related to security creation as laid down in SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and Annexure A of Circular 1.

3.1.2 At the time of issuance of the tranche prospectus when the issue structure, including terms related to security has been finalized, the debenture trustee must issue a due diligence certificate covering all relevant clauses of formats as laid down in SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and Annexure A of Circular 1.

  1. Empanelment of External Agencies by Debenture Trustee

4.1 The debenture trustee can appoint external agencies to carry out due diligence as per the guidelines laid down in Circular 1 and Circular 2. For such appointment, debenture trustees must: (i) adopt a board approved empanelment criteria / policy and disclose the same on their website; and (ii) formulate a policy on mitigating conflict of interest and disclose the same on their website. Such policy must, inter alia, include a provision requiring that the external agency should not have had any pecuniary relationship with the Issuer for the period of three years prior to the issue.

  1. KCO Comments

Post the release of Circular 1, there remained a conflicting market opinion on the query ‘whether additional security can be created post listing of the NCDs or whether unsecured listed NCDs can be converted into secured listed NCDs after listing'. SEBI has now put an end to this speculation and clarified that (i) creation of an additional security post listing of NCDs; or (ii) conversion of unsecured listed NCDs into secured listed NCDs after listing, is indeed possible in accordance with Regulation 59 of the SEBI LODR. As elaborated above, SEBI has also enlarged the scope of the term ‘encumbrance'.

While we await a specific clarification from SEBI, it is understood that for any change in terms of any security structure pertaining to issuance of listed NCDs, prior approval of the concerned stock exchange shall still be required (under Regulation 59 of the SEBI LODR), in addition to following the process as prescribed in this Latest Circular.

SEBI, through this Latest Circular has thrown more responsibility on the shoulders of the debenture trustee, who is to ensure that the due diligence and appropriate filings and documentations are in place for creation or change in security. Additionally, once the detailed process for creation / addition or modification of security is completed, an Issuer is also required to obtain a new ISIN for the listed NCDs.


1 SEBI | Enhanced guidelines for debenture trustees and listed issuer companies on security creation and initial due diligence

2 SEBI | Creation of Security in issuance of listed debt securities and ‘due diligence' by debenture trustee(s)

3 SEBI | Monitoring and Disclosures by Debenture Trustee(s)

4 SEBI | Revised format of security cover certificate, monitoring and revision in timelines

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