To strengthen and safeguard the interests of debenture holders of listed debt issues, the market watchdog Securities and Exchange Board of India (Sebi) on October 13, 2020, issued new norms. As per the new norms for Debenture Trustees (DT), there would be a process to be followed during default by issuers of the listed debt securities.
DT can be a person or entity that safeguards the interest of debenture holders and also acts as a liaison between the issuer company and debenture holders.
“This circular prescribes the process to be followed by the debenture trustee(s) in case of default by issuers of listed debt securities, including seeking consent from the investors for enforcement of security and/or entering into an Inter-Creditor Agreement (ICA),” notes Sebi’s latest circular.
As per Sebi, the DT’s under the new norm should send the notice to investors within three days of the default. Further, the notice sends to the investors should contain negative consent for proceeding with the enforcement of security, positive consent for signing the ICA; the time period within which the consent needs to be provided, like if consent is to be given within 15 days from the date of the notice; and the date of meeting to be convened.
Further, consent of not less than 75 per cent of the investors by the value of the outstanding debt and 60 per cent of the investors by number at the International Securities Identification Number (ISIN) level would be required for making any material modification in the structure of debt securities including restructuring or roll-over of debt securities. “This will ensure that all the investors are timely informed about the event of default and decision of making any material modification in the structure of debt securities is taken at the consensus of majority of investors and not by the debenture trustee at its own discretion,” says Suresh Surana, Founder, RSM India.
Earlier, that was not the case during a default. Deepesh Mehta, Founder of Grow Wealth explains that in the last two years, debt markets have witnessed storms, which have led to a loss of money for investors. “For example, earlier one of the Inter-Creditor Agreement, where no consent was taken by the investors, was done wherein a group of asset management companies decided not to execute the pledged security. Executing that would lead to a fire sale, which could bring down the valuation of that stock” says Mehta.
“Though this was done to protect the investor and realise the full value of debentures/ bonds that were issued, due to market forces the value of stock prices came down and the pledged value would be lower than the loaned amount,” adds Mehta.
The new norms are expected to take the view of the actual investors before entering into such an agreement. But the caveat is, if the process of seeking consent takes a lot of time, it will probably not be relevant on the day of executing the trade.
As per the Pratapsingh Nathani, Chairman and Managing Director, Beacon Trusteeship, a Sebi-registered debenture trustee business, the mere signing of ICA would not suffice and there is a need to form a small committee of creditors to take quick action in the cases involving multiple lenders or creditors. As per the current dispensation, the DT does not have powers to accept a haircut/ sacrifice, which is the norm in all ICA cases.
“Independent evaluation and monitoring are good moves as they will empower the debenture trustees to appoint their own valuer, unlike the current scenario, where they rely on the valuation certificate given by the issuer,” adds Nathani.
While there is no doubt that DTs will exercise greater diligence in their role due to the changes and not use a “softer approach” towards delinquent companies and promoters. “Independent due diligence of the property secured, continuous asset-monitoring, holding a meeting of debenture holders for taking their approval for enforcing any security, entering into inter-creditor agreements, will ensure timely action and boost the investors’ confidence in the debt-market,” concurs Surana.
Sebi’s concern also stems from the fact that most of the DTs have a poor track record of initiating enforcement actions quickly. Only in 35 per cent of default cases, enforcement action was taken by respective DTs according to a study by the Trustee Association of India (TAI). “Any delay would erode the value of the security/collateral. However, despite various laws, the legal process to recover the dues is abysmally slow. This needs to be fast-tracked,” believes Nathani.