The Securities and Exchange Board of India (SEBI) in its board meeting held on 26 April 2017 took some significant decisions impacting the bond market, inter alia, by approving certain amendments to the SEBI (Debenture Trustee) Regulations, 1993 (the DT Regulations). Whilst formal notification of the amended DT Regulations is forthcoming, we have analysed the key features of the proposed amendments which seek to streamline a key legislation governing one of the most important intermediaries in the bond market ecosystem and bring about much needed alignment of the DT Regulations with the Companies Act, 2013 and other relevant SEBI regulations.

Both the DT Regulations and the Companies Act, 2013 and rules thereunder contain provisions covering duties and obligations of debenture trustees which often led to ambiguities in interpreting overlapping legislations, with contradictory provisions causing difficulties in compliance.  To address this impediment and fortify the existing provisions of the DT Regulations to enable the debenture trustees to perform the task of securing the interest of the investors, SEBI formed a task force comprising of SEBI officials and representatives of the debenture trustees to examine the challenges in performing the obligations and duties of debenture trustees in protecting the interest of the debenture holders. The recommendations of the task force were placed on SEBI’s website and suggestions were invited from stakeholders.

Key amendments proposed

Set out below are the key changes proposed to be introduced by the amendments:

  • Single form of Trust Deed - The amendments seek to do away with Schedule IV of the DT Regulations which set out the contents of the debenture trust deed leaving only a cross reference to the contents of the form of the debenture trust deed set out in Form SH-12 under the Companies (Share Capital and Debentures) Rules 2014. This change will enable a single reference point for a model debenture trust deed to be adopted and obviate two conflicting forms prescribed by SEBI and the Ministry of Corporate Affairs, making compliance of this requirement far more convenient for both trustees and issuers.
  • Eligibility criteria of Debenture Trustee aligned - The amendments seek to specifically align the DT Regulations to Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 (Debenture Rules) which sets out several restrictions on who can be appointed as a debenture trustee for a given debenture issue. As per Rule 18(2) of the Debenture Rules, no person shall be appointed as a debenture trustee, if he, inter alia, (a) holds beneficial shares in the issuer; (b) is beneficially entitled to moneys other than the remuneration payable to the debenture trustee; (c) is indebted to the issuer or its group companies; and  / or (d) has pecuniary relation with the issuer amounting to the lower of 2% or more of the issuer’s gross turnover or total income or rupees fifty lakh rupees or such higher amount as may be prescribed, during the immediately preceding financial years or during the current financial year. The intent is to bring about considerable transparency and impartiality in the performance of duties of a debenture trustee and ensure that there are no conflicts of interest.
  • Monitoring of security cover - If the debentures are secured by way of receivables / book debts (usually in the case of the issuer being NBFCs and HFCs) the debenture trustee will now be required to obtain (i) quarterly certificates from the directors and independent chartered accountant of the issuer certifying the value of the book debts and receivables; and (ii) annual certificate from the statutory auditor of the issuer. This seems to be only from an information and monitoring point of view and the DT Regulations or the proposed amendments do not provide for furnishing of any additional security in the event there is a breach / depreciation of security cover (which are covered in the Companies Act, 2013 and NBFC / HFC regulations, as the case may be).
  • Enhanced Liability in respect of defaults by debenture trustee: The liability of the debenture trustee in respect of defaults committed by the debenture trustee are also sought to be streamlined by SEBI with other intermediaries regulated by it. In addition to the existing liability in case of default, the scope has been widened to include the failure by the debenture trustee to furnish any information relating to its activity as required by SEBI or furnishing incorrect or misleading information to SEBI. Further, failure by the debenture trustee to resolve the complaints of the investors or providing unsatisfactory responses to SEBI in this regard shall make the debenture trustee liable for actions under Securities and Exchange Board of India (Intermediaries) Regulations, 2008 which shall include suspension and cancellation of certificate of registration of the debenture trustee.
  • Certification by the Compliance Officer: The compliance officer appointed by the debenture trustee to monitor, inter alia, compliances of the debenture trustee with the various rules and regulations framed by the SEBI will now need to obtain a certificate in terms of SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007 (Certification Regulation) which includes passing an examination specified by the National Institute of Securities Market (NISM) established by SEBI. As per SEBI’s the Certification Regulation, a certificate once obtained is valid for a period of 3 years post which the compliance officer will need to complete a programme of continuing professional education specified by NISM. The proposed amendment by SEBI is intended to provide confidence to the debenture holders that the compliance officer appointed by the debenture trustee has appropriate knowledge to address issues faced by the investors.
  • Bringing unsecured debentures within the purview of the DT Regulations - The proposed amendments seek to remove a discrepancy in the existing provisions in relation to the definition of ‘debenture trustee’ which previously read as trustee of a trust deed for ‘securing any issue of debentures’. This will be amended to take into account an unsecured debenture issuance where the trust deed would not be creating any security.
  • Duties and Obligations of the Debenture Trustee streamlined - The scope of duties and obligations of the debenture trustee was a typical bone of contention in the past between debenture holders and debenture trustees with the duties and obligations of the debenture trustees under the Companies Act being much wider than those specified under the DT Regulations. In the proposed amendments, SEBI has sought to harmonise the duties and obligations of the debenture trustee with the provisions of the Companies Act, 2013 and Rule 18 of the Debentures Rules. By retaining certain beneficial duties as per the existing DT Regulations, in the proposed amendments, which were not part of the Companies Act, 2013, SEBI has strengthened the DT Regulations in favour of the investors. These duties include taking possession of the trust property in accordance with the debenture trust deed, taking appropriate measures for protecting the interest of the debenture holders in the event of any breach of the  debenture trust deed, ascertaining and satisfying itself that, inter alia, the debenture certificates, interest warrants have been duly dispatched to the debenture holders, informing SEBI of any breach of any applicable laws and exercising due diligence by ensuring compliance of the Companies Act, 2013, listing agreements and the debenture trust deed.
  • Definitions aligned with Companies Act, 2013 – A number of definitions under the DT Regulations will be aligned with those under the new Companies Act, 2013. Definitions like ‘associate’, ‘debenture’ and ‘Companies Act’ are proposed to be amended to synchronise it with the new Companies Act, 2013. The references to the old Companies Act, 1956 are proposed to be removed and be replaced with corresponding provisions of the new Companies Act, 2013. Further, the existing definition of ‘principal officer’ is proposed to be expanded to include the well-recognized concept of ‘key managerial personnel’ under the new Companies Act, 2013, who in turn can be a chief executive officer, managing director, company secretary, whole-time director or such other officer. The definition of ‘body corporate’ is sought to be amended to include non-banking financial companies and public sector undertakings under central and state enactments.
  • Strengthening end-use compliances by Issuers - The proposed amendments also clarify that any certification of utilisation of proceeds will need to be certified by the statutory auditor as opposed to certification by independent accountants/auditors which typically tend to be loosely worded and often subject to liberal interpretation.
  • Fixed timeframe for document submission - In terms of submission of information by the issuers to the debenture trustees, the proposed amendments mandate that they be submitted within crystallised timelines, for example periodical reports / performance reports are now required to be obtained within 7 days of the relevant board meeting of the issuer or 45 days of the respective quarter, whichever is earlier.
  • Updated modes of communication - The amendments also propose to lay down the mode of communication to the debenture holders which can be in the form of electronic media, press release and placing notices on its website. As per the DT Regulations, the debenture trustee is required to promptly communicate to the debenture holders any defaults in payment of interest or redemption of debentures.
  • ‘Change in Control’ aligned with Takeover Code - The definition of ‘change in control’ is sought to be modified to bring it in line with the new Takeover Code. As such, Regulation 2(ae)(i) will now refer to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 instead of the repealed regulation of 1997.
  • Definition of ‘insurance company’ aligned with Insurance Act – Whilst the Companies Act, 1956 contained a definition of ‘insurance company’, there is no corresponding definition in the new Companies Act, 2013 and hence the definition of ‘insurance company’ in the proposed amendments has been aligned to Insurance Act, 1938.
  • Maintenance of records by Debenture Trustee - To further safeguard the interest of the debenture holders, a debenture trustee will henceforth be required to maintain books of accounts, records, documents, etc. in respect of the debentures for a period of not less than 5 financial years from the date of redemption of debentures (this was previously taken as 5 financial years preceding the current financial year).

Khaitan Comment

The proposed amendments seek to streamline and synchronise the regulatory framework governing the debenture trustees and most of the amendments ensure greater transparency and disclosures to the investors on a continuous basis. This will ensure that timely and periodic checks can be maintained by the debenture trustees and investors on the debt servicing by the issuer companies and achieve effective monitoring and prevention of probable defaults. The amendments together with the notification of the new Insolvency and Bankruptcy Code, 2016 and recent amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 to cover debt securities will provide greater confidence and comfort to the investors and encourage increased investments into Indian bond markets.