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TMI BlogOperational Circular for Debenture TrusteesX X X X Extracts X X X X X X X X Extracts X X X X ..... ional circular contains footnotes corresponding to the respective erstwhile circulars. The terms 'Issuer' and 'listed entity' have been used interchangeably in this operational circular. 4. Debenture Trustees are directed to comply with the conditions laid down in this operational circular and it is reiterated that Debenture Trustees shall have necessary systems and infrastructure in place for implementation of this circular. The Board of Directors of the Debenture Trustee shall be responsible for ensuring compliance with these provisions 5. This Circular is issued in exercise of powers conferred under: 5.1 Section 11(1) of Securities and Exchange Board of India Act, 1992; 5.2 Regulation 2A of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 5.3 Regulation 55 of the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021; ('SEBI NCS Regulations') 5.4 Regulation 29 of Securities and Exchange Board of India (Issue and Listing of Municipal Debt Securities) Regulations 2015; 5.5 Regulation 101 (1) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h payment was made e.g. quarterly, annually) Bank name and Account number from which payment is remitted UTR No 2.3. The above information should be emailed to the respective department(s) as well as to the Treasury & Accounts division at [email protected]. 3. Grant of prior approval to Debenture Trustee for change in control [CIR/MIRSD/14/2011 dated August 02, 2011; ] 3.1. Debenture Trustee is required to obtain prior approval of SEBI in case of change in control. With a view to expedite the process of granting prior approval, SEBI has adopted a 'single window clearance at SEBI', for the Debenture Trustees in case of their having multiple registrations with SEBI. 3.2. Therefore, in case a Debenture Trustee holds multiple registrations with SEBI, it shall make only one application addressed to "Chief General Manager, Department of Debt and Hybrid Securities, SEBI" accompanied by the following information: a) Whether any application was made in the past to SEBI seeking registration in any capacity but it was not granted? If yes, details thereof. b) Whether any action has been initiated/ taken under SCRA/ SEBI Act or rules and regulations made thereunder? If yes, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EBI registered intermediaries to other legal entity [SEBI/HO/MIRSD/DOR/CIR/P/2021/46 dated March 26, 2021] SEBI has been receiving registration applications pursuant to transfer of business (SEBI regulated business activity) from one legal entity which is a SEBI registered Intermediary (transferor) to other legal entity (transferee). In this regard, following is clarified: 5.1. The transferee shall obtain fresh registration from SEBI in the same capacity before the transfer of business if it is not registered with SEBI in the same capacity. SEBI shall issue new registration number to transferee different from transferor's registration number in the following scenario: a) "Business is transferred through regulatory process (pursuant to merger/ amalgamation/ corporate restructuring by way of order of primary regulator/ govt./ NCLT, etc.) or non-regulatory process (as per private agreement/ MOU pursuant to commercial dealing/ private arrangement) irrespective of transferor continues to exist or ceases to exist after the said transfer. b) In case of change in control pursuant to both regulatory process and non-regulatory process, prior approval and fresh registration shall be ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1. We hereby surrender our certificate of registration as Debenture Trustee. 2. We enclose the original certificate of registration (or indemnity in case the certificate is lost or stolen) for cancellation. 3. We hereby confirm that: a. no complaint/ disciplinary proceeding is pending against us; b. no investigation/ inquiry by SEBI is pending against us with respect to our activities as a Debenture Trustee; c. as on date of application, we have paid all fees; d. we shall continue to be liable for all liabilities/ obligations (including monetary penalties, if any) for violations, if any, of the provisions of the SEBI Act, Rules and the SEBI (Debenture Trustee) Regulations, 1993 that have taken place before our surrender of certificate of registration; e. all our current assignments as a Debenture Trustee have been either duly terminated or transferred to another registered Debenture Trustee _____ with registration no.___; f. we have issued a public notice in a widely circulated national and a regional daily dated________ informing surrender of our registration as Debenture Trustee (Please enclose a clipping of the said public notice); g. we have notified the Depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of registration with Sub-registrar, Registrar of Companies, CERSAI, Information Utility (IU) registered with Insolvency and Bankruptcy Board of India (IBBI) etc. as applicable; and ii. Consent/ No-objection certificate (NOC) from existing charge holders for further creation of charge on the assets or relevant transaction documents wherein existing charge holders have given conditional consent/permission to the Issuer to create further charge on the assets, along-with terms of such conditional consent/ permission, if any; and iii. Consent/ NOC from existing unsecured lenders, in case, negative lien is created by Issuer in favour of unsecured lenders. d) In case of personal guarantee or any other document/ letter with similar intent is offered as security or a part of security: i. Details of guarantor viz. relationship with the Issuer; and ii. Net worth statement (not older than 6 months from the date of debenture trustee agreement) certified by a chartered accountant of the guarantor; and iii. List of assets of the guarantor including undertakings/ consent/ NOC as per para 2.1(b) and 2.1(c) above; and iv. Conditions of invocation of guarantee including details of put op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia requires a Debenture Trustee, to exercise independent due diligence to ensure that security is free from encumbrances, adequate consent has been taken from existing charge holders, if any, etc. Regulation 15(1)(i) of DT Regulations places obligations on the Debenture Trustee to ensure that the assets of the Issuer are sufficient to discharge the interest and principal amount with respect to debt securities of the Issuer at all times. 2.2.2. A Debenture Trustee, by itself or through professionals appointed and compensated/ remunerated by the Debenture Trustee viz., practicing chartered accountant, practicing company secretary, registered valuer, or legal counsel shall independently carry out due diligence. The terms and conditions with respect to exercising due diligence shall also be included in the debenture trustee agreement. The due diligence to be exercised by Debenture Trustee with respect to creation of security shall inter-alia include the following: (a) Debenture Trustee shall verify that the assets provided by Issuer for creation of security are free from any encumbrances or necessary permissions or consents has been obtained from existing charge holders by carrying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In case security details have not been finalized at the time of filing of a draft shelf prospectus/ placement memorandum by an issuer, then the Debenture Trustee shall undertake due diligence as under: (a) The Debenture Trustee may furnish a due diligence certificate, confirming that it has carried out due diligence for the clauses other than that related to security creation [clauses are specified in the formats prescribed under regulations 40(a) and 44(3) of the SEBI NCS Regulations and Annex-IIA of this operational circular]. (b) At the time of the issuance of the tranche prospectus/ placement memorandum when the issue structure including terms related to security has been determined and finalized, the Debenture Trustee shall issue a due diligence certificate covering all clauses of formats prescribed under regulations 40(a) and 44(3) of the SEBI NCS Regulations and Annex-IIA of this operational circular. 2.4. Encumbrance on securities for issuance of listed debt securities: 2.4.1. Creation of encumbrance on the securities for securing the listed debt securities shall be through the depository system only in accordance with the Depositories Act, 1996, the SEBI (Depositorie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and execution of the debenture trust deed. 2.6.3. The charge created by Issuer shall be registered with Sub-registrar, Registrar of Companies, CERSAI, Depository etc., as applicable, within 30 days of creation of such charge. In case the charge is not registered anywhere or is not independently verifiable, then the same shall be considered a breach of covenants/ terms of the issue by the Issuer. 2.7. Manner of change in security/ creation of additional security/ conversion of unsecured to secured in case of already listed debt securities: 2.7.1. Regulation 59 of SEBI LODR Regulations provides for a change in terms of listed debt securities. A change in the structure of debt listed debt securities, inter-alia, may include: a) A change in security, b) Creation of additional security in case of already secured listed debt securities or c) Creation of security in case of unsecured listed debt securities. 2.7.2. In order to harmonize the process of creation of security pursuant to listing, the following directions are issued: a) Before initiating due diligence, the Debenture Trustee and the Issuer shall ensure compliance with the paras 2.1 and 2.2 of this Chapter. b) Pursuant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compliance with the provisions of Regulation 15(1)(i) of DT Regulations. 2.8. Engagement of Independent professionals by Debenture Trustee: 2.8.1. For the purpose of availing the services of an independent professional for carrying out due diligence and continuous monitoring under the provisions of this operational circular, the Debenture Trustee shall: a) Put in place a criterion/ policy for engagement of an independent professional/ availing the services of an independent professional as approved by its board of Directors and shall disclose the same on its website b) Formulate a policy on mitigating conflict of interest and shall disclose the same on its website; the policy shall, inter-alia, include a requirement that the independent professional should not have had pecuniary relationship with the issuer three years prior to the date of opening of the issue. c) The Debenture Trustee shall directly compensate/ remunerate the professional who is engaged. 2.8.2. While a Debenture Trustee may avail the services of independent professionals, the responsibility shall rest with the Debenture Trustee. Annex-IIA FORMAT OF DUE DILIGENCE CERTIFICATE TO BE GIVEN BY THE DEBENTURE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, other agencies and of independent verification of the various relevant documents, WE CONFIRM that: (a) The Issuer has created charge over its assets in favour of debenture trustee as per terms of offer document/ placement memorandum and debenture trustee agreement. (b) Issuer has executed the debenture trust deed as per terms of offer document/ placement memorandum and debenture trustee agreement. (c) The Issuer has given an undertaking that charge shall be registered with Sub-registrar, Registrar of Companies, Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI), Depository etc., as applicable, within 30 days of creation of charge. We have satisfied ourselves about the ability of the Issuer to service the debt securities. PLACE: DATE: DEBENTURE TRUSTEE TO THE ISSUE WITH HIS STAMP Chapter III: Security and Covenant Monitoring System [SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2022/ 38 dated March, 29 2022 and SEBI/HO/MIRSD/MIRSD/CRADT/CIR/P/2021/618 dated August 13, 2021] 1. In order to strengthen the process of security creation, monitoring of security created, monitoring of security cover and covenants of the debt securities, a platform for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market practices, related to issuance of debt securities, the system, as per the nature of the debt securities, shall enable various stakeholders to record information for the following aspects: 4.1. Security creation, security cover and covenants; 4.2. Periodical monitoring of security cover and covenants; 4.3. Interest and redemption payment (part and full) of debt securities; 4.4. Credit Rating information 5. Accordingly, the role and responsibilities of various stakeholders in the system have been defined below. A. Recording of information related to security creation, security cover and covenants 5.1. Information regarding assets offered as security (Security creation/ Security Cover): a) Issuer shall record relevant details regarding proposed 'Security creation/ Security Cover' (if applicable) including asset details, other related documents in the system based on the type of asset offered for security creation as per Annex-IIIA. Issuers shall fill all the requisite fields in the system at the time of creation of temporary ISIN/ ISIN. b) The assets offered as security by an Issuer shall be recorded in the system pursuant to validation/ verification by the Debenture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the system: a) The Issuer shall enter the covenants of the issuance in the system and upload the debenture trust deed within five working days of signing of debenture trust deed, including but not limited to the following: i. Covenants as to title of Security ii. Covenants as to Security Cover as per terms of Issue iii. Covenant as to further borrowing/ issues iv. Covenant as to creation of further encumbrances on the security v. Financial covenants including any restrictions on payment of dividends, maintaining Debt/ equity ratio, Gross Debt to EBITDA, Debt to Value Ratio etc. vi. Covenants as to any change in nature and conduct of business or disposal of assets vii. Covenants with respect to changes in the composition of its Board of Directors viii. Covenants with respect to related party transactions by the issuer ix. Monitoring of Debenture Redemption Reserve, Debenture Redemption Fund, Recovery Expense Fund x. Other non-financial covenants such as credit rating, negative lien undertaking, etc. b) Debenture Trustee shall validate the covenants so entered by the Issuer within seven working days of signing the Debenture Trust Deed. B. Periodic monitoring of Securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rincipal, the Debenture Trustee shall seek status of such payment/ repayment from the Issuer and/ or conduct independent assessment (from banks, investors, etc.) to determine the same. b) Based on such assessment, the Debenture Trustee shall update in the system the status of such payment/ repayment, within seven working days of the interest payment becoming due or nine working days of the maturity/ redemption date. c) The Debenture Trustee shall update the details in the system and initiate necessary action as per provisions of Chapter IX to this operational circular. 5.10. Redemption of debt securities: a) Issuer shall initiate the release of charges and update the system with the relevant documents including but not limited to Statutory Certificate, No dues from the holders of debt securities (applicable only in case of private placement), ISINs Extinguishment letter, ROC Charge Satisfaction forms/ certificate. b) The Debenture Trustee shall release charges in case any debt is repaid and update/ validate the same in the platform. D. Credit Rating information 5.11. The Issuer shall upload all the credit rating information for debt securities including rating action, date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ress the alert before overriding the same. 9. Monitoring/ Trigger events: 9.1. While the Depository shall ensure that there is only one unique asset ID assigned to an asset of the issuer, Debenture Trustee, on a yearly basis, shall reconcile the list of assets recorded in the system for an Issuer and in case any duplicate entry is found for an asset, shall take necessary steps to eliminate such duplicate entries in the system and verify security cover thereof and take remedial action, if required. 9.2. Any event which reduces the security cover below the mandated/ stipulated limit, as per regulation 54 of SEBI LODR Regulations, shall be updated by the issuer in the system immediately. Such event shall be termed as 'trigger event' and Depository shall send such trigger events' alerts to all the concerned stakeholders. 10. All issuers of debt securities shall ensure that the details are recorded in the system before activation of ISIN [Applicable for all issues made on or after April 01, 2022 ]. Depositories shall allot or defreeze an existing ISIN (in case of re-issuance), as applicable, only after confirming recording of information in the system. 11. For existing outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the charge creation details on ROC, CERSAI and IU or any other independent agency, Issuer, shall update the same on depository platform wherein Issuer will enter the following details: 3.1. Date of application/ filing with statutory/ government authority 3.2. Details of any receipt or challan obtained by Issuer after filing. 3.3. List of documents submitted to Agency 3.4. Certificate/ document obtained from statutory/ government authority after successful registration of charge. 4. An individual charge created maybe required to be registered with more than one agency, hence depository may enable Issuer to upload the above mentioned information for more than one agency. Annex-IIIC Interest and principal payment details 1. Issuers shall fill all the requisite fields in at the time of creation of ISIN/ temporary ISIN as specified by filling in the following details: Item Details Interest Payment * Name of Instrument * Date of Information Memorandum * Issue Size * No. of Instrument * Face Value (Rs.) * Rate of Interest * Interest Amount to be paid on due date * Record Date * Frequency * Due date for Interest Payment Redemption payment * Name of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de along with Code Description in FAR (Fixed Asset Register) of the issuer, wherever available. j. Validity/ Expiry date, if any. k. Encumbrance/ lien details, if any. 2. Specific additional parameters for certain asset types: In addition to the above, following parameters shall also be captured for these specific asset types and subtypes. Sr. No. Asset Type Asset Sub Type Parameters to compare for Duplicate check 1. Immovable Property All (Residential, Commercial, Industrial, Agriculture, etc.) a. Area of the property b. Geographical Co-ordinates (Latitude/ Longitude). 2. Current Assets Specific accounts maintained (DSRA, DRR, MRR etc.) a. Details related to account maintained such as Bank Name, account number, IFSC code etc. b. Mode of maintenance of account (Current account/ Fixed Deposit/ Bank Guarantee etc.) and details thereof. 3. Securities/ other financial assets Securities in Demat form a. Demat Account Number b. ISIN Number c. Quantity d. Pledgee and pledger details 4. Guarantees Guarantees a. Issuing Authority b. Government order number c. Government order date d. Guarantee Amount Corporate a. Guarantor details such as N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensure that the amount maintained in the REF is available as per paragraph 1.1 before issuing the 'No-objection letter' in that regard. 2. Manner of utilization of Recovery Expense Fund: 2.1. In the event of default, the Debenture Trustee/ Lead Debenture Trustee shall obtain the consent of holders of debt securities for enforcement/ legal proceedings and shall inform the same to the Designated Stock Exchange. The Designated Stock Exchange shall release the amount lying in the REF to the Debenture Trustee/ Lead Debenture Trustee within five working days of receipt of such intimation. 2.2. For the purpose of the provisions of this Chapter, Lead Debenture Trustee shall mean: 1. A Debenture Trustee who is chosen as the Lead Debenture Trustee by other Debenture Trustees; or 2. A Debenture Trustee who represents holders of more than 50% of the outstanding value of debt securities. 2.3. The Debenture Trustee shall keep a proper account of all expenses incurred out of the funds received from REF towards Legal expenses, cost for hosting meetings etc. towards enforcement/ legal proceedings in relation to the Debt securities. 3. Refund of REF to the Issuer 3.1. The balance in the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suer shall be as under: a) In case of asset classes wherein frequency of valuation has been prescribed by SEBI, the market value shall be provided, accordingly, in the security cover certificate. b) For the asset classes wherein there is no regulatory guideline on frequency of the valuation of a specific asset class then it shall be on quarterly basis. 1.4 In case, the issuer has more than one Debenture Trustee for its listed debt securities, then the Issuer shall prepare such certificate separately for each Debenture Trustee. 1.5 The assets that are not paid for shall not be included as part of any security cover calculation. 1.6 In case security cover offered for the debt securities comprises the assets of the Issuer only, the security cover shall be prepared on standalone basis. 1.7 In case debt securities are secured by creation of charge on the assets of a third party/ subsidiary/ group/ holding company; or assets of the Issuer are offered for securing the debt securities issued by a third party/ subsidiary/ group/ holding company; or assets of the Issuer are offered for securing the other liabilities of third party/ subsidiary/ group/ holding company, the Issuer shall m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.3 In case of reduction in the computed value of security cover in comparison to the previous quarter or previously calculated security cover, the Debenture Trustee shall record the reason for such variation in the security cover certificate. Clarification, if any, in this regard, may be obtained by Debenture Trustee from the Issuer. 3. Calculation of Security Cover Ratios In order to standardize calculation of security cover ratio as prescribed in Annex-VA, the following formulas shall be used: 3.1 Exclusive security cover shall be calculated in the following manner: Exclusive 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝐶𝑜𝑣𝑒𝑟 = Value of assets having 𝐸𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 charge outstanding value of corresponding debt + Interest accrued 3.2 Pari-passu security cover shall be calculated in the following manner: Pari-passu 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝐶𝑜𝑣𝑒𝑟 = Value of assets having pari−passu charge outstanding value of corresponding debt + Interest accrue ..... 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