Sebi issues circular on ‘due diligence’ framework for debenture trustees

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Sebi issues circular on ‘due diligence’ framework for debenture trustees

Markets regulator Sebi on Tuesday came out with a framework for creation of security for listed debt securities and ‘due diligence’ that needs to be carried out by debenture trustees. The new framework will become effective from January 1, 2021, the Securities and Exchange Board of India (Sebi) said in a circular.

In respect of creation of charge of security by the issuer, before making the application for listing of debt securities, the issuer will have to create charge as specified in the offer document in favor of the debenture trustee (DT) and also execute a debenture trust deed (DTD) with the DT, Sebi said.

Stock exchanges have been directed to list the debt securities only upon receipt of a due diligence certificate from DT confirming the creation of charge and execution of the DTD. The charge created by issuer will be registered with sub-registrar, registrar of companies, depository, among others, as applicable, within 30 days of the creation of such charge.

In case the charge is not registered anywhere or is not independently verifiable, then the same will be considered a breach of terms of the issue by the issuer, Sebi said. Under the norms, DTs will have to exercise independent due diligence and it places obligations on the DTs to ensure that the assets of the issuers are sufficient to discharge the interest and principal amount with respect to debt securities of issuers at all times.

DTs by themselves or through advisers will have to independently carry out due diligence. The terms and conditions with respect to exercising due diligence need to be included in the DT agreement. DTs will have to verify that the assets provided by issuer for creation of security are free from any encumbrances or necessary permissions have been obtained from existing charge holders by carrying out checks.

They will also have to independently assess that the assets for creation of security are adequate for the proposed issue of debt securities. Further, they will have to issue ‘due-diligence certificate’ as per format specified format. Sebi said information on consents required for creation of further charge on assets are adequately disclosed in offer document. DTs will have to maintain records and documents pertaining to due diligence exercised for a minimum period of five years from redemption of debt securities. With regard to disclosures in the offer document, Sebi said, terms and conditions of DT agreement including fees charged by DTs, details of security to be created and process of due diligence carried out by the DT should be disclosed.

In order to enable the DT to exercise due diligence with respect to the creation of security, the issuer, at the time of entering into DT agreement, will have to provide details of assets on which charge is proposed to be created.

This includes title deeds, title reports issued by a legal counsel and copies of the relevant agreements among others, Sebi said in the circular. For unencumbered assets, the issuer needs to provide an undertaking that the assets on which charge is proposed to be created are free from any encumbrances.

In respect of encumbered assets, the issuer will have to provide details of existing charge over the assets along with details of charge holders and no-objection certificate (NOC) from existing charge holders for further creation of charge on the assets In addition, the issuer will have to provide NOC from existing unsecured lenders, in case negative lien is created by issuer in favour of unsecured lenders.

In case of personal guarantee, issuer will have to provide details of guarantor, net worth statement and conditions of invocation of guarantee, including details of put options or any other terms and conditions which may impact the security created. Last month, Sebi amended Issue and Listing of Debt Securities (ILDS) norms and DT rules to enable debentures to perform their duties effectively and secure the interest of investors in listed debt securities.