On August 4, 2022, the Securities and Exchange Board of India (SEBI) issued a circular providing enhanced guidance for debenture trustees and listed issuing companies on securities origination and initial due diligence (latest circular) 1 . This applies to all issuers who have listed or propose to list their debt securities (Issuer(s)).
This follows other existing circulars of November 3, 20202 (Circular 1), November 12, 20203 (Circular 2) and May 19, 20224 (Circular 3) for securities creation and due diligence issued by SEBI. Circular 1 mandated requirements for (i) posting collateral for listed debt securities (as specified in the information memorandum); (ii) execution of the Debenture Trust Indenture with the Debenture Trustee; and (iii) the Debenture Trustees to perform due diligence with respect to the creation of such security, prior to the registration of the Secured Debentures. In addition to Circular 1, SEBI has issued Circulars 2 and 3 providing guidance on the monitoring of securities created / assets over which an encumbrance is created and disclosure and reporting requirements; and a revised security coverage certificate format, tracking of covenants, etc.
With the last circular, SEBI has further clarified and proposed the main changes:
B. KEY CHANGES
1. Method of change of title / creation of additional title / conversion of unsecured securities into secured securities in the case of non-convertible debt securities (NCD) already listed
1.1 The latest Circular specifically acknowledges that (i) the Security Change; (ii) provision of additional security in the event of debt securities already guaranteed; or (iii) the creation of security in the case of unsecured debt obligations will amount to structural changes to the terms of listed debentures under Regulation 59 of the SEBI (Registration and Disclosure Requirements), 2015 ( SEBI LODR). To make one of these structural changes related to creating security, SEBI has issued the following guidelines:
1.1.1 Prior to the commencement of due diligence, the Debenture Trustee and Listed Entity must enter into a Amended Debenture Trust Agreement to incorporate (i) the obligations arising from paragraphs 4 to 7 of Circular 1, (ii) the relevant provisions relating to ongoing monitoring set out in Circular 2 and Circular 3 and (iii) any other relevant SEBI stipulations of time to time.
1.1.2 The Debenture Trustee shall perform due diligence in accordance with the provisions of Circular 1. Thereafter, the Debenture Trustee is required to issue a certificate of no objection to the Issuer to proceed with the proposed changes in the security structure / creation (NOC).
1.1.3 As such, the Issuer is required to provide security in favor of the Debenture Trustee. Within thirty days of the creation of this security, it must be registered with the Deputy Registrar, Registrar of Companies, Central Registry of Reconstruction of Securitization and Collateral Assets of India, Custodian, etc., as the case may be.
1.1.4 The Issuer and the trustee of the debentures must then enter into a Supplemental/Amended Debenture Trust Indenture (Amended DTD) incorporating all the terms and conditions resulting from the due diligence carried out by the trustee of the debentures and the securities provided by the Issuer.
1.1.5 Pursuant to the execution of the Amended DTD, the Issuer is required to submit the following documents to the Depositaries and the Exchange(s): (i) NOC; (ii) signed version of the modified DTD; (iii) an undertaking by the Debenture Trustee that security has been created and registered; and (iv) any other document/consent required to be submitted under applicable laws.
2. Charges on securities intended for the issuance of listed debt securities
2.1 The latest circular stipulates that any charge on securities for securing NTMs shall be created through the depository system only in accordance with applicable regulations and circulars.
2.2 In accordance with the last circular, “congestion” includes the following: (i) pledge, lien, lien, negative lien, non-assignment covenant or non-assignment agreement; (ii) any restrictions on free and negotiable ownership of securities, however denominated, whether enforced directly or indirectly; and (iii) any covenant, transaction, condition or arrangement in the nature of a charge, however named, whether executed directly or indirectly.
3. Due diligence in case of shelf prospectus / memorandum
3.1 In situations where particulars of the securities have not been finalized at the time of filing of a draft shelf prospectus, then the Debenture Trustee shall undertake due diligence as follows:
3.1.1 A Certificate of Due Diligence may be issued by the Debenture Trustee evidencing that he has performed due diligence for Provisions other than those related to the creation of security as set out in the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and Appendix A to Circular 1.
3.1.2 At the time of issuance of the tranche prospectus, when the issuance structure, including the terms of the securities, has been finalized, the the trustee of the debenture must issue a certificate of due diligence covering all relevant clauses of the formats as set out in the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and Appendix A to Circular 1.
4. Constitution of Outside Agencies by the Debenture Trustee
4.1 The Debenture Trustee may appoint external agencies to carry out due diligence in accordance with the guidelines set out in Circular 1 and Circular 2. For such appointment, the Debenture Trustees must: (i) adopt approved incorporation criteria/policies by the council and disclose it on their website; and (ii) formulate a policy on mitigating conflicts of interest and disclose it on their website. This policy must, among other things, include a provision requiring that the external agency had no pecuniary relationship with the Issuer during the period of three years before the issue.
C. KCO COMMENTS
After the publication of Circular 1, there remained a contradictory view of the market on the question “whether additional security can be created after the listing of the DTMs or if the listed non-secure DTMs can be converted into the listed secured DTMs after the registration “. SEBI has now put that speculation to rest and clarified that (i) the creation of an additional security position on the NTM list; or (ii) conversion of non-secure listed NCDs to secure listed NCDs after registration is effectively possible in accordance with SEBI LODR Rule 59. As explained above, SEBI has also broadened the scope of the term “charge”.
Pending specific clarification from SEBI, it is understood that for any change in terms of the security structure relating to the issuance of listed NCDs, the prior approval of the relevant stock exchange will always be required (under the 59 of SEBI LODR), in addition to following the process prescribed in this last circular.
SEBI, through this latest circular, has thrown more responsibility on the shoulders of the debenture trustee, who must ensure that due diligence and proper filings and documentations are in place for the creation or modification of security. Additionally, once the detailed security creation/addition or modification process is completed, an issuer is also required to obtain a new ISIN for the listed NTMs.
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