Amendments to SEBI (Issue And Listing of Debt Securities) Regulations 2008

Introduction 

The Securities and Exchange Board of India (“SEBI”), vide SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2020 (“Amendment Regulations”), has amended SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“ILDS Regulations”) with effect from October 08, 2020. The ILDS Regulations deal primarily with the listing obligations and disclosure requirements in respect of ‘Debt Securities’ (as has been defined under section 2(e) of the ILDS Regulations), proposed to be listed for both public and private placement issuances. Given that the ILDS Regulations have not been amended since the year 2015, this is a long-expected move, bringing it in line with the relevant provisions of the Companies Act, 2013 instead of the pre-existing references to the Companies Act, 1956. Simultaneously, SEBI (Debenture Trustees) Regulations, 1993 (“DT Regulations”) have also been amended, vide SEBI (Debenture Trustees) (Amendment) Regulations, 2020, and have also come into force as of October 08, 2020, empowering debenture trustees.  

Scope of material amendments 

Format of the debenture trust deed 

Regulation 15(2) of the ILDS Regulations has been amended to mandate debenture trustees to accept trust deeds that will contain the matters prescribed under section 71 of the Companies Act, 2013 and Form No. SH.12 of the Companies (Share Capital and Debentures) Rules, 2014 and are divided into two parts: 

• Part A providing statutory/standard information pertaining to the debt issue; and 
• Part B providing details specific to the particular debt issue. 

While it can be contended that this amendment would impact only debenture trust deeds for public issuances, given that Regulation 15 is enlisted under Chapter II which deals specifically with public issuances, it is noteworthy that regulation 14 of the DT Regulations has also simultaneously been amended to give effect to this change in the format of the trust deeds. This makes it obligatory on the part of the concerned debenture trustee to ensure that, going forward, this format is followed in all transactions, irrespective of the nature of its issuance, i.e., whether public or private placement. However, SEBI is yet to clarify the modus operandi for the slated division into Part A and Part B, given that all existing formats of the trust deeds are already as per Form No. SH 12.   

Undertaking from the issuer on security being free from encumbrances

Regulation 21A, which has been newly inserted in the ILDS Regulations, requires that the issuer now has to provide an undertaking in the information memorandum/disclosure document that assets on which charge is created are free from any encumbrances and, wherever such assets are already charged to secure an existing debt, the existing creditor’s consent to create a second or pari-passu charge has been obtained. Usually, while the nature of charge was earlier required to be disclosed in an information memorandum, specific details about consent requirements were not required to be disclosed in a disclosure document, but only captured as a representation/covenant in the trust deed. 

Creation of recovery expense fund 

As per the newly-introduced regulation 26(7), the issuer has to create a recovery expense fund (“REF”) in the manner specified by SEBI and inform the debenture trustee about the same. 

SEBI, vide its circular dated October 22, 2020 (“Circular”), has clarified that the REF has to be created by the issuer in order to enable the debenture trustee(s) to take prompt legal action for the enforcement of security in the event of default (in relation to listed debt securities), at which time the REF shall be utilized in the manner decided at the meeting of the holders of the debt securities. An amount equal to 0.01% of the relevant issue size, subject to the maximum of INR 25,00,000 (Indian Rupees Twenty Five Lakhs), is to be deposited by the issuer towards the REF with the designated stock exchange (as has been identified in the disclosure document) at the time of issuance of such debt securities. 

The Circular, inter-alia, also details the mechanism in relation to the manner of utilization of the REF and refund of the REF to the issuer.  

While this stipulation has been made applicable from January 01, 2021, the Circular is silent with regard to whether such REF is required to be created by an issuer (which is already not listed) proposing to issue and list debt securities before January 01, 2021. 

Additional disclosures 

Various disclosure items have been added under Schedule I of the ILDS Regulations, pertaining predominantly to ‘issue details’ that are now compulsorily required to be disclosed in the disclosure document.  

These are, to mention a few: (i) ‘All covenants of the issue (including side letters, accelerated payment clause, etc.)’; (ii) ‘risk factors pertaining to the issue’; (iii)‘manner of voting/conditions of joining inter-creditor agreement’ in the event of defaults; (iv) ‘date of creation of security/likely date of creation of security’; and (v) ‘interest to the debenture holder over and above the coupon rate as specified in the trust deed and disclosed in the offer document/information memorandum’. 

Implications

Whereas a cursory review of the said amendments may not see them as major changes, they may have far-reaching implications in practice, considering that well-settled formats of trust deeds may now require significant revisions and that any additional obligation requiring the issuer to create the REF may deter many unlisted companies from opting for issuing listed debt securities.  

The amendments also require stringent disclosure in respect of side letters that until now were quite popular with certain investors who did not want specific terms to be disclosed in the trust deed and/or the disclosure document. Though a few such critical clarifications on these norms are still awaited, the alignment of the ILDS Regulations with the requisite provisions of the existing Companies Act, 2013 is, overall, a welcome move.