Creation of Security in issuance of listed debt securities and ‘due diligence’ by debenture trustee(s)

SEBI/HO/MIRSD/CRADT/CIR/P/2020/218 · 2020-11-03 · SEBI

Summary

This circular mandates issuers to provide specific documents and consents to debenture trustees when creating security for listed debt securities. It requires debenture trustees to conduct independent due diligence on the assets and guarantees offered as security before issuing a certificate. Issuers must disclose detailed information regarding the security creation process and the trustee's due diligence in their offer documents or private placement memoranda. The Issuer must create a charge in favor of the debenture trustee and execute a debenture trust deed before applying for listing. Stock Exchanges list debt securities only after receiving a due diligence certificate confirming these actions, and the charge must be registered within 30 days. This circular is issued under SEBI's powers to protect investors and regulate the market, effective from January 1, 2021.

Text

In order to secure the interest of investors in listed debt securities and to enable debenture trustee(s) to perform their duties effectively, amendments to the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“ILDS Regulations) and SEBI (Debenture Trustees) Regulations, 1993 (“DT Regulations”) were approved by SEBI Board and notified vide Gazette Notifications no. 34 and 35 dated October 08, 2020. Following guidelines are issued to give effect to above amendments:

Regulations 17, 21 and 21B of ILDS Regulations require an Issuer to disclose a proposal to create security in offer document (“OD”) or private placement memorandum (“PPM”)/ information memorandum (“IM”). Schedule I of ILDS Regulations specifies that the type of security (movable, immovable, tangible, intangible etc.) and type of charge (pledge, hypothecation, mortgage etc.) shall be disclosed by the Issuer.

Regulation 13 of the DT Regulations stipulates that the debenture trustee shall enter into a written agreement (“debenture trustee agreement”) with the Issuer before the debenture trustee agrees to act as debenture trustee in respect of the said issue of debt securities.

In order to enable the debenture trustee to exercise due diligence with respect to creation of security, the Issuer at the time of entering into debenture trustee agreement shall provide the following information/ documents to the debenture trustee(s):

Details of assets, movable property and immovable property on which charge is proposed to be created including title deeds (original/ certified true copy by issuers/ certified true copy by existing charge holders, as available) or title reports issued by a legal counsel/ advocates, copies of the relevant agreements/ Memorandum of Understanding, copy of evidence of registration with Sub-registrar, Registrar of Companies, Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) etc.

For unencumbered assets, an undertaking that the assets on which charge is proposed to be created are free from any encumbrances.

For encumbered assets, on which charge is proposed to be created, the following consents along-with their validity as on date of their submission: (a) Details of existing charge over the assets along with details of charge holders, value/ amount, copy of evidence of registration with Sub-registrar, Registrar of Companies, CERSAI, Information Utility (IU) registered with Insolvency and Bankruptcy Board of India (IBBI) etc. as applicable; (b) 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; (c) Consent/ NOC from existing unsecured lenders, in case, negative lien is created by Issuer in favour of unsecured lenders.

In case of personal guarantee or any other document/ letter with similar intent is offered as security or a part of security: (a) Details of guarantor viz. relationship with the Issuer; (b) Net worth statement (not older than 6 months from the date of debenture trustee agreement) certified by a chartered accountant of the guarantor; (c) List of assets of the guarantor including undertakings/ consent/ NOC as per para 4.2 and 4.3 above; (d) Conditions of invocation of guarantee including details of put options or any other terms and conditions which may impact the security created; (e) Executed copies of previously entered agreements for providing guarantee to any other person, if any.

In case of corporate guarantee or any other document/ letter with similar intent is offered as security or a part of security: (a) Details of guarantor viz. holding/ subsidiary/ associate company etc.; (b) Audited financial statements (not older than 6 months from the date of debenture trustee agreement) of guarantor including details of all contingent liabilities; (c) List of assets of the guarantor along-with undertakings/ consent/ NOC as per para 4.2 and 4.3 above; (d) Conditions of invocation of guarantee including details of put options or any other terms and conditions which may impact the security created; (e) Impact on the security in case of restructuring activity of the guarantor; (f) Undertaking by the guarantor that the guarantee shall be disclosed as “contingent liability” in the “notes to accounts” of financial statement of the guarantor; (g) Copy of Board resolution of the guarantor for the guarantee provided in respect of the debt securities of the Issuer; (h) Executed copies of previously entered agreements for providing guarantee to any other person, if any.

In case securities (equity shares etc.) are being offered as security then a holding statement from the depository participant along-with an undertaking that these securities shall be pledged in favour of debenture trustee(s) in the depository system.

Details of any other form of security being offered viz. Debt Service Reserve Account etc.;

Any other information, documents or records required by debenture trustee with regard to creation of security and perfection of security.

Source: SecMarx — Creation of Security in issuance of listed debt securities and ‘due diligence’ by debenture trustee(s). Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.