SEBI notifies enhanced guidelines for debenture trustees and listed issuer companies on security creation and initial due diligence.

LegalitySimplified

The Securities and Exchange Board of India on 4th August 2022, has revised the requirements relating to encumbrance, creation of security and related due diligence by debenture trustees (DTs). As per the modification, Creation of encumbrance on the securities for securing the non-convertible debt securities shall be through the depository system only in accordance with the Depositories Act, 1996, the SEBI (Depositories and Participants) Regulations, 2018, Depository bye laws and other applicable regulations and circulars.

Encumbrance for the above shall mean the following:

  • Pledge, hypothecation, lien, negative lien, non-disposal undertaking or non-disposal agreement;
  • Any restriction on the free and marketable title to securities, by whatever name called, whether executed directly or indirectly;
  • Any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.

Regulation 59 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) provides for a change in terms of listed non-convertible debt securities. A change in the structure of non-convertible debt securities, inter-alia, may include:

  • A change in security,
  • Creation of additional security in case of already secured debt securities or
  • Creation of security in case of unsecured debt securities.

Accordingly, in order to harmonize the process of creation of security pursuant to listing, the following directions are issued:

Before initiating due diligence, a DT and the listed entity shall enter into an amended debenture trust agreement to incorporate the obligations as notified in SEBIs earlier notifications for continuous monitoring and any other stipulations of SEBI from time to time with respect to security creation, initial due diligence and continuous monitoring by DTs. A DT shall carry out due diligence for change in security, creation of security/ additional security and shall issue a no-objection certificate (NOC) to issuer company for going ahead with proposed change in the structure/ creation of security.

Thereafter, the issuer company shall create the proposed security and the charge in favour of DT and the same shall be registered with the 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 as a breach of the covenants/ terms of the issue by the Issuer.

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