Norms for debenture trustees

JUNE 14: SEBI, which recently dashed off letters to debenture trustees of defaulting companies, has now advocated an arms length relations...

JUNE 14: SEBI, which recently dashed off letters to debenture trustees of defaulting companies, has now advocated an arms length relationship between the issuer and the trustee. In the case of a strong association, a cooling-off period of two years has been proposed for a change in the trustees.

With an eye on the increasing case of defaults in debenture redemptions on maturity, the Sebi board has called for trustees appointing nominee directors on the boards of the issuing company in case of two successive defaults in interest payments, default in creating security or redemption. The trustees also have the responsibility of informing the investors about the status of compliance and other action taken by the issuer.

Assets on which security will be created and ranking of charge has to be stated in the offer document, while if it is a second or residual charge, the document should specify the risk associated with it. All consent letters have to be obtained by the trustees before the issue.

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Issue funds would be parked in an escrow account until the security documents are executed. The offer document will also contain details on the security cover to be maintained, the basis on which it has been computed, valuation methods and periodicity. According to the Sebi board, the asset cover has to be arrived at after reduction of the liabilities having a first charge – in those case where there is a second or subsequent charge.

The board has also decided to propose to the Department of Company Affairs that failure to create security within the specified time would be treated as a criminal liability on the company and its officials.

Subsequent to the issue, the lead managers are responsible for despatch of debenture certificates and refund orders, while trustees would be responsible for despatch of certificates where an allotment letter is issued initially and debenture certificate is to be issued after registration of charge.