Sebi to empower debenture trustees against defaulters

With companies increasingly defaulting on debenture repayments, a panel appointed by the Securities and Exchange Board of India (Sebi) on de...

With companies increasingly defaulting on debenture repayments, a panel appointed by the Securities and Exchange Board of India (Sebi) on debenture trustees (DTs) has recommended that trustees should be provided with additional powers to take action against companies which default on debenture repayment obligations. Sebi should make public the names of defaulting companies by putting them on its website, as practiced by the RBI for wilful defaulters of banks, the group said.

Investments worth over Rs 5,000 crore, mostly made by small investors, are locked up in debentures floated by over 450 corporates which have now turned defaulters on interest and principal payments. “A general complaint so far had been that trustees used to ignore defaults after helping companies to mobilise funds through debentures,” analysts said. The DTs may be empowered to inspect books of accounts, records, registers of the body corporate and trust property to the extent necessary for discharging its obligations, it said. The debenture trustees regulations have been in operation since 1993 and the group, formed to review the guidelines, finalised its report on August 29, 2002, Sebi said on Monday.

	The recommendations…
• Trustees should be provided with additional powers to take action against defaulting companies • Sebi should make public the names of defaulters by putting them on its website • The DTs be empowered to inspect books of accounts, records, registers of the body corporate and trust property. Story continues below this ad

The nominees of DTs, appointed on the board of issuing company to ensure protection of interest of investors, should be granted immunity from actions against them, as company directors, under all other Acts, it recommended. Such immunity is currently available to nominee directors appointed by IDBI on the board of any company, the group said, adding that matter may be taken up with DCA. “Sebi should be given powers to interpret DTs regulations as in the case of Takeover Code,” the group said.

The group also recommended that the definition of the FI may be amended to include DTs and trustees should be entitled to use the provisions of securitisation ordinance to expeditiously recover the dues of debenture holders.

This would save FIs and banks from conducting parallel proceedings under the securitisation ordinance, as lenders, and in civil courts as debenture trustees, the panel further observed. The group said the appointment of DTs was mandatory in the case of listed companies but it does not apply to private placements.

On the eligibility of becoming DTs, the group has recommended a minimum net worth of Rs 1 crore and the existing trustees should be given two years period to comply with this requirement. The group recommended that the companies should be required to use postal ballots for convening the debenture holders meeting to alter any terms of the issue or for passing any resolution which would affect the rights of the debenture olders, the group said.

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Investor Grievances Forum president Kirit Somaiya says that about 88 companies have listed their debentures on the exchanges, out of which 66 had defaulted on payments. Moreover, 384 corporates, whose instruments were not listed, had stopped making regular payments to investors.

The debenture defaulters include the who’s who of the corporate sector. “Many companies in the textile, chemical and steel sectors have defaulted. You can read the same names in the defaulters list of the RBI. These companies have also taken loans from banks and defaulted. They have now defaulted on debenture payments,” said an investor.

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