SEBI in its Board Meeting held on 29th September, 2020 has approved amendments in various Regulations which shall come into effect by way of amendment in the respective Regulations. The brief highlights of the same are as below:
Strengthening role of Debenture Trustees
SEBI, in the recent past, has brought in certain amendments in order to strengthen the role of DTs so as to protect interest of debenture holders. The latest amendment in the existing DT Regulations was made by SEBI (Debenture Trustees) (Amendment) Regulations, 2017 which aimed to streamline provisions of DT Regulations with the CA, 2013 and other SEBI Regulation and also to enable DTs to secure the interest of investors.
The Board Meeting approved that DTs shall convene meeting of debenture holders for enforcement of security, joining of inter-creditor agreement (ICA) etc. The requirement of forming a ICA comes from the RBI Prudential Framework for Resolution of Stressed Assets and the Resolution Framework for COVID-19 related stress. By virtue of these notifications, there is a mandatory requirement of Inter-Creditor Agreements (ICA) by the lending institution governed by the RBI, for the purpose of invocation of a resolution plan of any defaulting borrower. The aforesaid frameworks recognize that even other lenders to the borrower which are other than the lending institutions, such as debenture trustee, may sign the ICA, if they so desire. In line with the same, SEBI is proposing the DTs to convene meeting for joining ICA to safeguard the interests of the debenture holders.
Keeping the same intent, DTs are also bestowed with the responsibility of monitoring the asset cover for debentures and obtain half yearly certificate from statutory auditor. The Board approved following additions to the responsibility of DTs:
- DTs to exercise independent due diligence of the assets of the company on which charge is being created
- DTs shall convene meeting of debenture holders for taking required action for enforcement of security, joining the inter-creditor agreement etc.
- Carry out continuous monitoring of asset cover including obtaining mandatory certificate from statutory auditor on half yearly basis
- Creation of recovery expense fund at the time issuance of debt securities for utilisation in the event of default or to take legal action to enforce the security.
Pursuant to the text of the Board Meeting, it seems that SEBI is going to introduce a new concept of ‘recovery expense fund’ for creating fund for expenses that might be required to recover debts due to debenture holders in case of default.
Apart from the aforesaid, the existing provisions of the Companies Act, 2013 does have a requirement of transferring funds by specified class of companies to Debenture Redemption Reserve (‘DRR’) and also transfer certain amount of funds for debentures maturing during the next year to specified account/securities (‘hereinafter referred to as DRF’). However, these funds/reserves are for recovery of debts, whereas, recovery expense fund is a pool of fund for incurring expenses for recovering debts by DTs. Nevertheless, introduction of a separate fund requirement for any event of default seems to be a new compliance burden on companies. Further, whether such fund has to be created as an internal book entry transfer within the company like in case of DRR or transfer it outside the company in trust of the DT, is something we have to look for. Definitely, companies like NBFCs and HFCs which are frequently involved in raising funds through debentures shall have a new compliance to be ensured, if such amendment is made effective.
Amendments in SEBI (Delisting of Equity Shares) Regulations, 2009
SEBI (Delisting of Equity Shares) Regulations 2009 provides for voluntary delisting of equity shares from stock exchanges which provide the overall framework for voluntary delisting by a promoter or acquirer through a process referred to as Reverse Book Building. The Board Meeting has approved of exempting listed subsidiary from complying with the book building process if following conditions are met:
- The listed subsidiary is a wholly owned subsidiary of the company by virtue of scheme of arrangement
- The listed subsidiary is a subsidiary of the company for a minimum of 3 years
- The listed subsidiary and the holding company should be in the same line of business
- The shares of listed subsidiary and the holding company should be listed on recognised stock exchange for a minimum of 3 years
- Votes casted by public shareholders of listed subsidiary for delisting of securities should be 2 times in favour of the number of votes cast against it.
- The company should be compliance of provisions relating to scheme of arrangement under SEBI (LODR) Regulations, 2015
The process of Reverse Book Building is a price discovery mechanism in order to provide a price on which the public shareholders can exit from the company. Accordingly, the intent of exempting a wholly-owned listed subsidiary from undergoing the said mechanism seems logical by virtue of the fact that such a company will have a sole shareholder.
Disclosure by Informants under PIT Regulations
SEBI vide SEBI (PIT) (Third Amendment) Regulations, 2019 had introduced Chapter III under the existing PIT Regulations providing for a mechanism to submit by a person, a voluntary information with SEBI about alleged violation of insider trading laws. The procedural requirements to be followed by an informant while submitting the information with SEBI have been provided in the said chapter along with the format of the disclosure prescribed under Schedule D of the Regulations.
The aforesaid provisions however do not provide for any limitation period for submitting such an information with SEBI. Accordingly, SEBI has decided to provide for a time period of 3 years. The manner of calculating the said period shall come clear only once the amended text is released. Further, the Meeting approved to make changes in Schedule D of the Regulations so as to require informants to specifically disclose details such as:
- Details of securities;
- Trades by suspect;
- UPSI based on which insider trading is alleged;
Disclosure of forensic audit by listed entities
SEBI has in the past ordered forensic audit for various companies, however, there was no requirement of disclosing the same by the company to the investors at large, except if considered material by the company under Part B of Schedule III of SEBI (LODR) Regulations, 2015. Accordingly, SEBI at its Board Meeting has decided to direct companies to disclose initiation and submit report of forensic audit along with comments of management to the stock exchange without applying any test of materiality.
Though it is not clear as of now, however, it seems that SEBI will introduce this disclosure requirement as an amendment to Schedule III Part A Para A of SEBI (LODR) Regulations, 2015 as it is to be disclosed by the company without applying any test of materiality i.e. deemed to be material.
SEBI intends to bring transparency for investors especially public investor holding larger interest in listed entities to have information about lapses in the company, which otherwise was not being disclosed by the company. SEBI requires every listed entity to disclose following w.r.t. forensic audit:
- Initiation of forensic audit along with name of entity initiating forensic audit along with reasons, if any
- Final forensic audit report on receipt by the listed entity along with comments of the management.