Summary of the cartload of amendments introduced towards DTs and corporate bonds

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SEBI implements measures proposed in the Consultation Paper on Corporate Bonds and Debenture Trustees

-Aanchal Kaur Nagpal, Executive & Burhanuddin Dohadwala, Manager

corplaw@vinodkothari.com

Introduction:

Owing to a wide array of defaults by various companies owning debt obligations SEBI, in order to secure the interest of the debenture holders, introduced various measures, particularly in respect of Debenture Trustees (‘DTs’), as they are the ultimate saviors of the debenture holders.

An effective mechanism in place for DTs would ultimately lead to better protection of the interests of the debenture holders increasing investor confidence.

SEBI had issued a consultation paper dated February 25, 2020 (‘Consultation Paper’)[1] to seek comments/ views on the measures that were expected to strengthen the regulatory framework for corporate bonds, secure the interest of the debenture holders, enhance the role of the DTs and empower them to effectively discharge their responsibilities towards the debenture holders of listed debt issues/ proposed to be listed debt issues.

The increased events of default by a few financial institutions and the lapses/ complications on the part of DTs in the expeditious enforcement of the security brought to the fore, the need for a review of the present regulatory framework for DT.

With the given challenges/hurdles observed in:

  • Charge creation;
  • Enforcement of security of the secured debentures;
  • Delay in enforcing the security in the event of default;
  • Inter Creditor Agreement (‘ICA’);
  • Creation of floating charges and
  • Other related issues in the recent cases of default,

SEBI intended to review the regulatory framework for DTs and put in place various provisions that would further secure the interests of the debenture holders of listed debt issues, enable the DTs to perform their duties in the interest of the investors more effectively and promptly in case of default.

Implementation of the proposed changes in the Consultation Paper:

SEBI implemented the amendments/changes as discussed in the consultation paper by way of the following:

  1. SEBI (Debenture Trustees) (Amendment) Regulations, 2020[2] dated 8th October, 2020 (‘DT Amendment Regulations’);
  2. SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2020[3] dated 8th October, 2020 (‘ILDS Amendment Regulations’);
  3. SEBI (LODR) (Third Amendment) Regulations, 2020[4] dated 8th October, 2020 (‘LODR Regulations’);
  4. Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities dated 13th October, 2020[5]; (‘SOP for DTs’)
  5. Contribution by Issuers of listed or proposed to be listed debt securities towards creation of Recovery Expense Fund dated 22nd October, 2020[6] , effective from January 01, 2021; (‘Circular on recovery fund’)
  6. Creation of Security in issuance of listed debt securities and ‘due diligence’ by debenture trustee; (Dated November 03, 2020[7]), effective for new issues proposed to be listed on or after January 01, 2021, (‘Circular on creation of security’).

Thus, all the above provisions are to be read together with the Consultation Paper.  We have tried to provide a holistic view of the proposals in the Consultation Paper as well the implementation of the same through the table below:

Sr. No. Point of consideration Recommendation by the Consultation Paper Implementation Status Our remarks/comments
Creation of Identified Charge
1) NBFCs create a floating charge on their entire receivables for all its lenders on a pari passu basis. Lack of identification of the charged assets leads to difficulty in enforcement of security. Also, possibility that the good assets are enforced by banks while debenture holders are left with sub-par assets. Creation of charge on identified assets viz. Identified receivables, investments, cash to be created by NBFCs instead of a floating charge on entire books. Debentures to be treated as secured only on creation of identified charge. Implemented.

1) Circular on creation of security

– Documents/Consent   required   at   the   time   of entering   into DTA;

– Due diligence by DT for creation of security;

– Disclosures  in  the offer document or private placement memorandum/ IM and filing of OD or PPM/IM by the Issuer;

-Creation and registration of charge of security by Issuer prior to listing.

 Due diligence:

–   No clarity as to who will bear DD expenses, in case issuer, then increased cost

–   Exemption to be provided for issuers having common DT for several issuances as DTs cannot obtain their own comments or objections as required under Para 6.1 (b) (ii) of the Circular.

–   Since issue opens and closes on the same day in case of private placement, issuers to start with the stated process much before opening of the offer.

Creation of charge-

Registration of charge within 30 days of creation, failure to be considered as breach of covenants/terms of issue. [unlike time limit of 120 days provided under Companies Act, 2013]

 To read our detailed analysis on the Circular, kindly refer to our article – ‘This New Year brings more complexity to bond issuance as SEBI makes it cumbersome’[1]
Due diligence of identified assets and Asset cover certificate
2a) ·       Pursuant to regulation 15(1)(t) of the DT Regulations, asset cover certificates are submitted to the DT on a quarterly basis by the independent auditor and on a yearly basis by a statutory auditor.

·       These aid in monitoring the adequacy of assets charged against the debt issued.

·       Format of these certificates varies for every DT and mostly indicate only a statement confirming that 100% asset cover us maintained rather than a detailed list of assets.

 ·    Asset cover certificates by the statutory auditor to be submitted on a half yearly basis.

·    Asset cover certificate to be made more granular to enhance monitoring of quality of assets by including the entire list of identified assets as security.

·    If quality of any asset deteriorates/ asset if pre-paid, then issuer to replace such assets and maintain asset cover as per DTD.

·    Certificate to also certify compliance with all covenants in the IM/ DTD.

 Implemented

1)   DT Amendment Regulations

As per amended Rule 15(1)(t) of DT Regulations, in case of listed debt securities secured by book debts/ receivables, the DT is required to obtain a certificate from the statutory auditor, giving the value of receivables/ book debts including compliance with covenants of the IM/ offer document in the manner as specified by the Board.

2)   DT Amendment Regulations

Listed entities are required to forward a half-yearly certificate regarding maintenance of 100% asset cover in respect of listed NCDs.

Not applicable to:

–        Bonds secured by a Government guarantee.

 ·    While it is imperative for DTs to follow a pro-active approach in monitoring of the asset cover, if the requirement to specify the entire list of identified assets (as required under the Consultation Paper) would have been implemented, the same would have made the certificate too bulky considering the amount of identified assets in the list.

·    Thus, SEBI has specified that the value of the assets would be mentioned.

 

·    Further, issuers may develop a shared database of receivables for the DT to monitor variations in the assets on a  real time basis which could also be subject to detailed/sample checking by the statutory auditor.
2b) Quality to be maintained as per following parameters:

·    Establishing a delinquency rate (‘DR’) benchmark (to be used as a factor for monitoring asset quality) by the DT at the time of signing of DTD.

·  If DR breaches threshold, issuer to replace such assets with standard assets.

·  Covenant for maintaining of quality of assets, conditions for replacing delinquent assets to be included in IM and DTD for transparency.

 Yet to be implemented. Guidance for determination of DR benchmark should be prescribed.
Calling of Event of Default (EoD)
3) ·  Determination of EoD is inconsistent among DTs.

·  Some call DTs at DTD level and some at ISIN level.

·  The above is owing to varied practices for issuing debentures- multiple ISINs are issued under one umbrella IM/DTD or single ISIN is split across multiple tranches with different IMs.

 ·  Event of default (‘EoD’) to include breach of any covenant mentioned in IM/ DTD.

·  EoD to be called at ISIN level. This is because if a single investor is invested in a debenture under an ISIN, he has full right to enforce security under that ISIN.

 Implemented by

1)    DT Amendment Regulations

Amended regulation 15(2)(b), event to include breach of covenants of offer document/IM and DTD.

2)    SOP for DTs

EoD shall be reckoned at ISIN level as all terms and conditions are same throughout a single ISIN. (para A.3)

 –
Inter-Creditor Agreement (ICA)
4a) Since, security interest of debenture holders is pari passu to other lenders, DTs are approached by banks to join the Inter-Creditor Agreement (‘ICA’) for resolution plan of a borrower. However, a DT would face multiple challenges in respect of interests of the debenture holders while joining an ICA. (same has been discussed below) DTs to join ICA subject to the approval of the debenture holders.

Also, the same is subject to various conditions along with an opportunity to the DTs to exit the ICA at various stages and in various circumstances as if it never signed the same. In such cases, the resolution plan would not be binding on the DTs. (same has been discussed below)

 Implemented

1)      DT Regulations

As per the inserted regulation 15(7), the DT may enter into ICAs on behalf of the debenture holders subject to the approval of the debenture holders and conditions as specified by SEBI.

Inclusion of manner of voting/conditions of joining ICAs in schedule I.

2)      SOP for DTs

All the conditions as stipulated in the Consultation Paper have been adopted in the SOP. (para C.7).

 Discussed below
4b) A debenture holder representative committee consisting of debenture holders having majority investment may be formed after default by the issuer in order to fast track the ICA process. 1)      SOP for DTs

DTs may form a representative committee of the investors to participate in the

ICA or to enforce the security or as may be decided in the meeting.

 Clarity should be given by SEBI as to composition of the committee-whether the same will consist of debenture holders having majority across series/ISIN or series-wise/ISIN-wise should be laid in the regulations.
Voting mechanism
5a) Procedural delay viz. a long notice period of 21 days to receive consent for future course of action, would further delay enforcement of security by the DT, especially in case of joining an ICA where the review period under RBI norms is 1 month for signing the ICA. ·  Notice period for receiving consent of debenture holders to be reduced to 15 days from 21 days.

·  Negative consent for enforcement of security and positive consent for joining ICA to be taken simultaneously in the same letter.

·  Proof of dispatch and delivery to be maintained by the DT.

 1)      ILDS Amendment Regulations

The amended regulation 18(2) specifies 15 days’ notice period.

2)      SOP for DTs

Process for seeking consent will be as follows:

– DTs to send 3 days’ notice to the debenture holders from the EoD.

– Positive and negative consent to be taken together as specified in the Consultation Paper

– Consent to be given 15 days.

– Meeting to be convened of all holders within 30 days from EoD.(shall not be applicable in case of public issue)

– Necessary action to be taken by DT based on consent received.

– Consent of majority of investors shall mean ‘75% of investors by value of outstanding debt and 60% of investors by number at ISIN level’.

 Since the implications of entering/exiting ICA or going for enforcement actions might be huge; as such, an ordinary resolution might not suffice and a stricture approval should be specified.

Keeping that mind, SEBI has adopted an even stricture approach from a special resolution, by specifying dual condition in value and number.

SEBI has adopted the requisite consent for debenture holders from RBI norms on ICA.
5b) Contact details received from RTAs are not updated leading to difficulty in communication with the debenture holders.

Email-ids also not available as providing the same is not mandatory for debenture holders leading to hindrance in conducting e-voting.

 Email-ids to be provided mandatorily for debenture holders in case of private placement. Yet to be implemented. —
Creation of a recovery fund
6) In case of a default, DTs are required to fulfill their obligations to act in the interest of the debenture holders as well as enforcement of security even if they are able to recover their fees from the issuer.

The expenses towards the above the same are currently borne by the debenture holders in most cases.

Due to lags in receiving the money on time, there is a delay in the enforcement of the security.

 ·  A recovery fund to be created towards at the time of issue of debentures that will be used by DTs for recovery

·  Proceeding expenses.

 

·  Value of fund= 0.01% of issue subject to maximum of 25 lakhs per issuer.

 

·  The same will not be applicable on ‘AAA rated’ bonds. However, in case of downgrading of rating, issuer will be obligated to create such fund.

·  Amount to be returned to the issuer at the time of maturity in case of no default.

 Implemented

1)      ILDS Amendment Regulation

The inserted regulation 26(7) of ILDS Regulations specifies that a recovery expense fund will be created in the manner specified by SEBI and also inform the DT about the same.

Amendment in schedule I to insert details of creation of recovery expense fund and the details and purpose thereof.

2)      DT Amendment Regulations

Duties of DTs to include ensuring the implementation of the conditions relating recovery expense fund under regulation 15(1)(h).

3)      Circular on Recovery fund

Details relating to creation, operation, maintenance and refund of the recovery fund has been specified.

 The statutory auditor should certify, besides the asset cover, that the recovery fund is being adequately maintained, and well demarcated from other general funds of the company.

 

 
Disclosures on the website by DTs
7) While the DT Regulations mandate various duties on DTs, investors are generally not aware of the monitoring by the DTs as well as the compliance status of issuers regarding covenants of the IM. DTs to be mandatorily required to provide minimum disclosures on their website viz. Quarterly compliance report, defaults by the issuer, compliance status of asset cover, maintenance of various funds by the issuer, status of proceedings of cases under default etc.

This would enhance transparency and hold the DTs responsible.

 Yet to be implemented The intention behind such disclosures is to promote transparency in the performance of DTs. Keeping the same in mind, SEBI should instruct issuers to provide the link of such website in the IM as well as annual report of the issuer, in addition to the disclosure of details of the DT  [as required under regulation 53(e) of LODR regulations] for the information of the investors.
Disclosures regarding Performance of DTs
8) There exists no performance indicators to enable investors to ascertain the performance of a DT. Disclosure to be made by DTs w.r.t. the following parameters to reflect their performance:

– timeliness of action taken

Monitoring of covenants

Effectiveness in enforcing securities or taking remedial actions in case of default, etc.

 Yet to be implemented ·       DTs should also report at prescribed intervals that they have monitored the asset cover in the prescribed duration, and have obtained auditor’s certificate, and in their independent assessment, there is no deterioration in the asset cover, both in terms of value and quality. In case, they have observed any deterioration, the same should be disclosed, and reported along with steps taken to rectify the same.
Public Disclosure of all covenants by the issuer in IM
9) ·       There are instances where issuers enter into separate agreements with debenture holders containing additional/ specific covenants that do not form part of the principal IM.

·       These agreements, known as ‘side letters’ contain an accelerated payment clause” which states that if the borrower violates the terms of the covenants, including default or

·       downgrade of debt, such lender is entitled to

·       demand immediate repayment.

·       Such clauses hamper the interests of the issuer as well as other lenders.

 ·     All covenants including the ‘accelerated payment clause’

·     Shall be incorporated in the IM.

·     Issuer to inform DT of such covenants for monitoring the same.

·     Also, para 3.11 states that the IM should disclose that it has no side letter with any debenture holder except as disclosed in the

·     IM and on the stock exchange website where the debt is listed.

 Implemented by the ILDS Amendment Regulations amended schedule I of the ILDS Regulations to include details of all covenants of the issue (including side letters, accelerated payment clause, etc. Instead of allowing side letter to be a part of the IM, the concept of side letter should be discouraged totally. All covenants should be there in the IM only.

The issuer should also be made to undertake in the IM that it has not signed any side letter and that all covenants as included in the IM are the only covenants agreed to by the issuer.
Standardization of Debenture Trust Deed (DTD)
10) A DTD consists of standard covenants as specified under DT Regulations and as per form SH-12 under Companies Act, 2013 as well as customized clauses specific to an issuer.

DTDs are lengthy and thus should be standardized to make them comprehensible and easy to read and understand.

 DTD to be bifurcated into two parts:

– Part A: generic and standard clauses common to all DTs.

– Part B: specific and customized clauses relevant to the particular issue for which the DTD is executed.

(same as per offer document of mutual funds)

 Implemented

1)      ILDS Amendment Regulations

Regulation 15(2) has been amended to provide that the trust deed shall consist of 2 parts:

a) Part A containing statutory/standard information pertaining

to the debt issue

b) Part B containing details specific to the particular debt issue

2)      DT Amendment Regulations

Regulation 14 amended to include that trust deed shall consist of 2 parts:

(same as ILDS Amendment Regulations)

 SEBI should provide clarity as to what clauses would fall under part B.
Enhanced Disclosures
11) Details about the terms of the debentures, duties of DTs and redressal mechanisms in case of default, are not known to the investors.

The investors thus are not fully aware of the risks undertaken while investing.

 

 In order to enhance transparency, the issuer is required to provide additional disclosures in the IM such as:

– A risk factor to state that while the debenture is secured against a charge to the tune of 100% of the principal and interest amount in favour of DT, the possibility of recovery of 100% of the amount will depend on the market scenario at the time of enforcement of security.

– That the issuer has no side letter

– Pari passu charge of the investors, etc.

 Partly Implemented

1) ILDS Amendment Regulations

Schedule I of the ILDS Regulations has been amended to include a note as to the risk factor.

 SEBI to also make necessary amendments in order enable inclusion of other disclosures as well.
Framework and Standard Operating Procedure(SOP) for imposing fines
12) There have been a lot of instances of non-co-operation of the issuers as well as violations of the LODR Regulations by the issuer. Actions and adjudication proceedings initiated in this regard by the DT, usually take up a lot of time and the, non-compliance may continue during such proceedings as well. An SOP to be prepared that would list out penalties for specific violations by the issuer.

This would enable better compliance and co-operation on the part of the issuer.

 Yet to be implemented –

Points for consideration:

There are certain issues in the Consultation Paper that if not thought through would pose various complications in their implementation.

1) Creation of charge on identified assets

The Consultation Paper aims to discourage floating charge on the entire balance sheet and requires that debentures are to be secured by way of a charge on identified assets which would include identified receivables, investment and cash. Further, the debentures would be considered secured only if the charge is created on identified assets of the NBFC.

The rationale for the above is that, unlike other Companies where there are fixed charges created, NBFCs usually create a floating charge in favour of lenders. The problem arises when all such lenders are secured by way of pari passu charge on the entire receivables of the NBFC. The same leads to lack of identified/ specific security interest for each lender leading to difficulty in the enforcement of the same. Further, there is a change that the higher quality assets are handed over to banks and other major lenders, leaving only the sub-par assets in favour of the debenture holders.

Our comments:

Receivables are floating assets and are dynamic in nature. The intention of SEBI is to mandate NBFCs to create a pool of assets as identified asset towards secured debentures. Thus, creating a demarcated pool of receivables as security interest in debentures would not be possible as the pool would still keep fluctuating due to various transactions such as repayment, prepayments and default.

Thus, even if there is an identified pool created, the same would still be a floating charge due to various fluctuations.

In our view, the approach adopted by the Consultation Paper is akin to covered bonds where there is a pool of assets (identified assets) monitored by a pool monitor (DT). Hence it is suggested that SEBI gives recognition to covered bonds.

Amendment under IBC:

Currently, IBC does not make any express distinction on the basis of floating or fixed charge, and both such charges are treated as secured debentures in the waterfall under IBC. However, flaoting charges are subservient to fixed charges. Thus, an amendment would be required under IBC regarding the same.

The above recommendation is still required to be implemented

2) Joining the ICA by the DTs on behalf of the debenture holders

Firstly, the ICA applies to institutional investors alone. Hence debenture holders that would fall under the above category would only be allowed to be a part of such ICA.

Secondly, the rights of debenture holders also depend on the nature of the charge- when the same is exclusive or pari passu. It is only when the rights are par passu that the debenture holders will be required to be a part of the ICA.

The recommendations under the Consultation paper have been implemented by the SOP for DTs wholly.

The provisions relating to the same allow a way-out to the DTs in various circumstances and exit the ICA altogether, for instance, if the resolution plan is not in accordance with SEBI regulations, if terms of ICA are contravened by any party, if the resolution plan is not finalized within 180 days from the review period (with an extension upto 365 days). Under these circumstances, if the DT exits the CIA it will treated as if it never entered the ICA and the same will not be binding.

Now the above leads to various problems:

  • If the DT will be treated as exiting the ICA altogether, would that mean that DT could now take independent action? Since the language used is ‘ it will be treated as if the DT never entered the ICA’. [Lenders as party to the ICA, along with dissenting lenders, are prohibited from initiating any other legal action/ proceeding against the borrower, including proceedings under IBC]
  • If the DT initiates insolvency proceedings under IBC, how will the lenders be a part of the committee of creditors since they are barred from taking any other action?
  • How would the DT enforce security that is equally in favour of the other lenders as well?
  • In case of joint financing of a secured asset, consent of a minimum of 60% (in value) of creditors is required under SARFAESI to initiate enforcement action. Therefore, the debenture holders may not be having a practical solution by exiting the ICA.
  • Lastly, resolution of an entity is a collective process, and the process might require collective compromises as well. If creditors are provided exceptions, it is difficult to find success of either of the proceedings. Individual actions against the company can erode the asset base to the prejudice of the Company.

3) Certification of covenants under the asset cover certificate

As per regulation 56(1)(d) of the amended SEBI LODR Regulations,

The listed entity shall forward the following to the debenture trustee promptly

(d) a half-yearly certificate regarding maintenance of hundred percent asset cover or asset cover as per the terms of offer document/Information Memorandum and/or Debenture Trust Deed, including compliance with all the covenants, in respect of listed non-convertible debt securities, by the statutory auditor, along with the half-yearly financial results:

Thus the question arises as to what does ‘including compliance with all the covenants’ mean and what kind of covenants are required to be certified.

As per the rationale provided under the Consultation Paper and Discussion (Agenda) in the SEBI Board Meeting dated 29th September, 2020

  1. Consultation paper:

(i) Requirement for the asset cover certificate falls under the head ‘Due diligence and monitoring of asset cover by DT’ in the consultation paper;

(ii) As per para 3.2.2 of the consultation paper,

Point c- Issuer shall disclose the covenants of maintaining the quality of assets, conditions of replacing the bad/ delinquent assets in IM and DTD to create transparency and reduce the information gap regarding the covenants of the charge creation and the process thereafter.

Point d-The asset cover shall also certify the compliance with all the covenants mentioned in the IM or DTD, as applicable.

Thus, both the above points should be read in conjunction.

  1. SEBI Board Meeting dated 29th September, 2020

(i) Also reference should be made to paras 9.2.2, 9.2.3, 9.2.6, 9.2.7, 9.2.8 of the Agenda of the Board Meeting.

(ii) As per para 9.2.6, However, certain types of undertakings in support of creation of charge such as personal guarantee, negative lien are not registered with any independent agencies and hence there exists the issue of verification of such undertakings. Therefore, disclosures with respect of these undertaking need to be made in the offer document/ Information Memorandum.

Amended regulation 56(1)(d)- a half-yearly certificate regarding maintenance of hundred percent asset cover or as per the terms of offer document/ Information Memorandum including compliance with all the covenants, in respect of listed non-convertible debt securities, by the statutory auditor, along with the half-yearly financial results.

Our view:

Thus, on a holistic reading, it is observed that SEBI intends to monitor the quality of the charged asset. For the same, SEBI has instructed issuers to include undertakings i.e. covenants, in support of creation of charge such as personal guarantee, negative lien in the offer document/ IM/ DTD and compliance with such covenants needs to be ensured. Thus, ‘including compliance with all covenants’ under the amended regulation 56(1)(d) should be read in reference to maintenance of asset cover.

Therefore, statutory auditors will be required to only certify those covenants that revolve around the asset cover of debt securities.

Conclusion

SEBI has focused in strengthening the role of DT in case of default by issuers of listed debt securities. Thus, the measures as stated above are truly in the right direction and would help in easing the strained enforcement of rights of debenture holders. While most of the measures are a welcome moves, there are some moves that may be too ambitious and would definitely require thorough consideration.

Our write-up/video can be accessed below:

1. SEBI responds to payment defaults by empowering Debenture Trustees:

http://vinodkothari.com/2020/10/sebi-responds-to-payment-defaults-by-empowering-debenture-trustees/

2. This New Year brings more complexity to bond issuance as SEBI makes it cumbersome

http://vinodkothari.com/2020/11/sebis-new-year-gift-to-dts-and-issuers-makes-issue-of-secured-debentures-cumbersome/

3. Youtube Channel:

https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

4. Other write-ups:

http://vinodkothari.com/category/corporate-laws/

[1] http://vinodkothari.com/2020/11/sebis-new-year-gift-to-dts-and-issuers-makes-issue-of-secured-debentures-cumbersome/

[1] https://www.sebi.gov.in/reports-and-statistics/reports/feb-2020/consultation-paper-on-review-of-the-regulatory-framework-for-corporate-bonds-and-debenture-trustees_46079.html

[2] http://egazette.nic.in/WriteReadData/2020/222323.pdf

[3] http://egazette.nic.in/WriteReadData/2020/222324.pdf

[4] http://egazette.nic.in/WriteReadData/2020/222322.pdf

[5] https://www.sebi.gov.in/legal/circulars/oct-2020/standardisation-of-procedure-to-be-followed-by-debenture-trustee-s-in-case-of-default-by-issuers-of-listed-debt-securities_47855.html

[6] https://www.sebi.gov.in/legal/circulars/oct-2020/contribution-by-issuers-of-listed-or-proposed-to-be-listed-debt-securities-towards-creation-of-recovery-expense-fund-_47939.html

[7] https://www.sebi.gov.in/legal/circulars/nov-2020/creation-of-security-in-issuance-of-listed-debt-securities-and-due-diligence-by-debenture-trustee-s-_48074.html

FAQs on restructuring of securitised loans

/0 Comments/in , , /by

– Kanakprabha Jethani, Ass. Manager

(finserv@vinodkothari.com)

Background

The first half of this financial year came with lots of schemes to “apparently” support the financial sector during this time of crisis starting from moratoriums, restructuring, interest subvention and so much more. All these schemes were then adorned with an extension of their time limits, so much that at one point the borrower would altogether tend to forget he has an outstanding liability with some lender.

While the credit risk is an issue lenders cannot ignore, they also cannot ignore the fact that a huge chunk of their borrowers are not going to or will not be able to pay. Considering this, they are bound to allow moratoriums and offer restructuring benefits to them.

A lending transaction is between the lender and the borrower. Providing benefits such as moratorium, restructuring etc. is a matter of agreement between the two. However, in certain cases where there is an involvement of external parties, such as in the case of securitisation or direct assignment of a loan pool, practical dfficulties may arise.

The following FAQs intend to answer the basic questions regarding providing the restructuring benefit to borrowers of loans that have been securitised/assigned by the originator.

Stage1: While contemplating the decision to provide benefit of the schemes

1.     Can the originator provide such benefit?

The originator retains/invests in a very small portion of the portfolio. The rest of it is sold off to the assignee/SPV. The moment an originator sells off the assets, all its rights over the assets stand relinquished. However, after the sale, it assumes the role of a servicer. Legally, a servicer does not have any right to confer any relaxation of the terms to the borrowers or restructure the facility.

Therefore, if at all the originator/ servicer wishes to extend moratorium to the borrowers, it will have to first seek the consent of the investors or the trustees to the transaction, depending upon the terms of the assignment agreement.

On the other hand, in the case of the direct assignment transactions, the originators retain only 10% of the cash flows. The question here is, will the originator, with a 10% share, be able to grant moratorium? The answer again is No. With just 10% share in the cash flows, the originator cannot suo-moto grant moratorium, hence, approval of the assignee has to be obtained.

2.     Is approval of investors required?

As discussed above, when an asset is securitised/assigned, the investor becomes the ultimate owner of the asset to the extent of his/her investment in the said asset. Hence, any change in the terms of the loan impacts the rights/liabilities of such investors. Hence, the investors, being the actual owners of the asset, must agree to offer the benefit of any restructuring, moratorium etc.

As for schemes which provide an additional/separate credit facility to the existing borrower such as ECLGS scheme[1], such facilities are treated as separate facilities and are not linked with the existing loans (the one which is securitised). Hence, in such cases, the approval of the investor or trustee shall not be required. However, it is recommended that a NOC is obtained from the investor or trustee to the effect that the originator is providing the additional funding based on the existing lending exposure on the borrower.

3.     How will the approval be obtained ?

The investors may decide on the manner of providing approval. The originator, in the capacity of the investor (to the extent of retention in the transaction), may propose and initiate the process and obtain approval of other investors.

4.     Is it mandatory for the investor to approve?

The investors, like in any other investment, has the right to consider their benefits and losses and accordingly decide on whether to approve. Further, investors may also give conditional approvals, say a change in payout structure, alteration of interest rate etc., considering the increased risk and the fact that investor is, for the time being, foregoing its returns.

5.     What happens if investors do not agree?

In case the investors do not agree, no benefit of restructuring/moratorium can be provided to the borrower. But, considering the liquidity crunch in the economy, it is very likely that the borrower will fail to pay the loan instalments, thereby resulting in reduced cashflows from the borrower. However, in case the investors did not agree to grant restructuring benefits and amend the payout structure, they will have to be paid. This would call for the credit support to be utilised. Over time, when credit enhancement is utilised, the rating of the PTCs may be downgraded.

6.     What happens if investors agree?

In case the investors agree for providing the benefit to the borrower, the same shall come be put into effect by a revision in payout structure for the investors. The payout structure will be revised as per the terms of restructuring or moratorium as the case may be.

7.     What happens with the remaining investors if the majority  agrees?

The assignment agreement usually provides the nature of approval required to amend the payment terms- either majority or else 100% of the investor, either in number or in value (usually 100%). Hence, in case the majority has agreed, the rest of the investors shall have to bear the outcome of moratorium/restructuring.

Implementation stage:

8.     What will be the immediate impact on investors agreeing to provide the benefit?

When the investors agree for providing any such benefits, they simultaneously agree for an added arrangement concerning the payout structure. Hence, the immediate impact shall be on the cashflows arising out of the underlying assets.

9.     What will be the impact on the agreed payout structure?

The payouts may be reduced or deferred or structured in any other way as per the restructuring terms.

10. Can the investors in a securitisation transaction agree for moratorium/restructuring but not for reschedulement or recomputation of payout structure?

In case the investors agree for moratorium/restructuring, such approval would inherently come with reschedulement or recomputation of the payout structure. This is because, if moratorium/restructuring benefit is provided, the cashflows on the underlying asset would be impacted. This, in turn, would affect the cashflows in the securitisation transaction. Hence, when agreeing to provide the benefit to the borrower, investors must bear in mind that there would be a simultaneous change in their payout structure as well.

11. Can the credit enhancements be used to make payments to the investors in case they have agreed to provide the benefit?

Credit enhancements are utilised usually when there is a shortfall due to credit weakness of the underlying borrower(s). In case the investor have agreed for the restructuring, consequently the payout structure must have also been revised and hence, avoiding any default leading to utilisation of the credit enhancement. Irrespective of granting the restructuring benefit,  if there is still default, though credit enhancements can be utilised, however, it will reduce the extent of support, weaken the structure of the transaction and may lead to rating downgrade.

12. What will be the impact on the rating of the transaction?

Usually, any delays in payout, defaults etc. lead to a downgrade in the rating of the transaction. However, here it is important to consider that in a securitisation or a direct assignment, the transaction mirrors the quality of the underlying pool. Now, in case of moratorium, there will be a standstill on asset classification and in case of restructuring, the asset classification will be upgraded to standard. Hence, there is no impact on the credit quality of the underlying asset.

If the credit quality of the loans remain intact, then there is no question of the securitisation or the direct assignment transaction going bad. Therefore, we do not see any reason for rating downgrade as well.

Further, the SEBI had on March 30, 2020, issued a circular[2] directing rating agencies to not consider delays/defaults caused due to COVID disruption, as a default event for the purpose of rating.

After implementation:

13. What will be the impact in the books of the investor?

In case of securitisation, the income will be booked by the investor as per the revised payout structure. In case of direct assignment, the assignee shall take the impact of restructuring in its books. Say, in case there is a reduction in interest rate, the asset must be booked at such revised interest rate in the books.

14. What will be the impact on asset classification and provisioning for such loans?

In case of moratorium, the asset classification will be on a standstill for the period for which moratorium is granted. After the moratorium period is over, the asset classification as per IRAC norms shall be applied. Further, as per the RBI guidelines for moratorium[3], additional provisions shall be required to be maintained.

In case of restructuring, the asset classification shall be on the revised loan, as per the IRAC norms.

15. Who will be required to maintain additional provisions?

Usually, investors maintain provisions corresponding to the PTCs held by them. The asset classficiation and provisioning is done on the basis of payout from such PTCs. Similarly, any additional provision that is required to be maintained, shall be maintained by the investor corresponding to the value of PTCs held.

Further, in the case of DA,both the assignee and assignor shall maintain the provisions, in their respective share of interest in the loan.

16. Suppose, after restructuring, the borrowers still fails to pay as per the restructured terms, what will be the impact on the rating?

In case the borrower fails to repay as per the restructured terms, it is a case of default beyond the moratorium/restructuring allowed by the RBI. This would result in a downgrade in the quality of the underlying asset. Hence, it is quite probable that the rating of the transaction may downgrade.

17. In case there is a rating downgrade, can the size of classes/tranches be changed?

The prime motivation for tranching a securitisation transaction is to obtain high rating for atleast a part of the transaction. Hence, the upper class, say class A, gets the maximum amount of credit support and is sized in a manner that it is able to get superior rating.

Now, when there is a threat of rating downgrade, the size of classes/tranches cannot be changed to maintain the rating. It is crucial to consider that the rating is allotted based on the structure of the transaction and not the other way round.

Hence, if at all, the originator intends to maintain the rating to the transaction, it may introduce further credit support to the transaction, but the size of classes should not be changed.

_____________________________________________________________________________________________________________________________________

[1] Refer our write-up on http://vinodkothari.com/2020/05/guaranteed-emergency-line-of-credit-understanding-and-faqs/

[2] https://www.sebi.gov.in/legal/circulars/mar-2020/-relaxation-from-compliance-with-certain-provisions-of-the-circulars-issued-under-sebi-credit-rating-agencies-regulations-1999-due-to-the-covid-19-pandemic-and-moratorium-permitted-by-rbi-_46449.html

[3] Refer: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11872&Mode=0

Samagrata-October,2020

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Schemes of Arrangement under the Scanner

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Listed Companies made subject to stricter scrutiny and multilevel approvals

-Megha Mittal

(mittal@vinodkothari.com)

With the objective of empowering the stock exchanges and streamlining the processing of draft schemes filed with the stock exchanges, the Securities and Exchange Board of India has issues a Circular dated 3rd November, 2011[1] (“Amendment Circular”) thereby amending the Circular dated March 10, 2017[2] (“March, 2017 Circular”) which lays down the framework for Schemes of Arrangement by listed entities and relaxation under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957.

The Amendment Circular shall be effective for scheme submitted to the Stock Exchange after 17th November, 2020 and for those companies which are either listed, seeking to be listed or awaiting trading approval after 3rd November, 2020.

Schemes of Arrangement is unarguably a material event for the listed company, and as such, optimum transparency, disclosure by the company, coupled with stringent checks by the Committees, viz Audit Committee and Committee of Independent Directors, becomes a very crucial factor for decision making by the shareholders.

The Amendment Circular primarily aims at ensuring that the recognized stock exchanges refer draft  schemes  to  SEBI  only  upon  being fully convinced that the listed entity is in compliance with SEBI Act, Rules, Regulations and circulars issued thereunder. While the amendments introduced, bring to light the tenet of the regulatory bodies to ensure higher levels of transparency and disclosures with respect to the proposed schemes, there also seems to be an underlying tone of stress and responsibility that has been imposed on the Audit Committee and Independent Directors to assess the viability of the proposed Schemes.

In this article, the author has given a detailed comparison of the provisions, before and after the Amendment Circular, along with comments on the same.

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This New Year brings more complexity to bond issuance as SEBI makes it cumbersome for DTs and Issuers

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Due diligence, consents/NOC, Charge creation before listing coupled with mandatory listing deadline may be daunting compliance

FCS Vinita Nair | Senior Partner, Vinod Kothari & Company

When the going gets tough, the tough gets going; however, this may not hold good for issuers and debenture trustees (DT) in case of secured debentures intended to be issued and listed on or after January 1, 2021. SEBI, vide Circular dated November 3, 2020[1] (‘November 3 Circular’), has rolled out norms on several aspects of security creation and due diligence of asset cover in furtherance to the recent amendment made in ILDS Regulations[2] and DT Regulations[3] w.e.f. October 8, 2020. Among other things, the November 3 Circular requires creation of security interest before listing, and if one combines it with the standardization of timeline for listing of securities issued on private placement basis (effective from December 1, 2020) which requires application for listing to be made within 4 trading days of closure of issue, issuers will be fighting for breath in making listing applications on allotment. Additionally, DTs have been loaded with the responsibility of giving two certifications giving their affirmation of due diligence, mainly dealing with security cover creation and maintenance. One forms part of the disclosure document, another is to be submitted along with the listing application.

The inspiration for the changes is not difficult to understand – some of the recent defaults with financial sector issuers saw violations of asset cover norms and potential overlaps in assets for multiple issuances. However, it will be curious to see whether the revised norms will be easy to comply, given the fact that most of the issuances in India are from the financial sector, and the assets in all such cases are a fluid pool of receivables.

The November Circular deals with following:

  1. Documents/ Consents required at the time of entering into DT agreement;
  2. Due diligence by DT for creation of security;
  3. Disclosures in the offer document (OD) or Private Placement Memorandum (PPM)/ Information Memorandum (IM) and filing of OD or PPM/ IM by the Issuer
  4. Creation and registration of charge in relation to security by Issuer.

Thereafter, on November 13, 2020 SEBI issued circular on Monitoring and Disclosures by DT[4] (November 12 Circular) that is effective from quarter ended on December 31, 2020 for listed debt securities. The November 12 Circular deals with following:

  1. Monitoring of ‘security created’ / ‘assets on which charge is created’;
  2. Action to be taken in case of breach of covenants or terms of issue;
  3. Disclosure on website by DT;
  4. Reporting of regulatory compliance

This article discusses the impact that the both the aforesaid circulars will have on issue of secured debentures. The November Circular is applicable in case of public issue as well as private placement of debt securities. Having said this, it is well known fact that the market in India is essentially a market for private placements, mostly bespoke, mostly secured on loans and receivables.

Information to be provided at the time of entering DT Agreement

DT Agreement is entered into by the issuer with the DT in accordance with Regulation 13 of DT Regulations before the opening of the subscription list for issue of debentures. The agreement mainly contains an undertaking in relation to compliance with applicable law for allotment till redemption of debentures and the time limit within which the security shall be created. However, the November 3 Circular mandates furnishing of following documents by the issuer at the time of entering into DT Agreement. Additionally, the terms and conditions with respect to exercising due diligence shall also be included in the debenture trustee agreement.

The detailed list to be furnished is given in Annexure 1. Basis the nature of security, the DT is required to submit details periodically to the stock exchange as per November 12 Circular. Certain critical issues are discussed hereunder.

  1. In case of security created on moveable/ immoveable property, the issuer is required to give copy of evidence of registration with Sub-registrar, Registrar of Companies, Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) etc even prior to issuance of debentures. [Para 4.1 of November 3 Circular].
  2. Further, in case of encumbered assets, Consent/ No-objection certificate (NOC) from existing charge holders. [Para 4.3(b) of November 3 Circular]. In several cases, issuers have common DT for all issuances and the charge is created in favour of DT. There should be suitable carve out or exemption in those cases as the DT cannot be furnishing Consent/ NOC to itself.
  3. In case of negative lien created by issuer, Consent/NOC is required to be obtained from existing unsecured lenders [Para 4.3(c) of November 3 Circular]. By definition, if the creditor is unsecured, there is no question of the creditor having any right over any asset. Hence, the question of any consent of unsecured lenders does not arise. In case of negative lien, the issuer agrees to keep the agreed quantum of assets free from encumbrance, therefore, the requirement of seeking consent/NOC is not justified.
  4. In case of corporate guarantee, the guarantor is required to furnish audited financial statements (not older than 6 months from the date of debenture trustee agreement) giving details of all contingent liabilities [Para 4.3(c) of November 3 Circular]. The issuers intending to list debt securities are permitted to submit limited reviewed financial results and not necessarily audited financial statements. However, the guarantor is required to furnish latest audited financial statements.

Submission of periodic reports by DT to Stock Exchange (SE)

As per November 12 Circular, the DT is required to submit following to the SE for every issuer.

Periodicity Nature of submission Timeline Format Remarks
Quarterly
  • Asset Cover Certificate;
  • Statement of value of pledged securities;
  • Statement of value of Debt Service Reserve Account or any other form of security offered;
 Within 60 days from end of each quarter Annexure A to November 12 Circular
  • Details of all outstanding issuance is to be furnished.
  • Asset cover details to be furnished ISIN wise for secured as well as unsecured debt securities.
  • Formula for computation of asset cover has been provided in Table I for secured debt and Table II for unsecured debt in November 12 Circular.
  • The DT will also confirm compliance on the covenants and terms of issue.
Half yearly Net worth certificate of guarantor (in case of personal guarantee) Within 60 days from end of each half year NA  
Annually
  • Financials/ value of guarantor prepared on basis of audited financial statement etc. of the guarantor (secured by way of corporate guarantee)
  • Valuation report and title search report for immoveable/ moveable assets, as applicable.
 Within 75 days from end of each financial year. NA  

Enabling provision in DTD

As per November 12 Circular, the DT is required to incorporate the terms and conditions of periodical monitoring in the DTD pursuant to which the issuer will be liable to share information to enable DT to submit details to the stock exchange as provided in table above. For existing debt securities, issuers and DT shall enter into supplemental/amended debenture trust deed within 120 days from November 12 2020 incorporating the changes in the DTD.  In  case,  a  listed  entity  has  more  than  one  DT  for  its  listed  debt securities, then DTs may choose a common agency for preparation of asset cover certificate.

Due diligence by DT for creation of security

The due diligence may be carried out by the DTs by itself or through its advisers or experts. The DT, by itself or through its appointed agencies viz. chartered accountant firm, registered valuer, legal counsel etc., is required to prepare one or more reports viz. valuation report, ROC search report, title search report/ appraisal report, asset cover certificate, any other report/ certificate as applicable etc. The DT is also required to independently assess that the assets for creation of security are adequate for the proposed issue of debt securities. DTs are required to maintain records and documents pertaining to due diligence exercised for a minimum period of 5 years from redemption of the debt securities.

List of documents to be verified during due diligence and the format of due diligence certificate in given as Annexure 2. Certain issues in relation to the same is discussed hereunder:

  1. There is no clarity on who is to bear the cost of due diligence. If the same is to be borne by the issuer, the issue expense will increase. The issuer will be required to provide due diligence certificates obtained from DT, one at the time of filing the OD or PPM/IM and another at the time of filing the listing application.
  2. In case of creation of further charge on assets, the DT is required to intimate to existing charge holders via email about the proposal to create further charge on assets by Issuer seeking their comments/ objections, if any, to be communicated to the DT within next 5 working days. [Para 6.1 (b) (ii) of November 3 Circular]. Further, information about the consents is required to be furnished in the OD or PPM/IM.

In several cases, issuers have common DT for all issuances and the charge is created in favour of DT. There should be suitable carve out or exemption in those cases as the DT cannot be intimating and seeking its own comments/objections.

In case of private placement, where the issue opens, closes and debentures are allotted on same day, the process will have to be commenced much before opening of offer, given the requirement to wait for 5 working days.

Disclosure in OD or PPM/IM by issuer

The issuer is required to disclose following in the OD or PPM/IM:

  • “Debt securities shall be considered as secured only if the charged asset is registered with Sub-registrar and Registrar of Companies or CERSAI or Depository etc., as applicable, or is independently verifiable by the debenture trustee.”
  • Terms and conditions of DT agreement including fees charged by debenture trustees(s), details of security to be created and process of due diligence carried out by the debenture trustee;
  • Due diligence certificate (To be furnished at the time of filing OD or PPM/IM)

Creation of security

The November 3 Circular mandates creation of charge prior to listing. Due diligence certificate confirming execution of DTD and creation of charge is required to be furnished along with listing application.

The November 3 Circular, further mandates registration of charge within 30 days of creation. Failure to register the charge within 30 days of creation (as opposed to 120 days permitted under Act, 2013) will be considered as breach of covenants/terms of the issue by the Issuer.

What will be the consequence of breach of covenant? Whether it will deemed as an event of default requiring redemption? In our view, this may not be required. As per November 12 Circular, in case of breach of covenants or terms of the issue by listed entity, the DT shall  take  steps  as  outlined  in  para  6.1  and  6.3  of  SEBI  Circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/203 dated October 13, 2020[5] (October Circular). Para 6.1 and 6.3 of the October Circular mandates DT to send notice to investors within 3 days of event of default and convene meeting of the investors within 30 days of the event of default. The DT shall thereafter take necessary action as decided in the meeting of holders of debt securities in this regard. One needs to ascertain if meeting of debenture holders is relevant for delay in creation of charge.

As evident from the format of certificate given at the time of listing, the DTD is required to be executed before listing (as opposed to 3 months from the date of closure of an issue or an offer under ILDS Regulations and CA, 2013)

Disclosure on website by DT

The consultation paper provided for certain mandatory disclosures to be made by DT on the website. The November 12 Circular provides list of disclosures to be made along with the format prescribed in Annexure B thereto.

Disclosure prescribed in Consultation Paper Disclosure required to be made as per November 12 Circular Periodicity and Timeline Information to be furnished as per the format prescribed
Quarterly Compliance Reports received from the issuers Monitoring of Asset cover certificate and  Quarterly  compliance  report  of the listed entity Quarterly basis. Within 60 days of end of each quarter.
  • Confirmation about receipt of periodical status/ performance report from listed entity to be provided;
  • Information about utilisation certificate, asset cover certificate and asset cover ratio maintained is required to be furnished.
Compliance status on the receipt of asset cover from the issuers, maintenance of various funds by the issuers Covered above    
Defaults by the company Status of information regarding any default  by  listed  entity  and  action taken by debenture trustee Annually. Within 75 days of end of financial year. Details of default, date of intimating and sending notice to debenture holders, results of voting, date of meeting, date of enforcement, date of other actions viz. joining ICA, appointment of nominee director etc to be furnished.
Status of the proceedings of the cases under default Covered above    
Compliance status of each covenant-issue wise on a half yearly basis Status  of  information  regarding breach  of  covenants/terms  of  the issue,  if  any  action  taken  by debenture trustee Half yearly basis. Within 60 days of end of each half year. Details of covenants/ terms of issue breached during HY, details of security to be enforced, date of actual breach, detecting the breach and date of intimation to debenture holders, SE, SEBI etc to be provided.
– Revision in Credit ratings Continuous    basis within  T+1  day  from receipt of information Details of immediate previous credit rating and revised credit rating, along with hyperlink of the press release of the CRA to be furnished.
– Status  of  payment  of  interest/ principal by the listed entity Continuous    basis within  T+1  day  from receipt of information Status of Payment (Default / Delayed / Non-Cooperation, No Information etc. to be furnished along with date of information given to SE and CRA by DT and other actions taken by DT.
– Details of Debenture issues handled by debenture trustee and their status Half yearly basis. Within 60 days of end of each half year. Details of issues accepted during HY, issues fully redeemed during HY, issues outstanding during HY and cumulative issue handled during HY to be furnished.
– Complaints  received  by  debenture trustee(s) including default cases Half yearly basis. Within 60 days of end of each half year. Details of complaints pending prior to, received during, resolved during and pending at the end of half year to be furnished.
  Status  regarding  maintenance  of accounts    maintained    under supervision of debenture trustee Annually. Within 75 days of end of financial year. Details of maintenance of DRR, DRF, recovery expense fund, Accounts/ funds in case of municipal debt securities to be provided.
  Monitoring of Utilization Certificate Annually. Within 75 days of end of financial year. Information about utilisation certificate furnished on quarterly basis while monitoring asset cover.

Tough time ahead

As per SEBI Circular dated October 5, 2020[6] effective for issuance made on or after December 1, 2020, listing of private placement will be required to be done within 4 trading days from closure of issue, failing which, the issuer will not be able to utilize issue proceeds of its subsequent two privately placed issuance until final listing approval is received from stock exchanges and penalty will be separately payable. Given the procedural compliances given in the November Circular, it will be challenging for the issuer as well as DT to achieve the timeline.

While, SEBI has rolled out stringent norms for issue and listing of secured debentures, one will have to see how equipped the DTs are to carry out the due diligence and ensure adherence by issuer to these stringent timelines, given the quantum of secured debt issuance done by various issuers. Additional compliances imposed on the DT in terms of November 12 Circular will further add actionables for the DT and also on the issuers as the said information will be required to be furnished by the issuer. Disclosures regarding performance of the DTs, as was proposed in the consultation paper, has not been enforced yet.

In view of increased complexity in issuance of secured debentures, Corporates may consider opting for unsecured debt issuances. Further, Issuers and DTs will have to pull up socks to comply with several actionables lined up this New Year.

 

Annexure 1

Sr. No. Nature of securities extended by Issuer Information/Documents required to be furnished to Debenture Trustee
1. Movable property and Immovable property
  • Details of assets 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.
2. Unencumbered assets
  • An undertaking that the assets on which charge is proposed to be created are free from any encumbrances.

 
3. Encumbered assets Following consents along-with their validity as on date of their submission:

  • 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;
  • 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;
  • Consent/ NOC from existing unsecured lenders, in case, negative lien is created by Issuer in favour of unsecured lenders.
4. Personal guarantee or any other document/ letter with similar intent
  • Details of guarantor viz. relationship with the Issuer;
  • Net worth statement (not older than 6 months from the date of debenture trustee agreement) certified by a chartered accountant of the guarantor;
  • List of assets of the guarantor including undertakings/ consent/ NOC as mentioned in Sr. No. 2 and 3 above;
  • Conditions of invocation of guarantee including details of put options or any other terms and conditions which may impact the security created;
  • Executed copies of previously entered agreements for providing guarantee to any other person, if any.
5. Corporate guarantee or any other document/ letter with similar intent
  • Details of guarantor viz. holding/ subsidiary/ associate company etc.;
  • Audited financial statements (not older than 6 months from the date of debenture trustee agreement) of guarantor including details of all contingent liabilities;
  • List of assets of the guarantor along-with undertakings/ consent/ NOC as mentioned in Sr. No. 2 and 3 above;
  • Conditions of invocation of guarantee including details of put options or any other terms and conditions which may impact the security created;
  • Impact on the security in case of restructuring activity of the guarantor;
  • Undertaking by the guarantor that the guarantee shall be disclosed as “contingent liability” in the “notes to accounts” of financial statement of the guarantor;
  • Copy of Board resolution of the guarantor for the guarantee provided in respect of the debt securities of the Issuer;
  • Executed copies of previously entered agreements for providing guarantee to any other person, if any.
6. Securities such as equity shares etc.
  • 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.
7. Any other form of security
  • Debt Service Reserve Account etc.

Table 1: Information/Documents required to be furnished to Debenture Trustee

Annexure 2

The due diligence w.r.t. creation of security shall inter-alia include the following:

Nature of Security and things required to be verified by DT Manner of verification
1.  Assets provided by the issuer for creation of security are:

a.  free from any encumbrances; or

b.  necessary permissions or consents has been obtained from existing charge holders

 

 1.  Verify from Registrar of Companies, Sub-registrar, CERSAI, IU or other sources where charge is registered/disclosed as per terms.

2.  In case where existing charge holders have given a conditional consent/ permission to the issuer to create further charge on the asset, DT will be required to verify following:

a.  Verify whether such conditional consent/ permission given to issuer by existing charge holders is valid as per terms of transaction documents;

b.  Intimate to existing charge holders via email about the proposal to create further charge on assets by Issuer seeking their comments/ objections, if any, to be communicated to the DT within next 5 working days.
2.  Personal guarantee, corporate guarantee and any other guarantees/form of security. Verify from relevant filings made on websites of MCA, Stock Exchange(s), CIBIL, IU etc. and obtain appraisal report, necessary financial certificates viz. from the statutory auditor in case of corporate guarantee, certificate from Chartered Accountant in case of personal guarantee, as applicable, of the guarantor/ issuer.

Table 2: Due diligence by DT at the time of creation of security

 

Contents of due diligence certificate

To be furnished at the time of filing OD or PPM/IM To be furnished at the time of filing listing application
  • Adequate provision has been made to provide adequate security for the debt securities to be issued;
  • Issuer has obtained necessary permissions/consents for creation of security, further charge;
  • Issuer has made all relevant disclosures, including all covenants proposed to be included in OD or PPM/IM.
  • Issuer has given an undertaking that charge shall be created in favour of DT.
  • The issuer has created charge over its assets in favour of DTs;
  • The issuer has executed Debenture Trust Deed (DTD) and DT agreement;
  • The issuer has given undertaking for registration of charge within 30 days of creation.

Table 3: Contents of Due diligence certificate to be furnished by DT

 

[1] https://www.sebi.gov.in/legal/circulars/nov-2020/creation-of-security-in-issuance-of-listed-debt-securities-and-due-diligence-by-debenture-trustee-s-_48074.html

[2] SEBI (Issue and Listing of Debt Securities) Regulations, 2008

[3] SEBI (Debenture Trustees) Regulations, 1993

[4] https://www.sebi.gov.in/legal/circulars/nov-2020/monitoring-and-disclosures-by-debenture-trustee-s-_48159.html

[5] https://www.sebi.gov.in/legal/circulars/oct-2020/standardisation-of-procedure-to-be-followed-by-debenture-trustee-s-in-case-of-default-by-issuers-of-listed-debt-securities_47855.html

[6] https://www.sebi.gov.in/legal/circulars/oct-2020/standardization-of-timeline-for-listing-of-securities-issued-on-a-private-placement-basis_47790.htm

 

Other reading materials on the similar topic:

  1. ‘SEBI responds to payment defaults by empowering Debenture Trustees’  can be read here
  2. Our other articles on various topics can be read at: http://vinodkothari.com/

Email id for further queries: corplaw@vinodkothari.com

Our website: www.vinodkothari.com

Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

 

Workshop on Scheme for grant of ex-gratia payment of the differential interest

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While compound interest is the unquestionable reality of the world of banking and finance, somehow, courts have always been disapproving of the idea of “interest on interest”. After months of litigation in the Apex Court and a lot of confusion surrounding interest on interest being charged by the lenders on loan accounts whose payments were deferred under the moratorium scheme, the Central Government (CG), on October 23, 2020, introduced a Scheme for grant of ex-gratia payment of the difference between compound interest and simple interest, whereby the lenders will refund the differential interest, that is, difference between compound interest and simple interest during the 6 month period starting 1st March, 2020. The same will be taken over by the CG.

We intend to discuss the intricacies of the said scheme in this workshop (details provided below):

Date: 30th October, 2020 at 5.00 pm, IST. Will run for about 90-120 mins.

Where: On the internet, via Zoom Meetings

Please note that the webinar has a maximum capacity of 100, including the host, and entry is on first-come-first-enter basis.

Whether interactive?

Yes. Participants may post queries, either in advance or at the time of workshop. Participants may, based on feasibility, also be allowed to speak.

Fees: The fees for the workshop shall be INR 1000 per participant exclusive of GST (payable in advance).

For registration: Click on this link and fill the form- https://docs.google.com/forms/d/e/1FAIpQLSe2Y8sT9N5AVkjTu7fC5l-D2lubfiYJlREA_VA2Us5LOxSRgQ/viewform

For queries: Drop a mail to rastogi@vinodkothari.com.

What will be covered in the workshop?

  • Basics of the scheme including introduction, objective, rationale, scope etc.
  • Eligibility conditions
  • Getting into the intricacies- questions like- what kinds of loans will be excluded? How will MSME loans be dealt with?
  • Manner of calculating ex-gratia payments
  • Procedural aspects
  • Grievance Redressal Mechanism (including guidance on the communication issued by the IBA)
  • Modus operandi for claiming the payment from the CG
  • Answers to practical issues that the industry is facing
  • Answering your queries, of course.

Knowledge Resources:

 

 

Compound interest burden taken over by the Central Government: Lenders required to pass on benefit to borrowers

/6 Comments/in /by

-Team Vinod Kothari Consultants P. Ltd. (finserv@vinodkothari.com)

While compound interest is the unquestionable reality of the world of banking and finance, somehow, courts have always been disapproving of the idea of “interest on interest”. After some months of litigation in the Apex Court and a lot of confusion surrounding interest on interest being charged by the lenders on loan accounts whose payments were deferred under the Covid-induced moratoriums, the Central Government (CG) has come up with a scheme whereby the CG will take over the differential interest, that is, difference between compound interest and simple interest during the 6 month period starting 01.03.2020. The lending institutions will have to pass on this benefit to the borrowers. Of course, the scheme, called Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (1.3.2020 to 31.8.2020) [Ex-Gratia Scheme or EGS]  is limited only to smaller borrowers, that is, borrowers falling under the specified category loan accounts, classified as standard and having an aggregate exposure of not exceeding Rupees 2 (two) crores as on 01.03.2020.

We have earlier submitted that the government is best placed to provide any relief to borrowers on issues concerning interest on interest.[1] The issue has finally been addressed via Notification dated 23.10.2020 providing the “Scheme for grant of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (1.3.2020 to 31.8.2020)”.[2]

This ex-gratia payment scheme is another COVID-19 related relief and incentive by the Government to bear additional interest on certain small specified loan accounts. The total estimated burden on the exchequer by virtue of the Scheme may be about Rs 7500 crores.

The Ministry of Finance (MoF), GOI has also issued four clarifications to date on EGS via FAQs dated 26.10.2020, 29.10.2020, 03.11.2020, and 04.11.2020 respectively.[3]

In this write-up, we have highlighted some of the important aspects of the scheme in form of FAQs below:

Objective/Nature and Scope of the Scheme

  1. What is the objective of this Ex-gratia Scheme?

This Ex-gratia Scheme seems to be the CG’s answer to the resentment that was quite obvious in the Supreme Court proceedings in the matter of Gajendra Sharma Vs Union of India.[4] The Scheme says it clearly that the payment under EGS is not a contractual, legal or equitable liability of the CG and is only an only an ex-gratia payment to the following designated class of borrowers in view of the COVID-19 pandemic.

The essential idea of the EGS is to provide the benefit of having to pay simple interest by the borrowers covered under the Scheme. The period covered by the two moratoriums is to be taken into consideration under this Ex-gratia Scheme, that is the period from 01.03. 2020 to 31.05.2020[5] and 01.06.2020 to 31.08.2020[6]. The underlying philosophy of the EGS seems that the central purpose of the moratorium was to grant relief to smaller borrowers whose business/earnings were disrupted by the Pandemic. However, the grant of moratorium did not provide any relief from payment of interest. Thus, interest continued to be compound even while the borrower availed of the moratorium. In many cases, thus, the moratorium hardly helped, as it resulted in mounting of interest burden, which may have even worsened the situation of the  borrower.

The Scheme now transforms compound interest into simple interest during the Moratorium Period, that is, the period commencing from 01.03.2020 to 31.08.2020 (‘Moratorium Period’).

As our workings (See in next question) have demonstrated the impact of the EGS on the borrower depends on two factors – (a) the rate of interest on the facility; and (b) the size of the funded facility.

  1. How will the Ex-gratia payment be impacted with varying interest rates and outstanding amounts?

Please refer to the table at the end of this write-up.

  1. Is the payment of the ex gratia amount under the scheme, optional for lending institutions or the same has to be complied mandatorily by the lending Institutions?

The payment to the specified loan accounts of eligible borrowers is mandatory under the Scheme. The language of Ex-gratia Scheme clearly provides that the lending institutions shall credit the difference between simple interest and compound interest for a period between 1,03,2020 to 31.08.2020 in specified loan accounts of eligible borrowers.

Further the RBI notification dated 26.10.2020 clearly advises the lending institutions to be guided by the provisions of the scheme and take necessary action within stipulated timeline.

  1. Can a Lending Institution be selective in terms of granting the benefit or denying it to certain Borrowers?

The applicability of the scheme is not optional. As per the RBI notification, all lending institutions are advised to be guided by the provisions of the Scheme and take necessary action within the stipulated timeline. Hence, the lending institution is obligated to extend the benefit of the EGS to all the eligible borrowers. See below for the meaning of “eligible borrowers.”

Scope of “Lending Institutions”

  1. Which Lending Institutions have to pass the benefits to borrowers under this Scheme?

The following is the list of the lenders have to comply with the operational guidelines of the scheme (“Lending Institutions”) :

  • Banking Companies
  • Public Sector Banks (PSB)
  • Co-operative Banks – Urban Co-operative Banks,or a State Co-operative Bank, or a District Co-operative Bank
  • Regional Rural Banks (RRB)
  • All India Financial Institutions
  • Non-Banking Financial Companies registered with the RBI
  • Non-Banking Finance Company being a Micro Finance Institution, also a member of Self Regulatory Organisation (SRO) registered with RBI
  • Housing Finance Companies registered with RBI, or National Housing Bank
  1. Are all types of NBFCs covered under the Scheme irrespective of the asset size?

The Government intends to pass on the benefit of the Scheme through the Lending Institutions including all NBFCs involved in lending to the specified category of borrowers irrespective of the asset size of the NBFCs.

  1. Is this scheme applicable on co-lending?

The EGS scheme does not exclude loans originated by two or more Lending Institutions. The objective of the scheme is to pass the benefit of the EGS to eligible borrowers. Therefore,  in case the borrower is eligible, the benefit under the EGS shall be extended taking blended rate of interest as the reference rate for differential computation of CI and SI during the moratorium period. The rates of interest charged by the respective lenders may be different inter-se; however, the benefit of interest differential will be given to the borrower based on the blended interest rate.

  1. In case of co-lending, what if there is one eligible Lending Institution, and one who is not eligible?

Current guidelines of the RBI on co-lending do not seem to be extending to co-lending arrangements between one lender who is in the list of Lending Institutions above, and one who is not. It will be difficult to think of one of co-lenders passing on the benefit, while the other does not.

  1. Does this Scheme cover the loans which have been securitised?

The fact that a specified loan account has been securitized does not deny the borrower from availing the benefit under this Scheme. Therefore, the servicer/originator should pass the benefit of ex-gratia payment to the eligible borrower even in case of securitised loans. The interest rate differential is essentially credited to the account of the Eligible Borrower – therefore, it is treated as if it is a cash inflow from the borrower, and should accordingly become a part of the waterfall, as and when the same is received from SBI.

9A. In case of securitisation, the original lender is simply a servicer. Is it envisaged that the servicer will still be empowered/required to pass on the benefit of the Scheme to the borrower, and claim the same from the Govt, even though technically the loan is not on the books of the lender?

Given the benevolent and borrower-centric intent of the Scheme, we are of the view that the benefit of the Scheme cannot be denied to a borrower whose loans have been assigned. Technically, whether the originator is still holding the loan or has sold it away to an SPV or other assignee should not matter. The benefit can easily be passed on as a payment from the customer.

  1. Does this scheme include specified loan accounts which have been subject to direct assignment?

The same treatment as in case of securitisation should apply in case of direct assignments as well. The benefit of interest differential should be given to the borrower. The amount received from the CG through SBI should be treated as a payment received from the borrower, and should be shared between the assignor/assignee in their ratio of sharing the inflows.

A subsequent clarification in MoF FAQs dated 03.11.2020 in FAQ No. 2, specifies the eligibility of loans under EGS which have been bought as part of pool buyouts by one lending institution from another. [Updated on 04.11.2020]

  1. The amount received from the CG by way of interest differential may be treated as payment made by the borrower. Should it be treated as payment of principal, payment of interest, or payment of any other dues from the borrower?

In our view, the contractual appropriation rules should be applicable to the amount received from the CG. The amount received from the CG is essentially the amount received from the borrower. Hence, appropriation rules as contained in the loan agreement should apply to this amount as well.

  1. Does this Scheme cover Core Investment Companies?

Question does not arise as CICs are intended to provide financial support to “group companies only.

Scope of “Eligible Borrowers”

  1. Which all borrowers are eligible to be benefitted under the Scheme?

The borrowers falling under any or more of the “Facilities” (see below) are eligible under Ex-gratia Scheme “Eligible Borrower”. However, such facilities need to satisfy the following conditions:

  • Such borrower should not have sanctioned limit and the outstanding amount exceeding Rs. 2 (two) crores in aggregate with all the lending institutions as on 29.02.2020. That is, the sum of borrowings of such a borrower from specified loan accounts and borrowings other than that under specified loan account shall also be taken into account while arriving at aggregate exposure of Rs. 2 Crores.

For computation of the borrowing cap, see further questions below.

  • Such an eligible category loan account should be standard (less than 90 DPD) as on 29.02.2020.
  • Whether such borrower availed complete moratorium, partial moratorium, or did not avail any moratorium benefit in respect of such eligible category loan account is irrelevant for the purpose of extending benefit under the Ex-gratia Scheme.
  1. Will the Non Fund Based Limits as on 29.02.2020 be included for arriving at the borrower eligibility of amount upto Rs. 2 crore?

No, the fund based limits shall not be included for arriving at the eligibility criteria for the purpose under EGS. The same has also been clarified by the MoF in its FAQs.

  1. Whether the Rs. 2 crore limit applies for borrowings across all lending institutions?

Yes, the 2 crore limit shall be considered across all the lending institutions.

  1. In case of working capital facility, for the purpose of limit of Rs 2 crores, the lending institution shall consider the actual amount availed or the sanctioned limit?

The language and intent of the EGS is very clear that the aggregate of sanctioned and outstanding amount of loan in respect of a particular eligible borrower is to be considered. Hence, the sanction limit shall be considered.

  1. As on 29.02. 2020, a borrower is standard with one lender, but is not standard with another. What will be the eligibility of the borrower in such a case?

In our view, the condition for eligibility for the benefit is that the borrower is standard as on the reference date. Additionally, we need to aggregate the facilities enjoyed by the borrower with other lending institutions. We do not have to read any further conditions. That is, if the borrower is not standard with a particular lending institution, then such lending institution shall not grant the benefit to the borrower. However, the lending institution with which the borrower is standard should not be precluded from granting the benefit of the Scheme.

The same has also been subsequently clarified in MoF FAQs dated 03.11.2020 in FAQ No. 1. [Updated on 04.11.2020]

  1. How does a lending institution get to know how much facilities a borrower is availing from other lending institutions, in order to arrive at the borrowing cap?

Lending institutions are to assess this on the basis of information available with them as well as information accessible from credit bureaus. This has also been clarified by the MoF in its FAQs.

  1. A borrower has availed a loan of Rs 1 crore from an NBFC. Additionally, the borrower has taken a home loan of Rs 1.50 crores from the company where he is currently working. Is he eligible?

We need to aggregate the borrowings from Lending Institutions. Employee loan taken from the company where the borrower is working does not fall under the list of facilities for the purpose of the Scheme. Hence, no question of aggregating the same.

  1. A borrower satisfies all other conditions but is classified as NPA as on 29.02.2020 and subsequently becomes standard. Will the borrower be eligible under the Scheme?

The subsequent movement of the NPA to standard will not make the account eligible under the scheme. As per the eligibility conditions, the loan account must be classified as standard as on 29.02.2020.

  1. A borrower account was standard as on 29.02.2020 and also satisfies all the other eligibility conditions under the scheme, but as on date is an NPA. Can the benefit still be availed?

Yes, the benefit shall still be given to the borrower based on the fact that the loan account was eligible as on 29.02.2020.

  1. A borrower under a specified loan account is having a sanctioned limit of Rs. 2.5 Crores as on 29.02.2020, however its aggregate outstanding borrowing with respect to such loan account as on 29.02.2020 is less than 2 crore, will such borrower be eligible under the Ex-gratia Scheme?

The Ex-gratia Scheme clearly specifies that the ‘sanctioned limit’ and ‘outstanding amount’ with respect to loan accounts should not exceed Rs. 2 Crore. The aggregate of the borrower’s sanctioned limit and outstanding loan amount from all lending institutions to such a borrower should be less than Rs. 2 Crores. Hence, in our view, the borrower shall not be eligible.

  1. A borrower under specified loan account has an aggregate outstanding loan facility as on 29.02.2020 less than Rs. 2 Crores with a lending institution. Additionally it also has a Bank Guarantee in its favour with the same or any other lending institution. Will such a borrower be eligible under the Ex-gratia Scheme? 

The FAQs issued by the Department of Financial Services clearly states that non fund based limits will not be included for arriving at the eligibility. Accordingly, the borrower shall be eligible under the EGS.  

23A. A borrower availed a sanctioned loan facility of Rs. 2.5 Crore and as of 29.02.2020, the principal outstanding is Rs. 1.80 Crore, will such a borrower be eligible under the Scheme?

Yes. As per the FAQs issued by the Department of Financial Services (FAQ 10), the sanctioned and outstanding amounts have to be seen as on 29.02.2020. In the question above if the sanctioned loan facility has been completely availed, i.e. borrower cannot make further drawdowns from such sanctioned facility of 2.5 crore, then such borrower account should be eligible under the Scheme.

  1. Is there any requirement for eligible borrowers under specified loan accounts which needs to be fulfilled for the purpose of availing ex-gratia payment benefit?

No, as per the ex-gratia scheme guidelines all lending institutions under the scheme have to credit the difference between compound interest and simple interest in specified loan accounts of the eligible borrowers.

However, it is always prudent on part of borrowers and the lending institutions to exchange confirmation about the credit of such payment under the scheme.

  1. Will the eligibility be determined as on the date of this scheme or as on 29.02.2020?

The borrower account must fall in the category of specified loan account as on 29.02.2020. For example, a loan account was classified as an MSME as on 29.02.2020 and later on a subsequent change in definition has moved it out of the category of MSME, the benefit under the scheme shall still be given to the said borrower account, subject to fulfilment of the eligibility conditions.

Scope of “Facility”

  1. Which all classes or categories of loans/facilities are eligible under this Scheme?

The loans falling under any of the categories mentioned below are ‘specified loan accounts’ under this Ex-gratia Scheme.

  • MSME loans
  • Education loans
  • Consumer durable loans
  • Credit Card Dues
  • Automobile loans
  • Personal loans to professionals
  • Consumption loans
  • Housing Loans
  1. Does the specified loan account also include all personal loans, or personal loans given only to professionals?

RBI has defined the term “personal loans” in its circular dated 04.01.2018 as follows:

“Personal loans refers to loans given to individuals and consist of (a) consumer credit, (b) education loan, (c) loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), and (d) loans given for investment in financial assets (shares, debentures, etc.).”

The circular dated 04.01.208 also defines “consumer credit”, and the extant definition is as follows:

Consumer credit refers to the loans given to individuals, which consists of (a) loans for consumer durables, (b) credit card receivables, (c) auto loans (other than loans for commercial use), (d) personal loans secured by gold, gold jewellery, immovable property, fixed deposits (including FCNR(B)), shares and bonds, etc., (other than for business / commercial purposes), (e) personal loans to professionals (excluding loans for business purposes), and (f) loans given for other consumptions purposes (e.g., social ceremonies, etc.). However, it excludes (a) education loans, (b) loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), (c) loans given for investment in financial assets (shares, debentures, etc.), and (d) consumption loans given to farmers under KCC.

Therefore, from conjoining the above two definitions and comparing it with the list of specified loan accounts under the Scheme, we understand that Personal Loans given to individuals in respect to; a) education loans, b) credit cards dues, c) loans for consumer durables, d) auto loans, e) Personal loans to professionals, f) loans for consumption purposes g) Housing Loans shall qualify as specified loan accounts from personal loan category for the purpose under the scheme.

The expression “consumption loan” is quite wide. A loan which is not for business purposes, or for purchase of any specific asset or durable, may qualify as a “consumption loan”.

27A.  Whether loans given to doctors for business purposes are covered under the head ‘personal loan to professional’?

Going by the literal interpretation it seems that personal loans to professionals shall not include loans given for business purposes. The same is also specified in the definition of ‘consumer credit’ provided hereinabove. However, consumption loans are also not for business purposes and a personal loan by any person, including a professional, will be classified as a consumption loan. Hence, in essence there would not be a difference between the category ‘personal loan for professionals’ and ‘consumption loans’, the later being a broader term. Such an interpretation would reder this category as meaningless.

Further, restricting the meaning to only personal loan would mean that a loan given to a professional, for the profession, will disqualify on the ground that it is not a “personal loan. However, in our view, the intent seems to be cover loans to professionals. The word ‘personal’ loan seems to be a surplusage and should not be taken restrictively.

  1. A salaried employee / self-employed professional had availed of a personal loan from bank which has some amount outstanding as on 29.02.2020. Is the loan eligible for ex-gratia payment under the scheme?

Yes. Loans for consumption purposes (e.g., social ceremonies, personal expenditure, etc.) are also eligible for coverage under the scheme, besides other specified categories of loans like consumer durables, automobiles, education, credit card dues, housing and personal loans to professionals.

28 A. In case of education loans where students pay part of the interest and the remaining interest gets capitalised. Will such cases also qualify under this scheme?

In case of education loans, generally, the repayment starts after a deferment or moratorium period (say 1 or 2 years). EGS covers education loan under specified loan category, however it does not specify, whether the status of the loan account of repayment under such loans have commenced or not, or has been partially paid or not as of 29.02.2020. Therefore, in our view, education loan accounts have to be given benefit under EGS irrespective of the fact whether loan is under deferred period, or the re-payment has commenced or loan is partially being re-paid. Further, the reference date to be borne in mind for determining the outstanding amount on such loan account shall be 29.02.2020.

28B.  Will loans to Education Institutes be eligible under education loans?

No, loans given to education institutes will not be covered under the head ‘education loans’.

  1. Is there a distinction between secured loans and unsecured loans for the purpose of the Scheme?

No. There is no such distinction. As long as the loan is covered by the list of “facilities” above, it does not matter whether the loan is secured or unsecured.

  1. A business loan has been given to an MSME (private limited company), and is secured by pledge over shares of the company? Will this loan be eligible?

As per FAQ no. 20 of the FAQs issued by MoF, loans against shares shall not qualify for the Scheme. However, in our view, the intent of the MoF is to exclude loans against the financial assets, that is, loans where the intent is to use the proceeds of the loan for investing in financial assets. In the instant case, the loan is a loan taken for business purposes. The mere fact that the loan has been collateralised by pledge over shares, whether of the entity in question or any other shares, should not matter. This is our view.

  1. Will a loan taken for business purposes by a non-MSME qualify?

Loans to non- MSME for business purpose is not falling under any eligible category of Facilities, and hence not covered under the Scheme

  1. A borrower falls under the MSME category as per the new MSME classification. But such a borrower has not availed Udyam Registration, will it be eligible under the scheme?

The borrower must be classified as an MSME on 29.02.2020 irrespective of the classification under the new definition. Further, it is recommended that in case the borrower continues to be classified as an MSME, it may submit its proof of Udyam registration to the lending institution.

32.A    Is Udhyam Registration mandatory for MSME     classification?

As per the eligibility conditions, the lender has to ensure that the borrower account was a classified as MSME loan as on 29.02.2020. Further, on the said reference date, obtaining udhyam registration was not mandatory for the purpose of MSME classification. However, a declaration may be sought from the borrower in this regard that they were eligible to be classified as an MSME on such reference date.

  1. What if an auto loan for commercial use has been given by a Lending Institution? Does it mean that such auto loan is not covered under the specified loan account category?

All automobile loans are covered by the Scheme, whether the vehicle in question is used for personal or for business purposes.

Therefore, auto loans for commercial use shall also qualify as eligible “facility” for the purpose of the scheme.

A similar clarification has been issued subsequently  in MoF FAQs dated 03.11.2020 in FAQ No. 3. [Updated on 04.11.2020]

  1. Will lease transactions be included under the purview of this scheme?

Financial leases or operating leases are not covered under the Scheme.

  1. Will the loan against property (LAP) to individuals qualify as a specified loan account under the scheme?

Loan against property (LAP) is a market term, implying the nature of the security in case of the loan. For the purpose of determining whether the loan is an eligible facility or not, we are not concerned with the nature of the collateral or security. We are concerned with the end-use of the money. Hence, a LAP loan may be a consumption loan, or a business loan to an MSME, or a personal loan to a professional. Therefore, merely because the loan is a LAP, we cannot judge whether it is a qualifying facility or not.

On the other hand, a LAP loan may be given as a business purpose loan to an entity which may not be qualifying as an MSME. In that case, the facility will not qualify.

35A.  Whether loans availed against term deposits are eligible for ex-gratia payment?

Lenders have to consider that the loan account should fall under the specified loan category based on the end use of the loan as well as the type of borrower. The collateral securing such loan is irrelevant.

35B.  Whether micro loans guaranteed by Joint Liability Group (JLG) are covered under the Scheme? 

Individual loans from the eight eligible categories of borrowers, including those categorised as Micro, Small and Medium Enterprises (MSME) by the lending institution, are covered under the scheme irrespective of the nature of
guarantee.  [Mof FAQs dated 04.11.2020]

  1. What is the meaning of the word “professionals” in case of personal loans?

In technical parlance, the word “profession” has a narrow meaning. It mostly means those regulated professions where there is a professional body for the purpose of a recognised profession which entitles the professional to practice the same. Examples may be doctors, chartered accountants, architects, etc. However, in the context of the Scheme, it appears that the word “profession” has been used in the wider sense of a profession, vocation or calling, not being in the nature of business. Such a wide meaning is prevalent under taxation laws for recognition of income under the head “business” or “profession”. There does not seem to be sufficient reason for restricting the meaning of the word “profession” for the purpose of the Scheme to only regulated professions.

Hence, there are two types of loans – business loans, and personal loans. Business loans will qualify for the Scheme if the same is extended to MSMEs. Personal loans, to entities other than those engaged in businesses, may either be a personal loan given to a professional, or a consumption loan to a salaried employee. In our view, both the latter categories will qualify.

  1. A large number of NBFC loans are given to retail and wholesale traders. Do they qualify?

The fact that retail and wholesale traders are excluded from the definition of MSME would imply that they shall not fall under the category of ‘MSME loans’. However, in case the end use of the loan is for consumption by the trader, the same can qualify as ‘consumption loans’

  1. Will a loan given to a practising CA or CS firm qualify as a personal loan to professionals? Can it be classified under the head “MSME loans” in case the firm is registered as MSME?

The loan given to a practicing CA or CS (for purposes other than business) shall qualify as a personal loan to professionals. Further, a loan given to a practising CA/CS firm for business purposes can be classified as ‘MSME loan’ provided the firm is registered as an MSME.

  1. Will the gold loans to individuals fall under the specified loan account category?

The answer to this question is far from clear. On one hand, it is possible to contend that most of the gold loans are, in fact, consumption loans. We have discussed above that what should matter for the purpose of the Scheme is the end use of the loan and not the nature of the collateral. On the other hand, the MoF FAQs have specifically excluded loans taken for investment in financial assets. Gold is not one of the financial assets referred to in the FAQs. However, if the underlying philosophy of the Scheme is considered, gold loans do not seem to be those which were disrupted by the Covid pandemic. In most of the gold loans, there are no periodic payments too – therefore, if the underlying spirit of the Scheme is to relieve the borrower from the burden of compound interest for availing the moratorium, one may have a divergent view in case of gold loans.

Please also see our FAQs on the Covid Moratorium for further discussion about gold loans- http://vinodkothari.com/2020/03/moratorium-on-loans-due-to-covid-19-disruption/

 

Nevertheless, the ministry has also clarified in its FAQs dated 04.11.2020 that Consumptions loans, including those backed by gold as collateral, are eligible under the scheme. [updated on 05.11.2020]

 

  1. Will agri loans/ tractor loans be covered?

Our initial view was that agricultural loan is not specified in the category of specified loans under EGS. However, tractor loans may qualify under the head ‘automobile loans’.

However, FAQs issued by the MoF dated 29.10.2020 has clarified that crop loans and tractor loans etc. are agriculture and allied activities loans and are not part of specified loan accounts. Hence will not qualify under EGS. The ministry’s view seems to be on the presumption that tractors are used for agricultural purposes, whereas it can be used for transport as well. [Revised answer on 30th October 2020].

40A.   Will a tractor loan always be considered as agri loan?

A tractor has dual usage- both for cultivation as well as for travelling. In case a farmer has availed tractor loan and same has been categorised as auto loan considering the end use to be for travelling, there is no reason to exclude such loans from ambit of the Scheme. However, the MoF in its FAQs seems to have taken a view that tractor loans, irrespective of the end use shall not qualify under the Scheme.

  1. Are loans for construction equipment falling under the specified loan account category?

In case the construction equipment loan is availed by an MSME, the same may be categorised under the head ‘MSME loans’. Further, in case the equipment is wheel mounted, the same may be classified as ‘Automobile loans’. Apart from the aforesaid, loan for construction equipment shall not be covered under the Scheme.

  1. What should be the meaning of the term “automobile loans”? Should the word “automobile” be read in the same sense as a vehicle under the Motor Vehicles Act?

In typical industry parlance, the word “automobile loan” or “auto loan” is read in the sense of a loan to purchase a motor vehicle. Hence, for want of a better definition, the word “motor vehicle” as defined in sec. 2 (28) of the Motor Vehicles Act may guide the meaning.

  1. Are working capital loans getting covered under any category?

To the extent the WC loan is to an MSME, the same shall be eligible, otherwise it may not fall in specified loan category under EGS.

  1. Does the specified loan accounts cover unsecured loans given by fintech entities?

Loans given by Fintech entities or Micro Finance Institutions (MFI) may qualify under the EGS as they may be classified as specified loans under ‘consumption loans’ category.

  1. Does EGS cover loans against securities or other movable properties?

As clarified by the MoF in its FAQs, loans against fixed deposits [including Foreign Currency Non-Resident (Bank) {(FCNR(B)} account, bonds and other interest bearing instruments], and shares etc., and loans given for investment in financial assets (shares, debentures etc.) are not eligible for coverage under the EGS.

  1. Will Inter Corporate Deposits (ICD) qualify as specified loan accounts for the purpose of the scheme?

Inter Corporate Deposits made by the lending Institutions to MSMEs shall qualify as specified loan accounts under the Scheme. Any other ICD to non-MSME entity shall not be eligible under EGS.

Other qualifying conditions

  1. A borrower was having standard account classification as on 01.03.2020, but is currently an NPA and the Lending Institution has initiated a recovery mechanism. Is the Lending Institution still required to pass on the benefit of the EGS to such Borrower?

While the benefit of the Scheme is applicable, it does not imply that the ex gratia payment is an outflow to the borrower. That is, the Lending Institution may retain the amount as a payment received from the borrower. Hence, even in case of initiation of recovery proceedings against an eligible borrower, the ex-gratia payment can be retained by the lender and such credit amount could be set off from such lender’s claim.

  1. Assume a borrower had not opted for the moratorium or the moratorium was not granted to the borrower. Hence, EMIs continued to become payable during the Reference Period. The CI is now replaced by SI. Does that mean retrospectively, the CI will have to be replaced by SI, so that the overdue interest or other consequences for default during the Reference Period will also have to be recomputed?

There is no provision for recomputation of the loan obligations. The benefit by the CI shall be provided to the eligible borrowers by transferring their burden of paying interest on interest during the Reference Period only. However, the computation of overdue interest or other consequence based on the then prevailing EMIs will not be reversed.

  1. If a Lending Institution has not charged compound interest on the loan, is it still possible to compute CI and avail of the benefit of the Scheme?

If the terms of the loan are clear that the interest shall be simple interest, then the benefit under the Scheme is not even called for.

  1. In case of EMI-based loans, where there is no formal declaration or disclosure of a compound interest, but an IRR or effective interest rate is computed, can it be implied that there is a compound interest? In essence, can it be contended that IRR and compound interest are the same?

In the cases where an IRR or effective rate is charged from the borrower, the EMI computation already factors the interest compounded over the loan tenure. In case the borrower has availed moratorium, the amount is accrued but not payable.Therefore, interest charged over the interest component of the amount accrued during moratorium period shall be the ex-gratia amount and the same will be credited to borrowers account. In case the borrower has not availed moratorium, the borrower pays the amount on its accrual. The EMI computation however, already considered the compounding effect of the interest. Hence, the ex-gratia amount shall be the interest compounded during the Reference Period.

  1. In several forms of lending, it is a common practice for lenders to charge a “flat rate”, that is, a rate of interest computed with reference to the original loan, even though the borrower continues to pay the EMIs over time. In such a case, is the EGS applicable?

The RBI specifically instructs the lenders to disclose an annualised rate of interest, irrespective of the payment terms. The annualised rate is the IRR which is the contractual term agreed between the parties. Hence, the EGS benefit shall be applicable and the computation of simple interest and compound interest shall be based on such IRR.

51A. What if the contractual rate is 0%, will benefit under the Scheme still be provided?

In case the contractual rate is NIL or 0%, there is no question of granting any benefit to the borrower, given that the borrower has not paid any interest at all. However, in case the loan account falls under the category of consumer durable loan and no interest is charged for a specified period, then lender’s base rate or marginal cost of funds based Lending Rate (MCLR) whichever is applicable shall be considered as on 29.02.2020 to calculate the differential amount of interest. [Updated as of 02.11.2020]

  1. The Scheme provides that in case of consumer loans where there is no interest, there may still be an imputed interest based on the lender’s base rate / MCLR whichever is applicable. Can the same principle be applied in case of loans where only simple interest is charged?

The EGS specifically mentions the treatment in case of consumer durable loans where there is no interest charged by the lender for a specified period. However, in case simple interest has been charged that would essentially mean that the lender has forgone its interest over the accrued interest. Hence, the same shall not be eligible for benefit under the EGS.

  1. What will be eligibility of a borrower under EGS in any of two scenarios covered below?

Scenario 1: The borrower has taken moratorium benefit until the first three months under moratorium scheme, i.e. from 01.03.2020 till 31.05.2020.

Scenario 2: The borrower has taken the moratorium benefit for the last three months of the moratorium scheme, i.e. from 01.06.2020 till 31.08.2020.

Yes, the borrower shall be eligible for ex-gratia payment in both of the scenarios mentioned above. The Ex-gratia scheme is applicable on all the specified loan accounts, whether moratorium benefit is completely availed, or partially availed, or not availed at all.

All the payments made by such a borrower towards its eligible loan account between 01.03.2020 and 31.08.2020 will be ignored. For the purpose of uniformity, the difference between compound interest and simple interest is to be reckoned at an outstanding amount as on 29.02.2020 for a period of six months.

  1. Will it be right to say that all specified accounts of eligible borrowers are entitled for Ex-gratia payment under the scheme, irrespective of whether payment deferment have been availed or not under the moratorium scheme?

Yes, all the specified loan accounts of eligible borrowers are entitled to ex gratia payment under the Ex-gratia Scheme.

  1. Will the lending institutions continue to charge over dues and other penal interest on borrower’s account even including those to whom the benefit is granted under the scheme?

Yes. The ex-gratia scheme’s objective is to pass the differential benefit of compound interest and simple interest in specified loan accounts by crediting such loan accounts of eligible borrowers.

All the over dues charges and other penal interest shall continue to apply on all borrowers as may be applicable.

  1. What are the rates of interest on which the difference between compound interest and simple interest on the amount outstanding as on 29.02.2020 will be calculated?

The rate of interest would be prevailing as on 29.02.2020, any change thereafter shall not be reckoned for purpose of computation. Additionally penal interest rate or late payment penalty not to be included as contracted rate or WALR.

A ready reference on manner of determining the rate of interest on eligible loans has been provided in image below:

Time Periods under the Ex-gratia Scheme

  1. What is the time period for credit/payment of an ex-gratia amount by the lender?

The scheme provides that the exercise of crediting the amount under the scheme shall be completed by respective lending institutions on or before 05.11. 2020.

Therefore, the amount under this Ex-gratia scheme has to be credited to the borrower’s account by the lending institutions within the stipulated time.

  1. What shall be the compounding frequency if the loan agreement/document provides that interest shall be compounded semi-annually or quarterly?

The operational guidelines of the scheme in para 7 provides the manner of claiming reimbursement. As under the scheme compound interest shall be reckoned on a monthly basis, except where the contrary is provided. Therefore, where a contractual term specifically provides that the annualised rate should have quarterly or semi annually resets then in all such cases the adjustment shall be given to the same. If the contract or document is silent on the same the compound interest shall be calculated based on monthly resets.

  1. What would be the change in ex-gratia payout if loan installments are payable quarterly or semi-annually?

The payment of loan installment interval i.e. either monthly / semi-annually or  quarterly will have no effect on ex-gratia payment computation if the interest rate is compounded with monthly resets.

Modus operandi for passing on the benefit to the Borrowers

  1. Does this Ex-gratia Scheme mean that no interest will be charged by the lending institutions for the period of 01.03.2020 till 31.08.2020 on specified loan accounts?

No, this Ex-gratia scheme is in the form of waiver of interest on interest in the specified loan account category, irrespective of whether moratorium benefit was extended/availed completely, partially or not availed at all on such loan accounts.

Therefore, all the eligible borrowers in specified loan accounts will receive payment under the Scheme from their respective lending institution. The credit amount would be such part of interest which would have been chargeable by the lending institutions on the accrued interest component during the six months deferment period from 29.02.2020 till 31.08.2020. That is the difference between the Compound interest and Simple Interest on the outstanding amount will be payable by the lending institution which shall be reimbursed to them by the Government.

Illustration:

Outstanding loan amount in the specified loan account as on 29.02.2020 was Rs. 1,00,000 (Rupees One Lakh).

Interest Rate as applicable on such a loan account as on 29.02.2020 is taken @ 10% annualised rate, compounded monthly.

Therefore, the balance 105.33/- shall be credited to the specified account of the borrower by the lending institution.

  1. What is the exact manner of passing on the benefit to the borrower? Is it merely a credit to the account of the borrower, or does it lead to any cash benefit being transferred to the borrower?

In our view, the Scheme is simply a limited relief on compound interest. The interest differential as computed under the Scheme is simply credited to the account of the borrower by the 05.11.2020 as specified. Crediting the amount does not mean any actual cash transfer. The interest differential is treated as an amount paid by the borrower. The question of any refund will arise only if the outstanding amount by the borrower is less than the amount of the differential, or the account is fully squared off.

  1. The borrower’s account has a principal outstanding, but no EMIs or other sums are currently due. In that case, what is the treatment of the interest differential?

If there are no currently dues by the borrower, the interest differential may be treated as a payment of principal by the borrower. Of course, it will be counter-intuitive to apply the clauses pertaining to prepayment, for instance, a prepayment penalty..

  1. A borrower loan account has been closed in the books of the lending institution as on 30.04.2020. However, the borrower was eligible under the scheme as on 29.02.2020. Will the borrower receive any benefit under the Scheme?

Since the eligibility is to be determined as on 29.02.2020, the fact that the loan account has been closed should not deprive the borrower of the benefit under the Scheme.

Such borrowers are eligible for refund of differential interest from 01.03.2020 upto the date of closure of account.

Illustration

The outstanding amount in a specified loan account as on 29.02.2020 is Rs. 1,00,000 (Rs. One Lakhs Only). The borrower paid all the dues towards the loan amount by 30.04. 2020. The contracted annualised rate compounded monthly as on 29.02.2020 is at 10%.

The ex-gratia payment as under the scheme guidelines should be as follows:

Therefore, the borrower shall be entitled to Rs. 6.94 under the ex-gratia scheme.

It will be credited to the borrower’s savings/ current account. If no such account is maintained by the borrower with the lending institution, the borrower can advise the lending institution the details of the account in other banks where the amount can be credited /remitted to.

63A. Will the treatment of loans that have matured during 01.03.20 to 31.08.20 but are still active in system due to some pending charges, be same as closed loans?

If the loan has been closed during the reference period, and there are pending charges, the treatment shall be the same as a foreclosed account. Accordingly, the credit for differential interest amount can be adjusted with the overdues.

63B.  What if the loan is closed in between the month (say 20th of April) how to compute compound interest in such a situation?

The interest shall be computed for the broken period by converting the number of days into a fraction of the month. The same can be done by dividing the number of days by 30 (considering a month has 30 days on average).

63C. A specified loan account is transferred to another lending institution during the period between 01.03.2020 to 31.08.2020. Which lending institution will provide ex-gratia benefit to the customer?

The transferor lending institution shall provide the benefit to the customer. The reference period for calculating compound interest and simple interest differential amount will be from 01.03. 2020 till the date such loan account is tranferred.

  1. In case the borrower account has been closed, can the difference amount be retained by the Lending Institution as repayment by Borrower?

Yes, if there is an amount pending to be paid by the borrower.

64A. In case the account is foreclosed during the Reference Period, will the benefit of this scheme be applicable?

On October 29, 2020, the Department of Financial Services issued a set of FAQs, which state that for the accounts foreclosed during the Reference Period, the benefit of the scheme shall be available.

  1. Does the outstanding amount as on 29.02.2020 include overdue instalments or any other overdue charges such as overdue interest, penalty, etc?

The amount outstanding as on 29th Feb would include all amounts showing as outstanding from the borrower. If the overdue interest or any other charges have been debited to the loan account, and are shown as a part of the outstanding, in the loan account of the borrower, in our view, the same should form part of the reference amount, both for reckoning the limit of Rs 2 crores, as also for computing the interest differential. [Revised answer on 29th October 2020]

  1. Will it be possible for the lenders to ensure the credit of the differential amount to all the borrowers before 05.11.2020?

The determination of the eligible borrowers, the computation of the differential amount and the process of crediting the same to their respective accounts will be a cumbersome and lengthy process. It will be a burden for the lending institutions and seemingly the Government may have to extend the timelines.

Modus operandi for claiming the payment from the CG

  1. Where shall the lending institutions file their reimbursement claims after crediting the ex-gratia amounts in specified accounts of eligible borrowers?

The claims shall be submitted to the designated officer (s) /cell   at State Bank of India (SBI). The SBI shall act as a nodal agency of the Central Government for settlement of all the claims of lending institutions.

  1. What are the procedures to be followed by lending institutions for reimbursement of claims processing?

The following timelines and procedures need to be complied by all the lending institutions falling under the scheme.

  • The last date for filing claims of reimbursement of amounts credited to specified loan accounts of eligible borrowers is by 15.12.2020.
  • The reimbursement claim amount should be pre-audited by a statutory auditor of the lending institution.
  • A certificate by an auditor shall be attached with the claim.

68A.  In co-lending transactions, can one entity pass on the benefit to borrower and get the  credit from CG?, or same shall be availed from CG in the ratio of disbursement?

In co-lending transaction, the primary co-lender may pass on the benefit to the borrower on behalf of both the lenders and reclaim the same from the CG at the blended rate of interest. The claim amounts once received from CG shall be shared subsequently in the ratio agreed under the terms of co-lending.

Grievance Redressal Mechanism

  1. What is the timeline for lending institutions to address grievances of borrowers? 

As under the operational guidelines of the EGS, each lending institution is required to put in place a grievance redressal mechanism for eligible borrowers within one week from date of issuance of ex-gratia guidelines i.e. latest by 30.10.2020.

  1. Lending institutions usually have a grievance redressal mechanism in place. Is there a need to establish a separate mechanism for the purpose of this scheme?

The scheme does not require the lenders to develop a separate mechanism for redressal of grievances arising due to the scheme. The same may be a part of the existing grievance redressal mechanism of the lender. However, the scheme states that the lenders can consider communication dated 1.10.2020 from the Indian Banks’ Association (IBA) in respect of the resolution framework for COVID-19 related stress.

​For the purpose of incorporating the ​aforesaid​ in the existing grievance redressal mechanism, ​necessary ​communication in this regard may be circulated internally​ by the Nodal Officer or such other personnel authorised under the Grievance Redressal Policy of the lending institution​.

  1. What are the requirements under the abovementioned communication from IBA?

The said communication form the IBA lays down the following:

  • A web-based platform shall be developed for automatic lodgement and handling of grievances. The grievances may be received on the said portal/branch office of the lender. Grievances received at the branch should also be fed into the portal and the system shall generate a digital receipt for the customer.
  • The grievances should be directly handled at zonal/circle level based on the hierarchical structure of the lender. Preliminary remarks should be provided to the customer within a maximum of 72 hours by the Nodal Officer and final response should be provided within 7 working days.
  • Escalation matrix may be provided separately for different kinds of loans such as for retail and commercial banking customers. The grievance related to commercial loans may be handled at a higher level.
  • The framework should provide for re-opening of the grievance if the customer is not satisfied by the response.
  • A dashboard on the status of grievances viz. no. of grievances received, pending status etc. should also be made available to controllers/regulators for close monitoring.
  1. Is it mandatory to abide by the above guidelines provided by the IBA?

The scheme does not mandate compliance of the guidelines from the IBA. However, the same may be mandatory for the banks who are members of the IBA (owing to their membership) and recommendatory for other lending institutions.

  1. What are the remedies for a lending institution having grievances concerning the Scheme?

Grievances of lending institutions shall be resolved through designated cell at State Bank of India (SBI) in consultation with the Ministry of Finance, GoI. However in respect to the issues/queries related to interpretation of the scheme, the decision of GoI shall be final.

 

The timeline below summarises the important dates to be abided by Lending Institutions under the ex-gratia scheme.

 

Calculation Table-

 

[1] Our write up ‘Moratorium Scheme: Conundrum of Interest on Interest’ dated 16-09-2020, <http://vinodkothari.com/2020/09/moratorium-scheme-conundrum-of-interest-on-interest/>

[2] Operational guidelines on ex-gratia payment scheme  dated 23-10-2020, <https://financialservices.gov.in/sites/default/files/Scheme%20Letter.pdf>

[3] Department of Financial Services GOI notification dated 26.10.2020 < https://financialservices.gov.in/sites/default/files/FAQs%20on%20Ex%20gratia%20Package_26.10.2020_v1.pdf>; Department of Financial Services GOI notification dated 29.10.2020 <https://financialservices.gov.in/sites/default/files/FAQs.pdf>;

Department of Financial Services GOI notification dated 03.11.2020

<https://financialservices.gov.in/sites/default/files/FAQs%20dated%203.11.2020.pdf>; Department of Financial Services GOI notification dated 04.11.2020 <https://financialservices.gov.in/sites/default/files/FAQ_4.11.2020-converted.pdf>

[4] Writ Petition(s)(Civil) No(s). 825/2020; Supreme Court of India

[5] FAQs on moratorium- http://vinodkothari.com/2020/03/moratorium-on-loans-due-to-covid-19-disruption/

[6] FAQs on moratorium 2.0- http://vinodkothari.com/2020/05/moratorium-2-0-on-term-loans-and-working-capital/

 

Other Related Write-ups:

Moratorium Scheme: Conundrum of Interest on Interest