2020 – Year of changes for AIFs

Timothy Lopes – Senior Executive                                                                             CS Harshil Matalia – Assistant Manager


The year 2020 – ‘Year of pandemic’, rather we can say the year of astonishing events for everyone over the globe. Without any doubt, this year has also been a roller coaster ride for Alternative Investment Funds (‘AIFs’) with several changes in the regulatory framework governing AIFs in India.

Recent Regulatory Changes for AIFs

In continuation to the stream of changes, Securities Exchange Board of India (‘SEBI’), in its board meeting dated September 29, 2020, has approved certain amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’). The said amendments have been notified by the SEBI vide notification dated October 19, 2020. The following article throws some light on SEBI (AIFs) Amendment Regulations, 2020 (‘Amendment Regulations’) and tries to analyse its impact on AIFs.

Clarification on Eligibility Criteria

Regulation 4 of AIF Regulations prescribes eligibility criteria for obtaining registration as AIF with SEBI. Prior to the amendment,  Regulation 4(g), provided as follows:

“4 (g) the key investment team of the Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification;”

The amended provision to 4 (g) extends the meaning of relevant professional qualification, the effect of which seems to add more qualitative criteria to the management team of the AIF, to be evaluated  at the time of grant of certification. The newly amended section 4(g) of the AIF Regulations reads as follow:

“(g) The key investment team of the Manager of Alternative Investment Fund has –

  • adequate experience, with at least one key personnel having not less than five years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets; and
  • at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by the Board:

Provided that the requirements of experience and professional qualification as specified in regulation 4(g)(i) and 4(g)(ii) may also be fulfilled by the same key personnel.”

It is apparent from the prima facie comparison of language that the key investment team of the Manager may have one key person with five years of experience (quantitative) as well as a personnel holding professional qualification (qualitative) from institutions recognised under the regulation. Further, clarity has been appended in form of proviso to the section that quantitative and qualitative requirements could be met by either one person, or it could be achieved collectively by more than one person in the fund.

With this elaboration, SEBI has harmonized the qualification requirements as that with the requirement specified for other intermediaries such as Investment Advisers, Research Analysts etc. in their respective regulations. Detailed prescription on degrees and qualifications for AIF registration by SEBI is a conferring move and is expected to aid as a clear pre-requisite on expectations of SEBI from prospective applications for registration of the fund.

Formation of Investment Committee

Regulation 20 of AIF Regulations specifies general obligations of AIFs. Erstwhile, the responsibility of making investment decisions was upon the manager of AIFs. It has been noticed by the SEBI from the disclosures made in draft Private Placement Memorandums (‘PPMs’) filed by AIFs for launch of new schemes, that generally Managers prefer to constitute an Investment Committee to be involved in the process of taking investment decisions for the AIF. However, there was no corresponding obligation in the AIF Regulations explicitly recognizing the ‘Investment Committee’ to take investment decisions for AIFs. Such Investment Committees may comprise of internal or external members such as employees/directors/partners of the Manager, nominees of the Sponsor, employees of Group Companies of the Sponsor/ Manager, domain experts, investors or their nominees etc.

These  amendments are based on the recommendations to SEBI to recognize the practice followed by AIFs to delegate decision making to the Investment Committee.[1] The rationale behind amendments to AIF Regulations is based on the following merits as proposed in the recommendations::

  1. Presence of investors or Sponsors or their nominees in an Investment Committee which may serve to improve the due diligence carried out by the Manager, as they are stakeholders in the AIF’s investments.
  2. Presence of functional resources from affiliate/group companies of the Manager (legal advisor, compliance advisor, financial advisor etc.) in the Investment Committee may be useful to ensure compliance with all applicable laws.
  3. Presence of domain experts in the committee may provide comfort to the investors regarding suitability of the investment decisions, as the investment team of the Manager may not have domain expertise in all industries/ sectors where the fund proposes to invest.

Thus, the insertion was made, giving the option to the Manager to constitute an investment committee subject to the following conditions laid down in the newly inserted sub-regulation, i.e. Regulation 20(6) of the AIF Regulations given below –

  1. The members of the Investment Committee shall be equally responsible as the Manager for investment decisions of the AIF.
  2. The Manager and members of the Investment Committee shall jointly and severally ensure that the investments of the AIF comply with the provisions of AIF Regulations, the terms of the placement memorandum, agreement made with the investor, any other fund documents and any other applicable law.
  3. External members whose names are not disclosed in the placement memorandum or agreement made with the investor or any other fund documents at the time of on-boarding investors shall be appointed to the Investment Committee only with the consent of at least seventy five percent of the investors by value of their investment in the Alternative Investment Fund or scheme.
  4. Any other conditions as specified by the SEBI from time to time.

The constitution of investment committee is a global standard practice followed by the Funds. However, funds structure in India might be altered with the new defining role of investment committee under the AIF Regulations. The investment committee generally comprises of nominees of large investors in the fund and at times other external independent professional bodies that act as a consenting body towards prospective deals of the fund. The amendment will alter the role of investors holding positions at investment committee as the new defining role might deter them from taking underlying obligations. From the funds perspective seeking external independent professionals might get costly as there is an obligation introduced by way of this amendment regulation. Further, it casts an onus on the investment committee to be involved in day to day functioning of the fund, which used to be otherwise (where members were usually involved in mere finalising the deals).  Lateral entry of the members to investment committee post placement of memorandum with the consent of investors is aimed at greater transparency in funds functioning.

Test for indirect foreign investment by an AIF

As per Clause 4 of Schedule VIII of FEMA (Non-Debt Instrument) Rules, 2019 (‘NDI Rules’) any investment made by an Investment Vehicle into an Indian entity shall be reckoned as indirect foreign investment for the investee Indian entity if the Sponsor or the Manager or the Investment Manager –

(i) is not owned and not controlled by resident Indian citizens or;

(ii) is owned or controlled by persons resident outside India.

Therefore, in order to determine whether the investment made by AIFs in Indian entity is indirect foreign investment, it is essential to identify the nature of the Manager/Sponsor/investment manager, whether he is owned or controlled by a resident Indian citizen or person resident outside India.

RBI in its reply to SEBI’s query on downstream investment had clarified that since investment decisions of an AIF are taken by its Manager or Sponsor, the downstream investment guidelines for AIFs were focused on ownership and control of Manager or Sponsor. Thus, if the Manager or Sponsor is owned or controlled by a non-resident Indian citizen or by person resident outside India then investment made by such AIF shall be considered as indirect foreign investment.

Whether an investment decision made by the Investment Committee of AIF consisting of external members who are not Indian resident citizens would amount to indirect foreign investment?

In light of the above provisions of the NDI Rules and with the introduction of the concept of an “Investment Committee”, SEBI has sought clarification from the Government and RBI vide its letter dated September 07, 2020[2].


With the enhancement in eligibility criteria, SEBI has ensured that the investment management team of the AIF would have relevant expertise and required skill sets.

Further, giving recognition to the concept of an investment committee will cast an obligation on investment committee fiduciary like obligations towards all the investors in the fund. . However, there exists certain ambiguity under the NDI Rules, for applications wherein external members of investment committee who are not ‘resident Indian citizens’,   which is currently on hold and pending receipt of clarification.

[1] https://www.sebi.gov.in/sebi_data/meetingfiles/oct-2020/1602830063415_1.pdf

[2] https://www.sebi.gov.in/sebiweb/about/AboutAction.do?doBoardMeeting=yes

RBI aligns list of compoundable contraventions under FEMA with NDI Rules

‘Technical’ contravention subject to minimum compoundable amount, format for public disclosure of compounding orders revised.

– CS Burhanuddin Dohadwala | corplaw@vindkothari.com


Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. It provides comfort to any person who contravenes any provisions of FEMA, 1999 [except section 3(a) of the Act] by minimizing transaction costs. Reserve Bank of India (‘RBI’) is empowered to compound any contraventions as defined under section 13 of FEMA, 1999 (‘the Act’) except the contravention under section 3(a) of the Act in the manner provided under Foreign Exchange (Compounding Proceedings) Rules, 2000. Provisions relating to compounding is updated in the RBI Master Direction-Compounding of Contraventions under FEMA, 1999[1].

Following are few advantages of compounding of offences:

  1. Short cut method to avoid litigation;
  2. No further proceeding will be initiated;
  3. Minimize litigation and reduces the burden of judiciary;

Present Circular

Pursuant to the supersession of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017[2] (‘TISPRO”)and issuance of FEM (Non-Debt Instrument) Rules, 2019[3] [‘NDI Rules] and FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019[4] [‘MPR Regulations’], RBI has updated the reference of the erstwhile regulations in line with the NDI Rules and MPR Regulations vide RBI Circular No.06 dated November 17, 2020[5] (‘Nov 2020 Circular’).

Additionally, the Nov 2020 Circular does away with the classification of a contravention as ‘technical’, as discussed later in the article.

Lastly, the Nov 2020 Circular modifies the format in which the compounding orders will be published on RBI’s website.

Compounding of contraventions relating to foreign investment

The power to compound contraventions under TISPRO delegated to the Regional Offices/ Sub Offices of the RBI has been aligned with corresponding provisions under NDI Rules and MPR Regulation as under:

Compounding of contraventions under NDI Rules
Rule No. Deals with Corresponding regulation under TISPRO Brief Description of Contravention
Rule 2(k) read with Rule 5 Permission for making investment by a person resident outside India; Regulation 5 Issue of ineligible instruments
Rule 21 Pricing guidelines; Paragraph 5 of Schedule I Violation of pricing guidelines for issue of shares.
Paragraph 3 (b) of Schedule I Sectoral Caps; Paragraph 2 or 3 of Schedule I Issue of shares without approval of RBI or Government respectively, wherever required.
Rule 4 Restriction on receiving investment; Regulation 4 Receiving investment in India from non-resident or taking on record transfer of shares by investee company.
Rule 9(4) Transfer by way of gift to PROI by PRII of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank. Regulation 10(5) Gift of capital instruments by a person resident in India to a person resident outside India without seeking prior approval of the Reserve Bank of India.
Rule 13(3) Transfer by way of gift to PROI by NRI or OCI of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank.


Compounding of contraventions under MPR Regulations
Regulation No. Deals With Corresponding regulation under TISPRO Brief Description of Contravention
Regulation 3.1(I)(A) Inward remittance from abroad through banking channels; Regulation 13.1(1) Delay in reporting inward remittance received for issue of shares.
Regulation 4(1) Form Foreign Currency-Gross Provisional Return (FC-GPR); Regulation 13.1(2) Delay in filing form FC (GPR) after issue of shares.
Regulation 4(2) Annual Return on Foreign Liabilities and Assets (FLA); Regulation 13.1(3) Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).
Regulation 4(3) Form Foreign Currency-Transfer of Shares (FC-TRS); Regulation 13.1(4) Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident or from Non-resident to Resident.
Regulation 4(6) Form LLP (I); Regulations 13.1(7) and 13.1(8) Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by Limited Liability Partnerships (LLPs)/ delay in reporting disinvestment / transfer of capital contribution or profit share between a resident and a non-resident (or vice-versa) in case of LLPs.
Regulation 4(7) Form LLP (II);
Regulation 4(11) Downstream Investment Regulation 13.1(11) Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP.

Technical contraventions to be compounded with minimal compounding amount

As per RBI’s FAQs[1] whenever a contravention is identified by RBI or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide (i) whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice; (ii) whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or (iii) whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE). However, once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

Nov 2020 Circular provides for regularizing such ‘technical’ contraventions by imposing minimal compounding amount as per the compounding matrix[1] and discontinuing the practice of giving administrative/ cautionary advice.

Public disclosure of compounding order

Compounding order by RBI can be accessed at the RBI website-FEMA tab-compounding orders[1]. In partial modification of earlier instructions issued dated May 26, 2016[2] it has been decided that in respect of the Compounding Orders passed on or after March 01, 2020 a summary information, instead of the compounding orders, shall be published on the Bank’s website in the following format:

Sr. No. Name of the Applicant Details of contraventions (provisions of the Act/Regulation/Rules compounded)

(Newly inserted)

Date of compounding order

(Newly inserted)

Amount imposed for compounding of contraventions Download order


It seems that the compounding order will not be available for download.


The delegation of power is done for enhanced customer service and operational convenience. Revised format of disclosure of compounding orders will be more reader friendly. Delay in filing of forms under MPR Regulations on FIRMS portal is subject to payment of Late Submission Fees (LSF) as per Regulation 5. The payment of LSF is an additional option for regularising reporting delays without undergoing the compounding procedure.

Abbreviations used above:

  • PROI: Person Resident Outside India;
  • PRII: Person Resident In India;
  • NRI: Non-Resident Indian;
  • OCI: Overseas citizen of India;

FIRMS: Foreign Investment Reporting & Management System.

Our other articles/channel can be accessed below:

1. Compounding of Contraventions under FEMA, 1999- RBI delegates further power to Regional Offices:



2. Other articles on FEMA, ODI & ECB may be access below:



3. You Tube Channel:


[1] https://www.rbi.org.in/scripts/Compoundingorders.aspx

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10424&Mode=0

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10424&Mode=0

[1] https://m.rbi.org.in/Scripts/FAQView.aspx?Id=80 (Q. 12)

[1] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10190

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11253&Mode=0

[3] http://egazette.nic.in/WriteReadData/2019/213332.pdf

[4] https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=11723


FDI Policy consolidated after 3 years: mismatches with NDI Rules remain

FEMA (Non-Debt Instruments) Rules, 2019 requires to be aligned for few sectors.

Bunny Sehgal | Associate | Vinod Kothari and Company



The Department for Promotion of Industry and Internal Trade (‘DPIIT’) issued the Consolidated FDI Policy, 2020 (‘FDI Policy, 2020’) on October 28, 2020[1] in supersession of all press notes/ press release/ clarifications/ circulars issued by DPIIT. The FDI Policy, 2020, issued after 3 years[2], is effective from October 15, 2020. In case of any inconsistency or conflict between the provisions of FDI Policy 2020 and FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’), the relevant provisions of the NDI Rules will prevail.

FDI Policy is generally a compilation/ consolidation of all press notes/ press releases/ clarifications/ circulars issued by the DPIIT. The author has compared the FDI Policy, 2020 with the erstwhile policy, NDI Rules, and press notes issued by DPIIT in order to ascertain if there is any new insertion in the FDI Policy, 2020 or if the provisions deviate from NDI Rules and discussed the changes in this article.

1.   Definition of E-commerce entity

Under the NDI Rules, E-commerce entity means a company incorporated under Companies Act 1956, or the Companies Act, 2013.

However, under the FDI Policy, 2020, an E-commerce entity means the following:

  1. a company incorporated under Companies Act 1956, or the Companies Act, 2013;or
  2. foreign company under section 2 (42) of the Companies Act, 2013; or
  3. an office, branch or agency in India as provided in section 2 (v) (iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.

The FDI Policy, 2020 elaborates the definition further to include foreign company and office, branch or agency in India owned or controlled by a person resident outside India. The changes have been brought in line with the definition of E-commerce entity provided in the Press Note 2 of 2018[3] issued by Department of Industrial Policy and Promotion effective from February 01, 2019.

2.     FDI in Defence Sector

The provisions of the NDI Rules and the FDI Policy, 2020 with regard to the FDI sectoral cap and the necessary approvals for FDI in Defence Sector, have been provided as follows:

Sr. No. NDI Rules FDI Policy, 2020
1. Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act, 1951 and Manufacturing of small arms and ammunition under the Arms Act, 1959
Sectoral Cap- 100%

  • Automatic route– Upto 49%;
  • Government approval– Beyond 49%, wherever it is likely to result in access to modern technology or for other reasons to be recorded.
Sectoral Cap- 100%

  •  Automatic route– Upto 74%;
  • Government approval– Beyond 74%, wherever it is likely to result in access to modern technology or for other reasons to be recorded.
Other Conditions ( Relevant extract)
  •  Fresh foreign investment within the permitted automatic route, in a company not seeking industrial license, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, shall require Government approval.
  •  FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses.
  • Infusion of fresh foreign investment up to 49%, in a company not seeking industrial license, or which already has Government approval for FDI in Defence, shall require mandatory submission of a declaration with the Ministry of Defence in case change in equity /shareholding pattern or transfer of stake by existing investor to new foreign investor for FDI up to 49%, within 30 days of such change.

The limits provided in the FDI Policy, 2020 and other conditions were proposed vide press note 4 of 2020[4], and it will take effect from the date of FEMA notification. The FEMA notification in this regard is awaited, therefore, the amendment is not effective as on date.

3.     FDI in Private Security Agencies

The provisions of the NDI Rules and the FDI Policy, 2020 with regard to the FDI sectoral cap and the necessary approvals for FDI in Private Security Agencies, have been provided as follows:

Sr. No. NDI Rules FDI Policy, 2020
1. Sectoral Cap- Upto 49% through Government approval only. Sectoral Cap-  Upto 74%

  • Upto 49%- Automatic route;
  • Beyond 49% and upto 74%- Government approval

The sectoral cap for FDI in Private Security Agencies was revised as per the aforesaid limits vide Press Note 5 of 2016[5] dated June 24, 2016 effective on immediate basis. However, the NDI Rules continue to refer to old limits. The same is required to be aligned with FDI Policy, 2020

4.     FDI in Asset Reconstruction Companies

The FDI Policy, 2020 provides following additional conditions for making foreign investment in Asset Reconstruction Companies (ARCs) as prescribed in Press Note 4 of 2016[6] dated May 6, 2016 effective on immediate basis:

  1. A person resident outside India can invest in the capital of ARCs registered with Reserve Bank of India, up to 100% on the automatic route.
  2. The total shareholding of an individual FPI shall be below 10% of the total paid-up capital.

However, the NDI Rules do not provide for the aforesaid conditions in this regard. While (i) above is self-explanatory and that express provision will not make much difference, the condition given in (ii) is crucial.


The intent and objective of the Government of India is to attract and promote FDI in order to supplement domestic capital, technology and skills for accelerated economic growth and development. With the enforcement of FDI Policy, 2020, some gaps have been observed in the provisions of NDI Rules and FDI Policy, 2020 which have been left over either inadvertently, or due to pending notification of the same. Although, the FDI Policy, 2020 itself provides for the superiority of the NDI Rules in case of any conflict between the provisions of the FDI Policy, 2020, and the NDI Rules, it is imperative for the authorities to look into to bring the uniformity in the provisions.




[1] https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf

[2] The former Consolidated FDI Policy was issued in 2017.

[3] https://dipp.gov.in/sites/default/files/pn2_2018.pdf

[4] https://dipp.gov.in/sites/default/files/pn4-2020_0.PDF

[5] https://dipp.gov.in/sites/default/files/pn5_2016.pdf

[6] https://dipp.gov.in/sites/default/files/pn4_2016.pdf

SEBI’s stringent norms for secured debentures

Will it lead to a paradigm shift to unsecured debentures?

Shaifali Sharma | Vinod Kothari and Company



The debt market in India has seen significant growth over the years. Amongst the various debt instruments, debentures are one of the most widely used instruments for raising funds. In India, the regulatory framework for debt instruments is governed by multiple regulators through multiple regulations. As far as secured debentures are concerned, more stringent provisions have been prescribed by the respective regulators to protect the interest of investors. In theory, it seems that hard earned money invested by the investors in secured debentures are safe and secured against the assets of the company. However, some major defaults witnessed by debt market in the recent years depict a different reality.

Absence of identified security, delay in payment due to debenture holders and other increased events of defaults witnessed in recent years, has encouraged SEBI to revise the regulatory framework in relation to secured debentures and Debenture Trustees and thereby SEBI vide its circular[1] dated November 03, 2020 (‘November 03 Circular’), has issued norms with respect to the 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. Subsequently, on November 13, 2020, SEBI issued circular on Monitoring and Disclosures by Debenture Trustee[4], effective from quarter ended on December 31, 2020 for listed debt securities dealing with various issues namely monitoring of ‘security created’ / ‘assets on which charge is created’, action to be taken in case of breach of covenants or terms of issue, disclosure on website by Debenture Trustee and reporting of regulatory compliance.

The revised framework may pose challenges for corporates to raise fund through secured debentures and may leave them relying on unsecured debentures. In this article we shall discuss and analyse the impact and consequences of these stricter norms on companies and the way forward.

Current Scenario of Corporate Bond Market in India

The RBI Bulletin January, 2019[5] provides that the “total resource mobilisation by Indian corporates through public/private/rights issues is dominated by debt while equity accounts for close to 38%”.

In India, the corporate bond market is dominated by private placements, a graphical trend comparing corporate debt issuance under two routes i.e. public issue and private placement has been given below (‘table 1’). As per the latest data available with SEBI, the total amount raised through corporate bonds by way of private placement has increased from 4,58,073 crores to 6,74,702 crores in the last 5 years.

Table on amount raised through public and private placement issuances of Corporate Bonds in Indian Debt Market (Listed Securities)

Financial Year No. of Public Issues Total amount raised through Public Issue (in crores) No. of Private Placement (in crores) Total amount raised through Private Placement (in crores)
2015-16 20 33811.92 2975 458073.48
2016-17 16 29547.15 3377 640715.51
2017-18 7 4953.05 2706 599147.08
2018-19 25 36679.36 2358 610317.61
2019-20 34 14984.02 1787 674702.88
2020-21 (till Oct) 5 881.82 1157 442526


Source: Compiled from data available at SEBI’s website[6]

Table 1: Corporate Debt Issuance under Private Placement and Public Issue

As regards the concentration of secured borrowing in comparison to the unsecured borrowing in private placement market, the RBI Bulletin January 2019 further provides that ‘secured lending accounted for close to half of the total amount raised even in the private placement market of corporate debt’. The same may be understood from a graphical presentation below:

Source: RBI Bulletin January 2019

This includes secured and unsecured borrowing raised in the private placement market of corporate debt

As also noted by SEBI in its consolidation paper[7] dated February 25, 2020, in last 5 Financial Years the bond issuances were largely secured (approximately 76%).

Therefore, the above figures indicate that the volume of corporate bonds, particularly in private placement market, is higher in secured borrowings.

Regulatory Framework for issuing Secured Debentures

SEBI’s stringent norms for issuance of secured debentures

A company may issue secured debentures after complying with the extensive provisions as prescribed under the Companies Act, 2013 and SEBI Regulations. Further SEBI, in view of the increased events of defaults, challenges in relation to creation of charge, enforcement of security, Inter-Creditor Agreement process and other related issues, has reviewed the regulatory framework for Corporate Bond and Debenture Trustee and revisited the manner of issue of secured debentures by introducing amendments in DT Regulations[8], ILDS Regulations[9] and Listing Regulations[10] w.e.f October 08, 2020.

In furtherance to the above amendments made in ILDS Regulations and DT Regulations, SEBI vide November 03 Circular issued norms applicable to secured debentures intended to be issued and listed on or after January 01, 2021.

While the amended provisions aim to secure the interest of debenture holders, the same has raised compliance burden on issuer of secured debentures and thereby corporates may be inclined towards unsecured borrowing facilities due to following reasons:

  1. Creation of Recovery Expense Fund (REF)

Issuers shall create a Recovery Expense Fund (‘REF’) towards the recovery of proceeding expenses in case of default. The manner of creation, operation and utilization of Fund is prescribed by SEBI vide circular[11] dated October 22, 2020. It requires the Issuer to deposit 0.1% of the issue subject to a maximum of 25 lakhs per issuer. This means that all issuers with an issue size above of 250 crores will be required to deposit 25 lakhs to the REF irrespective of the amount.

All the applications for listing of debt securities made on or after January 01, 2021 shall comply with the condition of creation of REF and the existing issuers whose debt securities are already listed on Stock Exchange(s) shall be given additional time period of 90 days to comply with creation of REF.

This fund is in addition to the requirement of creation of Debenture Redemption Reserve and Debenture Redemption Fund and therefore would entails additional compliance cost to the issuer.

  1. Due diligence by Debenture Trustee for creation of security

The Debenture Trustee is required to assess that the assets for creation of security are adequate for the proposed issue of debt securities. However, there is no clarity on who is to bear the cost of due diligence. In case the same is to be borne by the issuer, the issue expense will unnecessarily increase.

In case of creation of further charge on assets, the Debenture Trustee shall intimate the 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 Debenture Trustee within next 5 working days.

In cases where issuers have common Debenture Trustee for all issuances and the charge is created in favour of Debenture Trustee, the requirement seems impracticable.

  1. Creation of security and strict time frame of listing debentures through private placement

The November 03 Circular mandates creation of charge and execution of Debenture Trust Deed with the Debenture Trustee before making the application for listing of debentures.

SEBI vide its circular[12] dated October 5, 2020, effective for issuance made on or after December 1, 2020, requires the listing of private placement to be completed within 4 trading days from the closure of the issue. Where the issuer fails to do so, he 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 will also be liable to penalty as may be prescribed.

In such scenario, it would be arduous for issuers and Debenture Trustee to comply with the procedural requirements in such stringent timelines.

  1. Entering into Inter-Creditor Agreement (ICA)

An ICA is an agreement between all lenders of a borrower through which lenders collectively initiate the process of implementing a Resolution Plan as per RBI guidelines in case of default. These provisions are applicable to Scheduled Commercial Banks, All India Term Financial Institutions like NABARD, SIDBI etc., small finance banks and NBFC-D. Trustees may join the ICA subject to the approval of debenture holders and conditions prescribed. Debenture Trustee may subject to the approval of debenture holders enter into ICA as per the RBI framework.

  • While the ICA is entered with the approval of debenture holders, however, the debenture holders may not be familiar of the concept of ICA and consequences, positive / negative, of joining ICA resulting into uninformed decision.
  • RBI guidelines on ICA applies to institutional entities and it does not provide any rights for debenture holders.
  • While the Debenture Trustee is free to exit the ICA, it will be challenging to exit ICA and enforce security in case of pari-passu charge.

In addition to the reasons stated above, other stringent compliances as introduced by the SEBI may impose burden and encourage corporates to give a second thought on shifting to unsecured debentures.

Should issuers move towards unsecured debt raising?

While the amendments focus on secured debentures, yet one of the major points in the SEBI Consultation Paper was creation of an ‘identified charge’ on assets. The proposal was in the light of the fact that in case of issuers like NBFCs, the debentures are secured by way of floating charge on receivables. Now, as is known, floating charges are enterprise-wide charges hovering on general assets of the company, unlike fixed charges. Floating charges are subservient to fixed charges. Further, the extant provisions of the Insolvency and Bankruptcy Code are not clear on the treatment of floating charges vis-à-vis unsecured debt. Hence, the prevalence of floating charges on receivables is not of much relevance in the case of issuers like NBFCs. Therefore, ‘secured’ debentures, might actually be an illusion and may have no concrete effect. Hence, with more stringent conditions coming in, it might actually be a motivation to the issuers to move to unsecured debentures.

Fund raising via unsecured debentures and applicability of Deposit Rules

Given the stringent regulatory framework for issuance and listing of secured debentures as discussed above, corporates may start looking for other sources of raising funds, including unsecured debt issuances. In case of issue of unsecured debentures, one has to see the applicability of the Companies (Acceptance of Deposits) Rules, 2014 (‘Deposits Rules’) or Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016[13] (‘NBFC Deposit Directions’), in case of NBFCs, in this regard.

Applicability of Deposit Rules / NBFC Deposit Directions for issuance of unsecured debentures

Applicability Whether deposits?
Secured debentures Unsecured debentures


For Companies


(on which Deposits Rules apply)

Secured debentures shall not be considered as deposits


Definition of ‘deposit’ under Rule 2 (1)(c)(ix) of the Companies (Acceptance of Deposits) Rules, 2014 excludes debentures which are secured by first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Companies Act, 2013 excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within ten years.

Further, if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures cannot exceed the market value of such assets as assessed by a registered valuer.

Unsecured debentures shall be considered as deposits, unless listed on any recognized Stock Exchange.


Amount raised by issue of unsecured non-convertible debentures listed on a recognised stock exchange as per applicable regulations made by SEBI shall not be considered as deposits since exempted under Rule 2(1)(c)(ixa) of the Companies (Acceptance of Deposits) Rules, 2014.



(on which NBFC Deposits Directions apply)

Secured debentures shall not be considered as public deposits


As per the definition of ‘public deposit’ under para 3(xiii)(f)  of the Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016, any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the company; or by any other asset or which would be compulsorily convertible into equity in the company provided that in the case of such bonds or debentures secured by the mortgage of any immovable property or secured by other assets, the amount of such bonds or debentures shall not exceed the market value of such immovable property/other assets;

Unsecured debentures shall be considered as public deposits, except in case of issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at Rs.1 crore and above


As per para 3(xiii)(fa) of said Master Directions, any amount raised by issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at Rs.1 crore and above, provided that such debentures have been issued in accordance with the guidelines issued by the Bank as in force from time to time in respect of such non-convertible debentures shall not be treated as public deposits.

Thus, the debentures will either have to be secured, or will have to be listed in order to avail exemption from the Deposit Rules/ NBFC Deposit Directions.

Compliance Corner: How different is unsecured from secured debentures?

A brief comparison of the requirements of issuance of secured and unsecured debentures is summarized below:

Sr. No. Basis of Comparison Section/ Rule Secured Debentures Unsecured Debentures
1. Creation of security Section 71(3) of the Companies Act, 2013 read with Rule 18 of Companies (Share Capital and Debentures) Rules, 2014 (‘Debenture Rules, 2014’) Secured by the creation of a charge on the properties or assets of the company or its subsidiaries or its holding company or its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.


Charge or mortgage shall be created in favour of the debenture trustee on:

  • any specific movable property of the company or its holding company or subsidiaries or associate companies or otherwise;
  • or any specific immovable property wherever situate, or any interest therein;
  • in case of a NBFCs, the charge or mortgage may be created on any movable property
No security created.
2. Registration of charge Section 77 of the Companies Act, 2013 Issuer shall register the charge within 30 days of its creation/ modification or such additional period as may be prescribed. Not Applicable
3. Redemption Period Rule 18(1)(a) of Debentures Rules, 2014 To be redeem within 10 years from the date of issue

Companies engaged in setting up infrastructure projects, infrastructure finance companies, infrastructure debt fund NBFCs and companies permitted by the CG, RBI or any other statutory authority may issue for a period exceeding 10 years but not exceeding 30 years.

No redemption time frame prescribed for unsecured debentures.
4. Voting Rights Section 71(2) the Companies Act, 2013 Does not carry voting rights Does not carry voting rights
5. Creation of Debenture Redemption Reserve (DRR) Section 71(4) read with Rule 18(7) of Debentures Rules, 2014 DRR/DRF requirement does not depend whether debentures are secured or unsecured, rather it depends on the type of company and the mode of issue i.e. public issue or private placement. Subject to same provisions


6. Appointment of Debenture Trustee Section 71(5) read with Rule 18(1)(c), (2) of Debenture Rules, 2014 Required in case the offer or invitation is made to the public or if the total number of members exceeds 500 for the subscription of debentures [Section 71(5)].

ILDS requires appointment of DT in case of every listed debentures.

Subject to same provisions
7. Duties of Debenture Trustee Section 71(6) read with Rule 18(3) & (4) of the Debenture Rules, 2014, SEBI (ILDS) Regulations, 2008 and SEBI (DT) Regulations, 1993 In accordance with provisions of Section 71(6) read with Rule 18(3) & (4) of the Debenture Rules, 2014

Other obligations as prescribed under SEBI (ILDS) Regulations, 2008 and SEBI (DT) Regulations, 1993

Subject to same provisions
8. Failure to redeem or pay interest on debentures Section 71(10), 164(2) of the Companies Act, 2013
  • In case of failure by the company to redeem the debentures on the date of their maturity or pay interest on the debentures when it is due, an application may be made by any or all of the debenture-holders, or debenture trustee to the Tribunal. The Tribunal can direct the company to redeem the debentures forthwith on payment of principal and interest due thereon.
  • If a company fails to pay interest on debentures, or redeem the same, and the failure continues for one year or more, all the directors of such delinquent company become disqualified.
Subject to same provisions
9. Listing of Debentures SEBI (ILDS) Regulations, 2008, SEBI (LODR) Regulations, 2015 Issuer to comply with the provisions of SEBI (ILDS) Regulations, 2008. Post listing, the issuer, in addition to SEBI (ILDS) Regulations, 2008, shall also comply with provisions of SEBI (LODR) Regulations, 2015 and SEBI (Prohibition of Insider Trading) Regulations, 2015. Subject to same provisions

Neither the Companies Act, 2013 nor the Debenture Rules, 2014 elaborate the manner of issue of unsecured debentures. However, the provisions for issue of unsecured debentures are almost the same as that for secured debentures except certain conditions such as redemption period, requirement of creation of charge on the assets of the issuer and filing charge with the Registrar of Companies.

Investors perspective may also prove the same stand –the unsecured debentures don’t carry securities against any assets of the company unlike in case of secured debenture, however the debenture-holder(s) or the Debenture Trustee may approach the Tribunal which may then direct the company to honour its debt obligations.

Concluding Remarks

From the issuer’s perspective, the debentures have to be secured so as to escape from the Deposit Rules. This is one of the main reasons why companies issue secured debentures.  While the issuer may be able to avoid the rigorous compliances of Deposits Rules, issuing secured debentures have apparently become very stringent.

From investor’s viewpoint, it may seem that the investment in secured debentures is safe as company has created charge on its assets sufficient to discharge the principle and interest amount. Yet some major defaults in past have made the investors more hesitant to invest in the secured debentures.

While at this stage it was important for SEBI to make the norms more stringent to safeguard the interest of the debenture holders, however, it will be challenging for the issuers to comply with such norms, failing which they may be inclined towards issuance of unsecured debt issuances.

Although unsecured debentures do not provide any security against investment, issuer may still rewards investors with higher yields which is a pay-off for increased risk taken by the investor.

Given the new compliance burden and their stringencies for issuance and listing of secured debentures, it will be interesting to see how the ratio of secured and unsecured borrowings changes in the coming years. For the sake of it, the upcoming trends, preferences and acceptability of stringencies by the corporates will be very vital for observation.

Other reading materials on the similar topic:

  1. ‘This New Year brings more complexity to bond issuance as SEBI makes it cumbersome’ can be viewed here
  2. ‘SEBI responds to payment defaults by empowering Debenture Trustees’ can be read here
  3. 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

[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://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/2ICBMIMM141CFFF458BB4B3A9F4C006F4AE4897F.PDF

[6] https://www.sebi.gov.in/statistics/corporate-bonds/privateplacementdata.html

[7] 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

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

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

[10] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

[11] 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

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

[13] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10563&Mode=0#C2

Sale of Legal Entity as an Asset: A step towards value maximization

Megha Mittal 


Maximization of value of assets of the corporate debtor is one of the primary objectives of the Insolvency and Bankruptcy Code, 2016 (“Code”/ “IBC”); and it is towards this objective that the Code requires a mandatory corporate insolvency resolution process to ensue prior to liquidation. The rationale behind such specified order is that under corporate insolvency resolution process, the corporate debtor is taken over as a going concern, which as per settled economic argument attracts a much better value via-a-vis disposal of assets. It is in view of such rationale that the liquidation laws also provide sufficient flexibility to keep the corporate debtor a going-concern even after commencement of liquidation[1].

Having said so, while the Liquidation Regulations allow sale of the corporate debtor as a going-concern, one cannot overlook the fact that the likelihood of the going-concern sale is already rusted by the time the corporate debtor reaches the liquidation stage.

 It is a common economic understanding that sum of parts is better than sum of the parts; and it is by virtue of such principle that going-concern values are generally in excess of value of individual assets. The various assets, stitched together as one, constitute a much greater value than the same assets in isolation.

In this backdrop, what may be considered as a rather unexplored territory is the prospect of sale of the legal entity only, sans the other assets that the corporate debtor may have. In this note, we analyse and put forth a case for saleability of legal entity itself, without other conventional assets, under the Code.

Read more

Corporate Restructuring- Corporate Law, Accounting and Tax Perspective

Resolution Division 


Restructuring is the process of redesigning one or more aspects of a company, and is considered as a key driver of corporate existence. Depending upon the ultimate objective, a company may choose to restructure by several modes, viz. mergers, de-mergers, buy-backs and/ or other forms of internal reorganisation, or a combination of two or more such methods.

However, while drafting a restructuring plan, it is important to take into consideration several aspects viz. requirements under the Companies Act, SEBI Regulations, Competition Act, Stamp duty implications, Accounting methods (AS/ Ind-AS), and last but not the least, taxation provisions.

In this presentation, we bring to you a compilation of the various modes of restructuring and the applicable corporate law provisions, accounting standards and taxation provisions.


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

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

-Aanchal Kaur Nagpal, Executive & Burhanuddin Dohadwala, Manager



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.


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)


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.


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)


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.


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:


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


3. Youtube Channel:


4. Other write-ups:


[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

Schemes of Arrangement under the Scanner

Listed Companies made subject to stricter scrutiny and multilevel approvals

-Megha Mittal


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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