SEBI proposes liberal provisions for promoter reclassification

Shaivi Bhamaria | Vinod Kothari and Company


Reg. 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) lays down conditions pursuant to which promoters/ person belonging to promoter group of a listed entity can be reclassified as public shareholders. Reg. 31A (5) provides that if a public shareholder seeks to re-classify itself as promoter, it will have to make an open offer as per the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

SEBI on November 23, 2020 has issued a Consultation Paper on Re-Classification of Promoter/ Promoter Group Entities and Disclosure of the Promoter Group Entities in the Shareholding Pattern[1] (‘Consultation Paper’) for public comments. At present SEBI has been granting relaxations from the requirements under reg. 31A of the LODR regulations on a case to case basis to promoters who have found reclassification difficult under current regulatory regime.  The said Paper has been issued on the basis of the recommendations of the Primary Market Advisory Committee (‘PMAC’) of SEBI in order to regularise the provisions relating to reclassification and minimise the need for providing relaxation on case-to-case basis.

Current Framework:

A summary of the present reclassification process is laid down below:

  1. The promoters/person belonging to promoter group seeking reclassification as public shareholders must satisfy the conditions laid down in reg. 31A (3) (b) of the LODR regulations;
  2. The listed entity must be in compliance with the conditions laid down in reg. 31A (3) (c) of LODR regulations;
  3. Promoters/person belonging to promoter group must make a request for re-classification to the board of directors of the listed entity. The request must contain the rationale for seeking re-classification and also a statement on how the conditions specified in reg. 31A (3) (b) are satisfied;
  4. The board after analysing the request must place the same along with its views, for approval of the shareholders in a general meeting. There should be a time gap of at least three months but not exceeding six months between the date of board meeting and the shareholder’s meeting;
  5. The request for re-classification should be approved in the general meeting by an ordinary resolution in which the promoter/ persons belonging to promoter group seeking re-classification cannot not vote to approve such re-classification request;
  6. Not later than 30 days from the date of approval by shareholders in general meeting, an application along with all relevant documents for re-classification must be made to the stock exchanges where the entity is listed. In case the entity is listed on more than one stock exchange, the concerned stock exchanges will jointly decide on the application.

Examples of case-to-case relaxation provided by SEBI

  1. Exemption from obtaining shareholders’ approval

In the informal guidance given to Alembic Pharmaceuticals Limited[2] SEBI had exempted the company from obtaining approval of shareholder for reclassification of 5 promoters as public shareholders inter-alia on the grounds that:

  1. The promoters cumulatively held 1.45% of the equity share capital of the company.
  2. They were senior citizens, leading independent lives and were not directly or indirectly connected with any activity of the company.
  3. They did not exercise any direct or indirect control over the affairs of the company, had never at any time held any position of key managerial personnel in the company.
  4. They did not had any special rights through formal or informal arrangements with the company or any promoter/person of the promoter group.
  5. They undertook that they would never be privy to any price sensitive information of the company

Further, in the informal guidance given to Gujarat Ambuja Exports Limited[3], SEBI had exempted the company from obtaining approval of shareholder for reclassification of one its promoters on the grounds that:

  1. the shareholding of the promoter was insignificant, constituting only 0.23% of the total paid up equity;
  2. Though being the son of a promoter, the said person was neither involved in the operations of the company nor was connected with the company.
  3. He did not exercise any direct or indirect control over the affairs of the company, did not have veto rights or special rights as to voting or control nor has any special information rights.
  4. Further the company had not entered into any shareholder agreement with him and he would never be privy to any price sensitive information of the company.

It is pertinent to note that SEBI in its interpretative letter had stated that the company would not be required to take shareholders’ approval, subject to compliance with the provisions of reg. 31A of LODR regulations. Reg, 31A of LODR regulations provide for shareholders’ approval, hence it was not very clear whether exemption from obtaining shareholders’ approval was granted or not.

Proposed amendments

1.      Relaxing the threshold of maximum voting rights allowed to be exercised by an outgoing promoter

At present reg. 31A (3) (b) (i) of LODR regulations provide that promoter/ persons belonging to promoter group seeking re-classification should not together hold more than 10% of the total voting rights in the listed entity.

The Consultation Paper proposes to increase the threshold of 10% to 15%, to enable those promoters who have shareholding of less than 15% but are no longer involved in the day-to-day control of the listed entity to opt-out from being classified as promoters, without having to reduce their share-holding.

2.      Suggestions for speeding up the process:

a.      Time limit within to place the reclassification request to be placed before the board

At present reg. 31A of LODR Regulations is silent on the time period within which the listed entity must place the reclassification request received from the promoter/ persons belonging to promoter group before the board, consequently as per SEBI’s data, in certain cases reclassification requests from promoter/ persons belonging to promoter group have not been placed before the Board, thereby ceasing the process in its initial phase.

To prevent this and streamline the process of reclassification, SEBI has proposed insertion of a time limit of one month receiving the reclassification request, within which the listed entity must place the same before its board of directors.

b.      Reduction in time period between board and shareholders meeting

As mentioned above, reg. 31A (3) (a) (ii) provides that the time gap between the meeting of the board at which the proposal for reclassification was accepted and the meeting of the shareholders, seeking approval for the same should be at least 3 months. The rationale behind the same was to give adequate time to the shareholders for considering the request of the promoter.

However, time gap 3 months resulted in an increase in the total time taken in the process. In order to increase both cost and time efficiency, the Consultation Paper proposes to reduce the minimum time gap from 3 months to 1 month.

3.      Extending the ambit of exemption from the procedure

a.      In case of reclassification is pursuant to an order/ direction of Government/ regulator

At present reg.  31A (9) provides exemption from the provisions of reg. 31A (3), (4) and (8)(a), (b) of LODR regulations in cases where re-classification of promoter/ persons belonging to promoter group is as per the resolution plan approved under s. 31 of the IBC, subject to the condition that the promoter seeking re-classification do not remain in control of the listed entity.

It is proposed to extend the said exemption to re-classification pursuant to an order/ direction of the Government/ regulator and/or as a consequence of operation of law since the re-classification is a natural consequence of the order/direction of the Government/ regulator.

b.      In case of reclassification of existing promoter pursuant to open offer

It is proposed to extend the exemption from procedure for re-classification to cases where the re-classification is pursuant to an open offer made in accordance with the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SAST regulations’), subject to the satisfaction of following conditions:

  1. The intent of the existing promoters to re-classify has been disclosed in the letter of offer
  2. The promoter/ persons belonging to promoter group being reclassified fulfil the conditions mentioned in reg. 31A(3)(b) and the listed entity fulfils the conditions stipulated at reg. 31A(3)(c) of LODR regulations.

The rationale behind the exemption being that in cases where intent of reclassification has already been mentioned in the Letter of Offer, the requirement of promoter making an application is a mere procedural formality since the fact of re-classification is already present in the public domain.

c.       Cases where the outgoing promoter is absconding / non-cooperating

Exemption from the procedure for re-classification, is also proposed to be granted in cases where, pursuant to an open offer, a listed entity intends to re-classify erstwhile promoter/ persons belonging to promoter group but the promoter/ persons belonging to promoter group are not traceable or are not co-operative, but the same can be done after the fulfillment of the following conditions:

  1. The listed entity should demonstrate that efforts have been taken to contact the promoters through issuance of notices in newspapers, stock Exchange websites etc.
  2. Such promoters seeking re-classification should not remain in control of the listed entity

4.      Disclosure of names of promoter group entities in the shareholding pattern

Reg. 31 of LODR Regulations mandates that all entities falling under promoter/ promoter group are to be disclosed separately in the shareholding pattern.

As a matter of practice, several companies do not disclose names of persons in promoter/ promoter group who do not hold any shares.

It is to be noted that pursuant to the SEBI (Listing Obligations and Disclosures Requirements) (Sixth Amendment) Regulations, 2018[4] SEBI had, by virtue of by insertion of reg. 31(4) required that all entities falling under promoter and promoter group be disclosed separately in the shareholding pattern of listed entities appearing on the website of the stock exchanges in accordance with the formats specified by the SEBI . However, since the provisions of the Regulations still did not explicitly require entities to disclose the entire list of promoter/ promoter group irrespective of their shareholding, companies continued the practice of disclosing only those promoter/ promoter group entities that held shares in the company.  A detailed write-up on this insertion in Reg 31(4) can be read here.

To fill this gap, it has been proposed that all entities falling under promoter and promoter group be disclosed separately even if they do not hold shares in entity. Further it is proposed that listed entities obtain a declaration on a quarterly basis, from their promoters on the entities/ persons that form part of the ‘promoter group’.

Disclosures of all entities falling under promoter/ promoter group irrespective of the fact whether they hold shares in the listed entity hold all the more importance in light of the recent SEBI circular on Automation of Continual Disclosures under reg. 7(2) of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT regulations’). In order to facilitate System Driven Disclosures (‘SDD’)[5]  pursuant to the said circular, the listed entities are  required to disclose to the designated depository the PAN number/ Demat account number (for PAN exempt entities) of all Promoters and promoter group so that the system can capture any trade in securities made by such entities.


Exemptions provided in the consultation paper in cases of open offer and order/ direction of Government/ regulator lead to reduction in compliance burden on the listed entity, further the proposed amendments w.r.t reduction in time gap between the board meeting and general meeting and the setting of time limit for placing the application before the board will lead to streamlining the entire process and bring efficiency in the same.

The clarification w.r.t to disclosure of names of promoter group entities holding ‘Nil’ shareholding and obtaining quarterly declarations from promoter may add to the compliance burden of listed entities at once, but in our view, should be effective in the long run.

Specific comments/suggestions on the Consultation Paper can be made to SEBI on or before December 24, 2020.


[1] For full text of the consultation paper see:,-15,71

[2] For full text of the informal guidance see:

[3] For full text of the informal guidance see:

[4] See:

[5] Circular no. SEBI/HO/ISD/ISD/CIR/P/2020/168 dated September 09, 2020 available at:,-16,559

Benevolent move of SEBI for a more democratic shareholder participation

-Effectiveness however doubtful!

Abhishek Saraf | Vinod Kothari and Company


SEBI observed that under the current remote e-voting framework, the participation of the public non institutional shareholders/ retail shareholders (shareholders) is at negligible level. One of the reasons behind such low participation may be due to reluctance of the shareholders to register with multiple e-voting service providers (ESPs) which provide the e-voting facility to the listed entities. Shareholders may be finding it a tedious task to register with multiple ESPs for casting their vote and maintain multiple user IDs and passwords for the said purpose.

In view of the same and with the intent to increase the optimum utilization of the remote e-voting process by shareholders, SEBI came out with consultative paper[1] on 5th March 2020 to review the e-voting mechanism as provided by various ESPs.

Based on the public comments on consultative paper, SEBI vide its circular[2] dated 09th December 2020 decided to enable the facility of a singly log in credential for the purpose of e-voting for all demat account holders.

This article covers the circular along with our analysis on the probable impact which SEBI intends to achieve by way of easing and at the same time securing the remote-e-voting process for shareholders.

Existing Mechanism

The existing mechanism requires shareholders to register themselves with ESPs and have a separate login credential for each ESP to be able to cast their vote on resolutions proposed to be passed at the general meetings. The same can be explained better with the help of the following example:

Suppose a shareholder Mr. S holds shares in 3 companies and these companies appoint different ESPs for providing remote e-voting facility to vote on the resolutions proposed to be passed at their respective general meeting.

Now the shareholder shall register himself with all the 3 ESPs and have a separate login credential for each ESP to be able to cast his vote. Under the given situation, the shareholder may find it tedious and therefore, skip the whole process itself.  The notice calling the general meeting contains the instruction for logging in the portal of the Depository in the following manner:

SEBI’s move to increase remote-e-voting

With an intent to address the issue of negligible voting by the shareholders, SEBI has introduced a mechanism to make e-voting process more secure, convenient and simple for shareholders under which the shareholder will be allowed to cast their vote directly through their demat accounts/ Depositories/ Depositories Participants without having to go through the hassle of registering with various ESPs and maintaining a list of multiple user IDs and passwords. In the process, only a single login credential will be enough for the shareholders to participate in remote e-voting and register their vote in respect of any item.

The existing process as envisaged above will be replaced with a single doorstep which will be accessed by a single login credential under which the shareholder shall be allowed to vote without any further authentication by ESPs.

By taking the help of the above example, the new facility can be explained in the following manner-

Under the new facility, Mr. S does will not have to maintain login credentials for all the 3 ESPs but only have to register with the Depository either directly or through his demat accounts with Depsoitory Participants to have access to all the ESPs through a single log in without additional authentication with ESPs. This has been explained in detail below.

The facility shall be implemented in 2 phases.

Under Phase -1:

SEBI has instructed to implement the process as provided in Phase-1 within 6 months of the date of the circular (i.e. within 9th June 2021).

Shareholders with demat accounts have been provided the option to either directly register with Depositories to access the e-voting page of various ESPs through websites of the Depositories or accessing various ESP portals directly from their demat accounts, through the facility provided by the depository without any further authentication by ESPs, for participation in the e-voting process.

Under Phase-2:

SEBI has instructed to implement Phase 2 within 12 months from the completion of the process in Phase 1.

Under the 2nd phase, it has been proposed to further enhance the convenience and security of the system with the help of One Time Password (OTP) verification mechanism wherein the shareholders will be allowed to login through registered mobile number or E-mail based OTP verification as an alternate in place of logging through username and password for cases where shareholders have directly registered with the Depository

Further for logging in through demat account with the DPs, a second factor authentication using mobile or e-mail based OTP shall also be introduced after logging in.

While the SEBI circular requires implementation in two phases, the consultative paper was different on the following fronts:-

  • Consultative paper did not provide for implementation of the mechanism in a phased manner;
  • It was proposed that only the Depositories will be required to establish a dedicated helpline unlike the SEBI circular where both Depositories and ESPs are required to have a dedicated helpline;
  • The consultative paper proposed that the ESPs shall send details of the votes cast, to the shareholders, via SMS/ Email whereas the circular places the responsibility of sending a confirmatory SMS on the Depository based on the confirmation received from ESPs.
  • Sharing of necessary details and logs by Depositories with ESPs and sharing of electronic logs and other related information with respect to e-voting transactions with Depositories by ESPs as proposed in the consultative paper has been done away with in the circular.

To dos for Depositories and ESPs


  • Accountable for authentication – The Depository has been made responsible to carry out the authentication of the shareholders and voting will be allowed by ESPs based on the Depository’s authentication.
  • Flash messages/ reminders – Another step taken to increase participation is SMS/ email alerts by the Depository to the demat account holders atleast 2 days prior to the date of the commencement of e-voting. The listed entity shall provide the details of its upcoming AGMs requiring voting to Depository who shall then send a SMS/ email alerts.
  • Dedicated helpline – Depositories to establish a dedicated helpline to resolve technical difficulties faced by shareholders relating to the e-voting facility


  • Dedicated helpline- listed companies shall ensure that the ESPs engaged by them also provide a dedicated helpline in this regard.
  • Better Disclosure- To enable shareholders to take informed decisions while voting on any proposed resolution of a Company, ESPs has been instructed to provide web-link to the disclosures made by the Company on the stock exchange website and report on the website of the proxy advisors.


This framework for one stop log-in has only been made mandatory in respect of public non-institutional shareholders/ retail shareholders and the existing process may continue for all physical shareholders and shareholders other than individuals viz. institutions/ corporate shareholders. Further, SEBI’s perception on the current shareholder participation is based on its public consultation and is probably because, the shareholders are not taking the trouble of registering themselves with the various ESPs.

The step taken by SEBI towards a more democratic participation of the shareholders may be effective in the long run. However, its current effectiveness seems to be doubtful unless the shareholders for whom the same has been made, find it useful and be ready to implement the same.




SEBI proposes enhanced disclosures for meetings with analyst, investors, etc.

– To curb information asymmetry and risk of divulging UPSI

 Shaifali Sharma | Vinod Kothari and Company


Analyst and investor meets are one of the many ways of communicating and sharing information. Conducting periodical meetings, conferences, one-to-one meetings or con-calls with analysts or investors who wish to know more about the company, its historic performance, financial details, future prospects, etc. is a common practice for the listed entities.  The most common amongst these meetings are the earning calls which is called immediately following the release of the quarterly or annual financial results. Whereas, one-to-one meets or conference calls with selective investors/ analysts are also conducted in the normal course of business of the companies.

With the intent to rule out any information asymmetry in the market, the schedule, presentations or any information material used during such  analyst or institutional investor meetings are required to be disclosed by companies to stock exchange(s) and also hosted on the company’s website as required under the SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015 (‘Listing Regulations’).

Moreover, the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) requires fair disclosure of material events and therefore, provides principles for fair disclosure which includes

  • publication of transcripts or recordings of analyst/ investor meetings on company’s website; and
  • ensuring information shared with analysts and research personnel is not an unpublished price sensitive information (‘UPSI’).

The governing Regulations are discussed in this article.

However, looking at the practice of most of the listed companies, it has been observed that such disclosures are simply box ticking exercise where disclosure of mere PowerPoint slides of presentation are given instead of what is discussed in the meeting to give an example.

The concerns relating to disclosures in respect of analyst meets/ institutional investors meet/ conference calls were discussed by Primary Market Advisory Committee (‘PMAC’) constituted by SEBI in July, 2020 which then formulated a Sub-Group to recommend specific disclosure requirements to strengthen analyst/ investor meets. In this regard, a ‘Report on disclosures pertaining to analyst meets, investor meets and conference calls[1]’ (‘Report’) has been issued on November 20, 2020 seeking public comments on or before December 21, 2020. The Sub-Group has recommended to make the disclosure requirements optional for the initial one year and mandatory thereafter for all the listed companies. This article attempts to analyse the recommendations and their probable impact on the current regime under the Listing Regulations and PIT Regulations.

Further, on perusing the Report it has been observed that it explicitly distinguishes between scheduled meeting with the analysts and investors and unscheduled one-to-one calls with them. This article discusses the intention behind such distinction recognised by SEBI itself.

Current Regulatory Framework in India governing Analyst/ Institutional Meets

Listing Regulations

Regulation 46(2)(o) of the Listing Regulations requires the listed entity to disseminate the schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submitting the same to the stock exchange. The aforesaid Regulation is reproduced below:

“46(2) The listed entity shall disseminate the following information under a separate section on its website:


(o) schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submission to stock exchange;”

Further, Part A(A)(15) of Schedule III of the Listing Regulations read with SEBI circular[2] dated September 09, 2015, requires the listed entity to disclose the schedule of analyst or institutional investor meet and presentations on financial results made to such analysts or institutional investors without any application of the guidelines for materiality as specified u/r 30(4) of the Listing Regulations.

Furthermore, Part C(8)(e) of Schedule V of the Listing Regulations requires the listed entity to disclose the presentations made to the institutional investors or analysts in the section on the Corporate Governance of the Annual Report under the head ‘Means of Communication’.

Apart from above requirements, principles governing disclosures and obligations of listed entity shall be simultaneously conformed viz.  to provide adequate and timely information to recognised stock exchange(s) and investors, provide adequate and timely information to shareholders, to ensure timely and accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the listed entity, etc. 

PIT Regulations

Pursuant to Regulation 8 of PIT Regulations, every listed company is required to formulate a Code of Fair Disclosure and Conduct for fair and timely disclosure of UPSI in compliance with the principles set out in Schedule A to the PIT Regulations. The principles of fair disclosure w.r.t analyst meet is as follows

  • to ensure that information shared with analysts and research personnel is not UPSI; and
  • to develop best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.

Regulatory Regime in other Countries

Country Name Disclosure Requirement


  • The Regulation FD[3] (for “Fair Disclosure”) issued by the Securities and Exchange Commission provides that an issuer or his official while entering into a private discussion with an analyst who is seeking guidance about earnings estimates, shall not communicate any material non-public information (MNPI).
  • It does not prohibit from communicating material non-public information to an analyst, the company may do so after making public disclosure of such information.
  • No practice of recording or transcribing the investor meetings
  • Market Abuse Regulations[4] prevents companies from making selective disclosure of MNPI.  If the company do so, an immediate announcement would be required but it would still be a breach of the regulations
  • No practice of recording or transcribing these investor meetings
  • Rule 703(4)[5] of the Singapore Exchange Listing Rules requires the issuer to observe the Corporate Disclosure Policy[6] as provided under Appendix 7.1. of the Rules. Para 23 under PART VIII of the Policy recommends the issuer to observe an “open door” policy in dealing with analysts, journalists, stockholders and others.
  • Issuer is required to abstain from disseminating material information which has not been disclosed to the public before. However, if such material information is inadvertently disclosed at meetings with analysts or others, it must be publicly disseminated as promptly as possible by the means described in Part VIII.
  • The Canadian Securities Exchange specifies prescribes Policy on ‘Timely Disclosures’[7] to be complied by the issuer. Para 7.1 provides that disclosure of information shall not be on selective basis. The policy classifies private meetings with analysts, brokers and investors as a good corporate governance activity. However, the policy provides that no material unpublished information is disseminated in such meetings.

Extant gaps in disclosure requirements

Information Asymmetry

As discussed above, the Listing Regulations require the listed entities to disclose the schedules and presentations for analyst or institutional investor meetings on its website and to the stock exchange(s) with 24 hours of the event taking place. However, except for few top companies, majority of the listed companies treat this as a mere formality. They disclose only the occurrence of analyst/ investor meets and circumvent disclosure of significant details of the said event.

As per the Report, it has been observed that the reports shared by the listed entities have information that does not have its source from quarterly results or investor presentation and thereby lead to selective sharing of information. Therefore, it is seen that there exists information asymmetry due to following the Regulations in letter and not in spirit.

Selective disclosure and Risk of divulging UPSI

Selective disclosure occurs when a company releases UPSI about the company to an individual or selective group of persons (e.g., analysts or institutional investors) before disclosing the information to the general public. It creates an adverse impact on market integrity similar to that of insider trading. Selective disclosure lead to asymmetry information.

For example, analyst/ investors during a one-to-one meet are provided with such price sensitive information which may not be disclosed in presentation or the financial results and is not available in public domain.

Therefore, issues concerning selective sharing of information, disclosure of incomplete information, inconsistency in the disclosures made by different listed companies have made it essential for SEBI to review the current regulatory requirements and further strengthen the disclosure regime.

Conflicting views of Kotak Committee on Investor/ Analyst meets

The Committee on Corporate Governance constituted under the Chairmanship of Mr. Uday Kotak Committee (‘Kotak Committee’) by SEBI issued its ‘Report on Corporate Governance[8]’ in October, 2017 wherein it took a contrary view and stated that disclosure of schedule of investor/ analyst meetings does not serve any practical purpose and therefore may not be required. Relevant extract provided below:

“The Committee was of the view that the disclosure of schedules of analyst/institutional investor meetings does not serve any practical purpose, and there have been instances of its misuse. Hence, the Committee recommended that the disclosure of schedules of analyst/institutional investor meetings may not be required. To clarify, the information to be shared at such meetings has to be strictly in compliance with the SEBI PIT Regulations.”

On the other hand, the present Report has considered institutional investors meet or conference call with analysts/ shareholders as a material event and emphasis has been placed on strengthening the disclosure framework. It is significant to note that while the Kotak Committee was of the view that putting up the schedule for investors meeting have the potential of being misused, the Sub-Group constituted by the PMAC holds a completely contrary view and has not recommended to do away with the said practice.

The Recommendations:  Enhanced disclosures w.r.t analyst / investor meets/ conference calls

New disclosure requirements pertaining to post-earnings conference calls/quarterly calls

Listed companies generally organise analyst / investor meetings or conference calls after the release of quarterly financial results. To curb any information asymmetry among different class of stakeholders, the following recommendations are proposed:

  • audio/video recordings
    • host on the website and share with the stock exchange(s)
    • immediately after the earnings call/ con-call/ analysts meeting before the next trading day or within 24 hours from the occurrence of event or information, whichever is earlier;
  • written transcripts
    • host on the website of the listed entity and respective stock exchanges within 5 working days after the event;
  • make available audio/video recordings and the written transcripts on the website
    • for a period of atleast 8 years in addition to the details disseminated on respective stock exchanges.

The idea is to immediately disclose any UPSI shared at such conference calls. Some of the top listed companies like Tata Steel[9], Reliance Industries[10], Infosys[11], Pricol Ltd[12], Power Finance Corporation Ltd[13], have already adopted the above practices and upload the audio/video recordings, transcripts of analysts / investor conference calls on their respective websites. The recommendations will now require the other listed companies to put in place an effective disclosure mechanism in this regard.

Discretion of companies to limit attendees of conference calls

Unlike in US, Indian listed companies generally restrict the conference calls to their respective analysts / investors only to avoid any unnecessary disruption of call, presence of competitors, etc.

However, genuine institutional investor or analyst may get excluded from participating in the meeting and thus, Sub-Group suggested that companies should make the provision of inclusion of certain individuals based on their request and on verification of their credentials.

Accordingly, Sub-Group has recommended to leave the discretion with the listed companies for deciding the participants for such meetings.

One-to-one meetings – Selective or effective disclosures?

Listed companies in their course of business are often seen conducting one-to-one meetings/ con-calls with investors / analysts (‘private meets’). Such private discussions are more risky due to the following:

  • unscheduled and unplanned;
  • company officials not prepared;
  • no presentation/ information statement for discussion;
  • greater risk of disclosing UPSI

Even if a company wishes to make public the proceeding of such meeting/ call, the investor may not agree to share private call records in public domain.

However, by disclosing one-to-one affairs, chances of information asymmetry will reduce. Also, other investors, particularly the minority investors, who are generally not a part of such meets may be benefitted from effective price discovery. Besides investors, regulatory authorities and stock exchanges will also be able to track such meets for any future references.

In view of the above, Sub-Group has made following recommendations:

  • listed companies to provide number of one-to-one meetings with select investors as part of corporate governance report submitted by them to stock exchanges on a quarterly basis;
  • an affirmation that no UPSI was shared by any official of the company in such meetings shall also be provided along with the corporate governance report;
  • company shall maintain a record of all such one-to-one meetings. The data should be preserved for a period of atleast 8 years.

Unlike in case of post-earning calls, it seems recording and disclosure of private meets is not required. It is always better to look before you leap, hence companies must consider recording such private meets (written or audio) and making it public to avert possibility of selective disclosure and leak of material information.

Further, in addition to the affirmation by official of company involved, a confirmation from the concerned party (investor/ analyst) shall also be obtained confirming that no material public information was shared with the concerned analyst during such meeting, and that the information shared in the meeting was only clarification of facts/information already available in public domain.

Concluding Remarks

After the recommendations of Kotak Committee in the year 2017 to discard the requirements of disclosing the schedule of analyst / institutional investor, a new approach of SEBI to enhance transparency and strength disclosure framework of analyst/ investor meets is evident from the recommendations of the Sub-Group.

An effective disclosure mechanism will be required to be put in place by companies for adequate and timely disclosures. A measure of ‘silent or quiet period’ may be adopted where companies for a specified period (generally prior to release of financial results) refrain from interaction with the analyst/ investor/ media in order to avoid inadvertent disclosures of UPSI on selective basis. To conclude, the recommendations seems to promote a culture of corporate governance encouraging companies to follow the compliance in spirit of law.


 Other reading materials on the similar topic:

  1. ‘A date to remember: Ad-hoc Analyst/Investor meets become a passé affair’ can be viewed here
  2. Our other articles on various topics can be read at:

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SEBI revisits mode of bidding in public issue of debt securities

Permits submission through UPI mechanism and online interface

-CS Henil Shah & CS Burhanuddin Dohadwala


In order to streamline the process in case of public issue of debt securities and to add an addition to the current Application Supported by Blocked Amount (‘ASBA’) facility. Securities and Exchange Board of India (‘SEBI’) vide its circular dated November 23, 2020[1] (‘November 23 Circular’) has introduction Unified Payments Interface (‘UPI’) mechanism for the process of public issues of securities under:

  • SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (‘ILDS Regulations’);
  • SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (‘NCRPS Regulations’);
  • SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (‘SDI Regulations’) and
  • SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (‘ILDM Regulations’).

The said circular shall be effective to a public issue of securities for the aforesaid captioned regulations which opens on or after January 01, 2021 (‘effective date’).  Earlier, SEBI Circular dated July 27, 2012[2] (‘Erstwhile Circular’) provided the system for making application to public issue of debt securities.  The Erstwhile Circular will stand repealed from the effective date. However, SEBI Circular dated October 29, 2013[3] w.r.t allotment of debt securities shall continue to remain in force.

Earlier in November, 2018[4] SEBI had introduced use of UPI as a payment mechanism with ASBA, to streamline the process of public issue of equity shares and convertibles and implemented the same in 3 phases.

The article below covers the role required to be done by the issuer in case of public issue of debt securities.


UPI[5] is an instant payment system developed by the National Payments Corporation of India (‘NPCI’), an RBI regulated entity. UPI is built over the IMPS (‘Immediate Payment Service’) infrastructure and allows you to instantly transfer money between any two parties’ bank accounts.

The facility to block funds through UPI mechanism whether applying through intermediaries (viz syndicate members, registered stock brokers, register and transfer agent and depository participants) or directly via Stock Exchange (‘SE’) app/ interface is set for upto and amount of Rs. 2 lakhs, which is the maximum limit approved by NPCI for capital markets vide its circular dated March 03, 2020[6].

Appointment of Sponsor Bank

Sponsor Bank as a term was introduced under the SEBI circular dated November 01, 2018 meaning a self-certified syndicate bank appointed by issuer to conduit/act as a channel with SE and NCPI to facilitate mandate collect requests and/or payment instructions of retail investors.

Comparison of mode of application under November 23 Circular and Erstwhile Circular

November 23 Circular Erstwhile Circular Remarks
Direct application through SE app/web-interface along with amount blocked via UPI mechanism. Direct application over the SE interface with online payment facility; Online payment facility stands replaced with UPI mechanism. However, it is not clear as to how the application to be submitted where amount to be invested is above 2 lac rupees.
Application through intermediaries along with details of his/her bank accounts for blocking funds Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE using ASBA facility No change
Application through SCSBs with ASBA. Applications through banks using ASBA facility; No change
Application through SCSBs/intermediaries along with his/her bank account linked UPI ID for the purpose of blocking of funds, if the application value is Rs.2 lac or less.

New insertion.

Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE without use of ASBA facility This was discontinued for all public issue of debt securities made on or after October 01, 2018 vide SEBI Circular dated August 16, 2018[7].

Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE for applicants who intended to hold debt securities in physical form. No reference made in the present circular

Modes of submitting application as per November 23 Circular

Process of the applying utilizing UPI mechanism is produced in a diagrammatic form as below:

* Application made on SE App/web interface shall automatically get updated on SE biding platform

# Upon bid being entered under the bidding platform SE shall undertake validation process of PAN and Demat account along with Depository.

## In case of any discrepancies the same are reported by depositories to SE which in turn relays the same to intermediaries for corrections.

Roles of issuer in case of public issue of debt securities

Apart from appointing a sponsor bank by the issuer the roles of issuer remain same as those already required under the SEBI circular dated July 27, 2012 i.e.:

  • Use of SE platform;
  • Entering to agreement with SE with respect to use of same;
  • Dispute resolution mechanism between the issuer and SE and maintenance of escrow account remain the same.

Only the aforesaid roles are aligned with newly introduced with UPI Mechanism.

Allotment of securities within 6 days

SEBI vide its circular dated November 10, 2015 had, in order to stream line the process of public issue of equity shares and convertibles issued a circular to reduce the timeline for issue from 12 working days to 6 working days and same was introduced for public issue of debt securities, NCRPS and SDI vide circular dated August 16, 2018[8]. The same has been re-iterated/repeated under the November 23 Circular. Indicative timelines for various activities are re-produced under Annexure-A.

Additional data details required to be mentioned under the Application and biding form relating to UPI

  1. Under Main Application form
  • Payment details –UPI ID with maximum length of 45 characters
  • Acknowledgement slip for SCSB/broker/RTA/DP
    • Payment details to include UPI
  • Acknowledgement slip for bidder
    • Payment details to include UPI ID
  1. Overleaf of Main Application form
  • UPI Mechanism for Blocking Fund would be available for Application value upto Rs. 2 Lakhs;
  • Bidder’s Undertaking and confirmation to include blocking of funds through UPI mode;
  • Instructions with respect to payment / payment instrument to include instructions for blocking of funds through UPI mode.


Public issue application using UPI is a step towards digitizing the offline processes involved in the application process by moving the same online. UPI mechanism in public issue process shall essentially bring in comfort, ease of use and reduce the listing time for public issues.

Annexure A:

Indicative timelines for various activities

Sr. No. Particulars Due Date (working day)
1. Issue Closes T (Issue closing date)
  • SE(s) shall allow modification of selected fields (till 01:00 PM) in the bid details already uploaded.
  • Registrar to get the electronic bid details from the SE by end of the day.
  • SCSBs to continue / begin blocking of funds.
  • Designated    branches    of    SCSBs    may   not    accept    schedule    and applications after T+1 day.
  • Registrar to give bid file received from SE containing the application number and amount to all the SCSBs who may use this file for validation/ reconciliation at their end.
  • Issuer, merchant banker and registrar to submit relevant documents to  the  SE(s)  except  listing  application,  allotment  details and   demat   credit   and   refund   details   for   the   purpose   of   listing permission.
  • SCSBs to send confirmation of funds blocked (Final Certificate) to the registrar by end of the day.
  • Registrar shall reconcile the compiled data received from the SE(s) and all SCSBs (hereinafter referred to as the “reconciled data”).
  • Registrar to undertake “Technical Rejection” test based on electronic bid details and prepare list of technical rejection cases.
  • Finalization of technical rejection and minutes of the meeting between issuer, lead manager, registrar.
  • Registrar  shall  finalise  the  basis  of  allotment  and  submit  it  to  the designated SE for approval.
  • Designated SE to approve the basis of allotment.
  • Registrar to prepare funds transfer schedule based on approved basis of allotment.
  • Registrar and merchant banker to issue funds transfer instructions to SCSBs.
  • SCSBs  to  credit  the  funds  in  public  issue  account  of  the  issuer  and confirm the same.
  • Issuer shall make the allotment.
  • Registrar/Issuer   to   initiate   corporate   action   for credit   of   debt securities, NCRPS, SDI to successful allottees.
  • Issuer  and  registrar  to  file  allotment  details  with  designated  stock exchange(s)  and  confirm  all  formalities  are  complete  except  demat credit.
  • Registrar  to  send  bank-wise  data  of  allottees, amount  due  on  debt securities,  NCRPS,  SDI allotted,  if  any,  and  balance  amount  to  be unblocked to SCSBs.
  • Registrar to receive confirmation of demat credit from depositories.
  • Issuer and registrar to file confirmation of demat credit and issuance of instructions to unblock  ASBA  funds,  as  applicable,  with  SE(s).
  • The   lead   manager(s)   shall   ensure   that   the   allotment,   credit   of dematerialised debt securities, NCRPS, SDI and refund or unblocking of application monies, as may be applicable, are done electronically.
  • Issuer  to  make  a  listing  application  to  SE(s)  and  SE(s) to give listing and trading permission.
  • SE(s) to issue commencement of trading notice.
7. Trading commences; T+6










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.



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:

Email id for further queries:

Our website:

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

[3] SEBI (Debenture Trustees) Regulations, 1993







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




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:









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.

Read more