SEBI responds to payment defaults by empowering Debenture Trustees

5 replies
  1. Bhaunik Shah
    Bhaunik Shah says:

    The below is the Reg. 56(1)(d) of the amended SEBI LODR.

    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:

    Provided that the submission of half yearly certificate is not applicable where bonds are secured by a Government guarantee.

    Query:

    The aforesaid regulation requires half-yearly certificate from the statutory auditor of a company 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.

    The question is – what does it mean by “including compliance with all the covenants”? Does the territory of this extend to ALL the covenants of offer document/Information Memorandum and/or Debenture Trust Deed ? (i.e. financial covenants and all other covenants whatever it may be) OR the statutory auditor is expected to cover only financial covenants and no other covenants – as it would be beyond their territory to check and verify the compliance by the company of all other covenants (other than financial covenants) of offer document/Information Memorandum and/or Debenture Trust Deed ?

    Would highly appreciate your view/feedback.

    Reply
    • Vinod Kothari Consultants
      Vinod Kothari Consultants says:

      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.

      2) SEBI Board Meeting dated 29th September, 2020

      i) Please refer 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.

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

      Link for agenda of SEBI Board Meeting- https://www.sebi.gov.in/sebiweb/about/AboutAction.do?doBoardMeeting=yes

      Reply
      • Bhaunik Shah
        Bhaunik Shah says:

        Thanks.

        Could you please clarify – since the amendment is effective from 8Oct20, the certificate requirement would be applicable for the half-year ended 30Sep20 (even though the Board is yet to approve the half-yearly results) or it will be applicable from the half-year ended 31March20 (even though the Board is yet to approve the half-yearly results)?

        Reply
        • Aanchal Kaur Nagpal
          Aanchal Kaur Nagpal says:

          The amendment should ideally be prospective i.e. should be applicable from half year ended on or after 8th October, 2020 unless the respective DT requires submission even for the half year ended 30th September, 2020.

          Reply

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