FinTechSEBI’s Consultation Paper on Debenture Trustee Reforms: Paving the Way for Ease of Doing Business

INTRODUCTION

The Securities and Exchange Board of India (hereinafter referred to as “SEBI”) has released a consultation paper titled Measures for Reforms to Debenture Trustees Regulations Including towards Ease of Doing Business in November 2024, wherein it proposes key changes to regulate the nature of business activities that a Debenture Trustee (hereinafter referred to as “DT”) can carry out. These proposals aim to foster trust among stakeholders by creating the ecosystem that is more transparent and streamlined.

BACKGROUND

A Debenture Trustee manages issuance of debenture by overseeing interests of debenture holder and ensuring issuers meet their obligations. All these activities are ‘regulated’ by SEBI. However, DTs also perform certain activities outside of SEBI’s regulatory jurisdiction, such as acting as trustees for unlisted debt or providing estate planning services. This expanded scope of operations has prompted concerns about regulatory clarity.

The consultation paper issued by SEBI proposes that debenture trustees should limit themselves to core, regulated activities that are directly related to protecting interests of debenture holders, rather than engaging in other financial services that could create conflict of interest. In other words, it requires DTs to hive off their non-core activities into separate entities, if they wish to continue them.

PROPOSED CHANGES IN SEBI’S CONSULTATION PAPER 

The proposed changes are aimed to redefine the role of DTs and setting clearer boundaries for their operations. The central focus is on the need to enhance regulatory environment around DTs while maintaining investor protection as a priority. One of the most important measures is the proposed ‘hiving off’ of any unregulated activity performed by DTs. Under this shift, SEBI would compel DTs to split operations that fall outside of their scope into a distinct legal entity. This new entity would not be permitted from using the DT’s brand name after a one-year ‘sunset’ period. This is intended to prevent any confusion or misunderstanding regarding the regulated status of a DT’s multiple services.

SEBI also intends to provide much-needed uniformity and clarity to the way defaults are identified and handled by standardizing ‘cross-default’ in its regulations. Another notable change proposed by SEBI includes the suggestion for unified decision-making in situations involving joint security interests across many International Securities Identification Numbers (hereinafter referred to as “ISIN”) with pari-passu status. SEBI recommends that decision-making be simplified through a collective vote when debenture holders from several ISINs have similar security interests. This will make future procedures more open and effective.

A standard Debenture Trust Deed (hereinafter referred to as “DTD”) for secured non-convertible debentures has also been introduced by SEBI to further guarantee uniformity. Any modifications from this standardized DTD structure must be properly documented and justified in an attached schedule, and DTs will be encouraged to utilize it. The goal of this standardization effort is to prevent problems with inconsistent documentation, streamline transactions, and make investor rights clearer.

Lastly, the consultation paper reiterates that DTs must only register if they are actively engaged in SEBI-regulated activities. In order to avoid any inferred affiliation with SEBI, persons involved in other activities, like estate planning, must explicitly identify the regulatory body that oversees those services.

IMPLICATIONS FOR DEBENTURE TRUSTEES AND MARKET PARTICIPANTS  

The mandate to hive off unregulated services into a distinct entity may oblige DTs to change their branding and organizational structure. In order to maintain compliance, DTs may need to review their organizational and marketing strategies throughout the required one-year transition phase, known as the ‘sunset period’, which eliminates any brand associations between SEBI-regulated and unregulated activities. A simplified method of decision-making is introduced by SEBI’s proposal to combine voting rights for holders of debentures with common security interests across ISINs. In addition to increasing the collective power of debenture holders in managing common interests, this could reduce the administrative difficulties placed on DTs when planning votes and gathering consents. However, in order to effectively manage and aggregate votes, this move might necessitate DTs investing in new technology.

Another step toward standardization is the model DTD which SEBI has proposed. It gives issuers and DTs a consistent template for secured non-convertible debentures. This improves predictability for market participants by lowering the possibility of inconsistent terms and conditions across various debenture offerings. In order to encourage greater responsibility in the structure of debenture agreements, DTs will also need to meticulously document and justify any variations from the model DTD.

IMPACT ON THE BOND MARKET  

Both institutional and retail investors are likely to find the market more appealing as a result of this distinct division of ‘regulated’ and ‘unregulated’ activities since they can now have confidence that DTs are only concerned with investor protection and compliance within SEBI’s regulatory framework. Furthermore, the bond market may become more stable if a uniform definition of ‘cross-default’ is introduced. Confusion and delays in managing defaults have resulted very often from inconsistent interpretations of cross-default provisions. The proposed regulation from SEBI may simplify default response, lessen market turbulence, and establish a more stable environment for issuers and investors alike with a standardized definition. In addition to that, debenture holders will be empowered by the consolidation of voting rights for common security interests across ISINs, which will facilitate investors’ ability to use collective decision-making authority. This leads to major boost in investor trust because their interests would be better represented in the event of default or other such events.

Another expected market boost is the model DTD for secured non-convertible debentures. SEBI’s plan could greatly lessen the variation in terms and conditions of debenture issues by standardizing important documents, which would make bond structures more consistent and simpler for investors to assess.

AMLEGALS REMARKS

Through these proposed changes, SEBI aims to achieve a positive balance between regulatory monitoring and ease of doing business. It can be anticipated that DTs may have short-term challenges as a result of this shift, however, market will clearly benefit in the long-run because of greater clarity, lower risk and boost in investor confidence.

In conclusion, SEBI’s proposed reforms to the Debenture Trustee Regulations signify a forward-thinking approach to fostering ease of doing business while enhancing investor protection. By streamlining compliance processes and addressing industry challenges, these measures aim to bolster the confidence of stakeholders and promote a more robust corporate bond market in India. Feedback from stakeholders will play a pivotal role in shaping the final framework, ensuring a balanced and effective regulatory environment.

– Team AMLEGALS assisted by Ms. Neha Katariya (Intern)

For any queries or feedback, feel free to connect to mridusha.guha@amlegals.com or liza.vanjani@amlegals.com