Debenture trustees may get a bigger role

The Securities and Exchange Board of India (Sebi) on Tuesday proposed new norms for debenture trustees (DTS) to give them a bigger role in protecting interests of debenture holders in case of defaults from a bond-issuing firm.

The market regulator said only in 10 per cent of defaulting secured issues, DTS were able to enforce the security. Further, Sebi pointed out DTS found it easier to enforce securities in the case of manufacturing firms as there was a fixed charge, but “the same was not true in the case of NBFCS due to floating charge and the absence of identified security”.

It pointed out various issues pertaining to recovery of dues, and also cited the case of DHFL to highlight the concerns. It said DTS were unable to get clarity on the maintenance of adequate security cover because of floating charges.

With NBFCS, the regulator said that there was also concern that attractive loan portfolios would get monetised to pay for existing loans, leaving DTS with lower-quality assets for enforcing security.

Among the dozen proposals, Sebi mulled the creation of identified charge by the NBFCS. This would require NBFCS to create charge on the identified assets for every issue. This may include identified receivables, investment and cash, instead of floating charge on the entire books of an NBFC. “A debenture issued by an NBFC shall be treated as secured only on the creation of identified charge. A transition period of threefive years shall be provided to shift from floating pari passu to identified charge,” the consultation paper said.

The regulator also considered putting in place a framework to allow DTS to monitor the quality of underlying assets in an efficient manner.