With an aim to provide a holistic picture of all borrowings and the status of encumbrance on the assets of listed entities, capital markets regulator Sebi on Thursday came out with a new format for disclosing security cover to stock exchange and debenture trustee. Also, the regulator has put in place obligations of listed entity and debenture trustee (DT) with respect to preparation and submission of security cover format, according to a circular. It has specified the manner of preparation of security cover certificate by listed entity and DT.
In addition, Sebi has revised timelines of submission of security cover certificate, valuation report and quarterly compliance report, and regulatory compliance by debenture trustees. This comes after representations were received from issuers, debenture trustee(s) as well as other market participants on issues related to operational challenges faced in complying with certain provisions of circulars and have also given suggestions on strengthening such requirements. These challenges were also discussed in the Sebi-constituted Working Group on "Unique Identification Code - Securities & Covenant Monitoring System".
After taking into account recommendations of the Working Group and feedback from market participants, the regulator last month amended the Debenture Trustees rules, LODR (Listing Obligations and Disclosure Requirements) norms and Sebi (Issue and Listing of Non-Convertible Securities) Regulations. Further, "based on the recommendation of the Working Group, the security cover format has been revised...The revised format has been prepared to provide a holistic picture of all the borrowings and the status of encumbrance on the assets of the listed entity," the regulator said.
Sebi said that a listed entity will be required to prepare the security cover certificate on quarterly basis, and the statutory auditor of the listed entity will certify the book values of the assets provided in such certificate. Also, debenture trustee on quarterly basis is required to certify the market value of assets based on the due diligence carried out by it or its appointed agencies and submit the security cover certificate in a specified format. The regulator has standardised the calculation of security cover ratios.
The certificates certified by the statutory auditor of issuer company and by the empanelled independent CAs of the debenture trustee will have the Unique Document Identification Number (UDIN) generated in the manner prescribed by the relevant regulatory authority. The DT will have to ensure that the qualifications/disclaimer (by whatever name called), does not impair the rights of debenture holders in terms of security provided. Further, if the DT is of opinion that such qualifications/disclaimer are affecting rights of debenture holders, the DT will be required to take corrective action in this regard.
With regard to monitoring of covenants, Sebi said that on quarterly basis, listed entity will have to furnish the compliance status with respect to financial covenants of the listed debt securities certified by statutory auditor of listed entity to debenture trustee. In order to ensure effective monitoring, debenture trustee is required to establish board-approved internal policies with respect to proactive and effective monitoring of breach of covenants and such policy.
In order to enhance transparency with respect to no-objection certificate (NOC)/no-dues certificate issued by DT and monitoring of listed entity, Debenture Trustee will have to make certain disclosure to stock exchanges, including any breach of the minimum security cover within 48 hours of such breach. In respect to timelines, Sebi said that the DT will have to submit security cover certificate to the stock exchange and make website disclosure of the security cover certificate and quarterly compliance report within 75 days from the end of each quarter except the last quarter of financial year.
In addition, the DT will be required to submit the security cover certificate to the exchange and make website disclosure of the security cover certificate and quarterly compliance report for the last quarter of the financial year within 90 days from the end of the financial year, and the valuation report and title search report to the exchange once in three years within 75 days from the end of the financial year. On independent verification of creation of Recovery Expense Fund (REF) by issuer companies, Debenture Trustee(s) will be required to take confirmation from designated stock exchange(s) or any other independent source in writing regarding the creation of REF by the listed entity and will not rely solely upon the communication by the listed entity.
The exchange(s) will be required to disclose the REFs created by the listed entities on half-yearly basis. Such disclosure will also include the details of the debenture trustee to the debt issue. The framework related to revised format of the security cover and monitoring of covenants' are applicable with effect from October 1. Other provisions of this circular will come into effect with immediate effect, Sebi said.