Executive Summary:
This circular from SEBI outlines the creation of a Recovery Expense Fund (REF) to enable Debenture Trustees to take prompt action in case of default in listed debt securities. Issuers proposing to list debt securities must deposit 0.01% of the issue size (up to Rs. 25 lakhs) towards the REF with the Designated Stock Exchange. The provisions of this circular come into effect on January 1, 2021, with existing issuers given 90 additional days to comply.
Key Points / Main Content:
Creation and Operation of REF:
* Issuers proposing to list debt securities must deposit 0.01% of the issue size, with a maximum of Rs. 25 lakhs, towards the REF with the Designated Stock Exchange.
* The deposit can be in cash, cash equivalents, or Bank Guarantees at the time of listing application.
* Designated Stock Exchanges will invest the cash in Government Securities, Treasury Bills, Fixed Deposits with scheduled commercial banks, gilt funds, debt mutual funds, or debt Exchange Trade Funds, with the interest earned added to the REF.
* Issuers must ensure Bank Guarantees remain valid for 6 months post the maturity date of the debt security and renew them at least 7 working days before expiry, or the Designated Stock Exchange will invoke them.
* In case of corporate restructuring, the Designated Stock Exchange must ensure the REF amount is available before issuing the Observation letter.
Utilization of Recovery Expense Fund:
* In the event of default, the Debenture Trustee/Lead Debenture Trustee will obtain consent from debt security holders for enforcement of security and inform the Designated Stock Exchange.
* The Designated Stock Exchange will release the REF amount to the Debenture Trustee/Lead Debenture Trustee within 5 working days of receiving the intimation.
* Lead Debenture Trustee definition provided.
* The Debenture Trustee must maintain proper accounts of expenses incurred from the REF for legal expenses, meeting costs, etc., related to security enforcement.
Refund of Recovery Expense Fund:
* The balance in the REF will be refunded to the issuer upon repayment to debt security holders on maturity or exercise of call/put option, subject to a No Objection Certificate (NOC) from the Debenture Trustees to the Designated Stock Exchange.
* Debenture Trustees must ensure no default exists on any other listed debt securities of the issuer before issuing the NOC.
Applicability:
* Effective from January 1, 2021, for all new listing applications.
* Existing issuers have an additional 90 days to comply.
Impact Analysis:
Issuers of Listed/Proposed Listed Debt Securities:
* Impact: Required to contribute to the Recovery Expense Fund (REF).
* Action Required: Deposit 0.01% of issue size (max Rs. 25 lakhs) into REF for new listings from January 1, 2021; existing issuers must comply within 90 days. Maintain/renew Bank Guarantees if applicable.
Recognized Stock Exchanges:
* Impact: Designated Stock Exchanges will manage and invest the REF. They will also be responsible for releasing funds to Debenture Trustees upon default and refunding balances to issuers upon repayment, after due diligence.
* Action Required: Establish mechanisms for receiving, investing, and managing the REF. Develop procedures for releasing funds to Debenture Trustees and refunding to issuers. Ensure Bank Guarantees are valid and invoke them if necessary.
Debenture Trustees:
* Impact: Can access the REF to cover expenses related to enforcement of security in case of default. They are also responsible for issuing No Objection Certificates (NOC) for refund of the REF to the issuer.
* Action Required: Obtain consent from holders of debt securities for enforcement, inform Designated Stock Exchange, maintain accounts of REF expenses, and issue NOCs after verifying no defaults on other listed debt securities.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): Regulatory body issuing the circular regarding debt securities.
Recovery Expense Fund (REF): A fund created to enable Debenture Trustees to take action for enforcement of security in case of default in listed debt securities.
Debenture Trustees: Entities registered with SEBI, responsible for protecting the interests of debenture holders.
Designated Stock Exchange: The stock exchange identified in the Offer Document/Information Memorandum where the issuer deposits the amount towards REF.
Securities and Exchange Board of India Act, 1992: The act under which SEBI is empowered to issue the circular.
Securities and Exchange Board of India Debenture Trustees Regulations, 1993: Regulations pertaining to Debenture Trustees mentioned in the circular.
Securities and Exchange Board of India Issue and Listing of Debt Securities Regulations, 2008: Regulations pertaining to the issuance and listing of debt securities.
Richa G. Agarwal: Deputy General Manager at SEBI, who issued the circular.
SEBI/HO/MIRSD/CRADT/CIR/P/2020/207 October 22, 2020
To
All issuers who have listed or propose to list their debt securities
All Recognized Stock Exchanges
All Debenture Trustees registered with SEBI
Dear Sir/ Madam,
Sub: Contribution by Issuers of listed or proposed to be listed debt securities towards
creation of “Recovery Expense Fund”
1. In order to enable the Debenture Trustee(s) to take prompt action for enforcement of security
in case of ‘default’ in listed debt securities, a ‘Recovery Expense Fund’ (REF) shall be created
which shall be used in the manner as decided in the meeting of the holders of debt securities.
A. Manner of creation and operation of REF
2. The issuer proposing to list debt securities shall deposit an amount equal to 0.01% of the
issue size subject to maximum of Rs. 25 lakhs per issuer towards REF with the ‘Designated
Stock Exchange’, as identified and disclosed in its Offer Document/ Information
Memorandum.
3. The REF shall be created and maintained in the following form:
a. The issuer shall deposit cash or cash equivalent(s) including Bank Guarantees
towards contribution to this fund at the time of making the application for listing of debt
securities.
b. The Designated Stock Exchange shall invest cash in Government Securities or
Treasury Bills or Fixed Deposit with a Scheduled commercial bank or gilt fund or debt
mutual funds or debt Exchange Trade Funds and the income/interest earned thereof
shall be added to the REF of the issuer.
Page 1 of 3c. The issuer shall ensure that the Bank Guarantee remains valid for a period of 6 months
post the maturity date of the listed debt security. The issuer shall keep the bank
guarantee in force and renew the Bank Guarantee at least 7 working days before its
expiry, failing which the Designated Stock Exchange shall invoke such Bank
Guarantee.
4. In case of any change in status of issuer of the listed debt securities on account of corporate
restructuring by way of Scheme of Arrangement etc., the Designated Stock Exchange shall
make sure that the amount maintained in the REF is available as per paragraph 2 before
issuing the ‘Observation letter’ in that regard.
B. Manner of utilization of Recovery Expense Fund
5. In the event of default, the Debenture Trustee/ Lead Debenture Trustee shall obtain the
consent of holders of debt securities for enforcement of security and shall inform the same to
the Designated Stock Exchange. The Designated Stock Exchange shall release the amount
lying in the REF to the Debenture Trustee/ Lead Debenture Trustee within 5 working days of
receipt of such intimation.
For the purpose of this Circular, Lead Debenture Trustee shall mean:
a. A Debenture Trustee who has been chosen to be the Lead Debenture Trustee by other
Debenture Trustees or
b. A Debenture Trustee who is the Debenture Trustee of more than 50% of the outstanding
value of debt securities.
6. The Debenture Trustee shall keep a proper account of all expenses incurred out of the funds
received from REF towards Legal expenses, cost for hosting meeting etc. towards
enforcement of security.
C. Refund of Recovery Expense Fund to the issuer
7. The balance in the Recovery Expense Fund shall be refunded to the issuer on repayment to
holders of debt securities on their maturity or at the time of the exercise of call or put option,
Page 2 of 3for which a ‘No Objection Certificate (NOC)’ shall be issued by the Debenture Trustee(s) to
the Designated Stock Exchange. The Debenture Trustee(s) shall satisfy that there is no
‘default’ on any other listed debt securities of the issuer before issuing the NOC.
8. This circular is issued in exercise of the powers conferred upon SEBI under Section 11 (1) of
the Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation
2A of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993
and Regulation 31(1) of the Securities and Exchange Board of India (Issue and Listing of Debt
Securities) Regulations, 2008 to protect the interest of investors in securities and to promote
the development of, and to regulate, the securities market.
9. Applicability: The provisions of this circular shall come into force w.e.f. January 01, 2021 and
all the applications for listing of debt securities made on or after January 01, 2021 shall comply
with the condition of creation of REF. 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
this circular for creation of REF.
10. The circular is available on the SEBI Website at www.sebi.gov.in under the head “Legal
Framework/Circulars”
Yours faithfully,
Richa G. Agarwal
Deputy General Manager
Tel. No: 022-26449596
Email id: richag@sebi.gov.in
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