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Debenture trustees are appointed by corporates whenever they raise debt by an issuance of any listed bond or debenture (Mint )
Debenture trustees are appointed by corporates whenever they raise debt by an issuance of any listed bond or debenture (Mint )

Role of debenture trustees to help bond investors

Debenture trustees can help strengthen the Indian debt capital market in the long term

Over the last couple of years, India has seen a wave of security defaults in the financial markets. Among them were some from reputed names with AAA credit rating. Normally, retail investors are advised to buy bonds or debentures based on the companies’ credit ratings.

Bonds or debentures issued in India come under the Securities and Exchange Board of India (Sebi) as they are traded on the exchanges. Over the last two decades, Sebi has issued licences to many debenture trustees (DTs), who play the role of a monitor on behalf of the investors. DTs are appointed by corporates whenever they raise debt by an issuance of any listed bond or debenture. DTs are supposed to play a fiduciary role to ensure proper security and timely payment of interest and principal as per the terms of the issue. Rating agencies also play an important role and are supposed to monitor the company’s financial performance and periodically retain, upgrade or downgrade the rating of issues. A rating of AAA means that the company has been performing well for some time with the hope that it will continue to do so until a material adverse change takes place warranting a downgrade. But the credit crisis, where AAA-rated debentures were downgraded overnight, led to the questioning of the veracity of ratings.

As a regulator to the debt capital markets, Sebi has played an active role to ensure that DTs perform their roles more effectively. Sebi has initiated changes like:

* The regulator has created the Recovery Expense Fund, which would be used for litigation expenses in the event of enforcement action. Until now most DTs were shying away from taking enforcement action since it involved cost and the issuer stopped paying the fee once DT initiated the enforcement action.

* New regulations require DTs to evaluate independently the value of the security, encumbrances etc. rather than relying on the various certificates submitted by the issuer. Further, they permit DTs to sign the Inter Creditor Agreement (ICA) under the Insolvency and Bankruptcy Code (IBC) if the borrower is refusing to act for the recovery of dues. These is indeed a step in the right direction, but mere signing of ICA may not help the recovery. What is really needed is to empower DTs or a small committee of debenture holders to take quick decisions which should be binding on all holders since all such cases entail some haircut and a DT is not empowered to take any decision involving that.

* Another significant change proposed by Sebi is to make it incumbent on the issuer to obtain a non-objection certificate (NoC) from existing charge holders before going ahead with the issue of bonds or debentures. More often than not, security creation is held up for want of NoC from the existing charge holders. However, some of the issuers have expressed concern about this requirement citing the time involved in obtaining such NoC but this is good from an investor’s perspective. For the near term, as the issuers find this to be an impediment in raising money via secured instruments, we could see some slowdown in the activity of issuance of secured instruments until more clarity emerges.

* Another key change by Sebi is verification from the bank about the payment of interest or principal should such information is not available from the issuer directly. Most of the time, issuers don’t respond to the communication from DTs about the delay in the payment of the dues. Now DTs can directly seek confirmation from the bank about the payment of dues or otherwise.

Some DTs or issuers may see these changes as tough but they would certainly help in strengthening the Indian debt capital markets for the long term.

Pratapsingh Nathani is chairman and MD, Beacon Trusteeship.

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