On June 23, 2020, the Securities and Exchange Board of India (“SEBI”) introduced an operational framework for transactions in defaulted debt securities post maturity date/redemption date (“Operational Framework”) under the provisions of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“Regulations”). Currently, the stock exchanges suspend trading of debt securities before the maturity/ redemption date. Pursuant to the Operational Framework, these restrictions have been done away with subject to compliance with the specified procedure. 

The Operational Framework shall be applicable from July 1, 2020. Some of the key provisions of the Operational Framework are as follows:  

Temporary restriction on transactions in debt securities:

1. Stock exchanges will not permit any transactions in the defaulted debt securities 2 (two) working days prior to their maturity/redemption date.
2. On the maturity/redemption date of the defaulted debt securities, depositories will temporarily restrict transactions in such debt securities from such maturity/redemption date till the time its status of payment is determined.

Intimation on status of payment:

1. The issuer of debt securities is required to intimate the stock exchanges, depositories and the debenture trustee(s) about the status of payment of debt securities within 1 (one) working day of payment/ redemption date.
2. However, for debt securities where default has occurred before June 23, 2020, the issuer has to intimate the status of payment within 5 (five) working days from the issuance of the Operational Framework.

Role of the debenture trustee:

1. At the time of execution of the debenture trust deed, the issuer is required to provide its bank details (from which it proposes to pay the redemption amount) and pre-authorise the debenture trustee(s) to seek debt redemption payment related information from the issuer’s bank. The issuer is also required to inform the debenture trustee(s) of any change in bank details within 1 (one) working day of such change.
2. In case the issuer fails to intimate the status of payment as provided in paragraph 2, the debenture trustee is required to seek the status of payment from the issuer and/or conduct independent assessment (from banks, rating agencies, etc.) to determine the same.
3. Based on such assessment, the debenture trustee has to intimate the stock exchanges/depositories of the status of payment within 9 (nine) working days of the maturity/redemption date. In case intimation of status of payment is not received by the stock exchanges/ depositories within the stipulated timeline, debt securities will continue to be restricted until intimation is received from the issuer/ debenture trustee.  

Default in payment of redemption amount and resumption of transaction on defaulted debt securities:

1. Within 2 (two) working days from the date of intimation from the issuer or debenture trustee(s) that the issuer has defaulted on its payment obligations, the depositories in co-ordination with stock exchanges are required to update the ISIN master file and lift restrictions on transactions in such debt securities.
2. Depositories are also required to immediately flag in the Corporate Bond Database such debt securities as “ISIN-defaulted in redemption”.  

Reporting of trades in defaulted debt securities on stock exchange platform:

Upon intimation by depositories that transactions have been permitted in the defaulted debt securities, stock exchange(s) will simultaneously but not later than 2 (two) working days of the default intimation from the issuer/debenture trustee(s), permit reporting of over the counter trades in the concerned defaulted debt securities on its reporting platform in terms of the SEBI circular on reporting of over the counter trades in corporate bonds on trade reporting platforms of stock exchanges, dated March 21, 2014.  

Continuous assessment of default status:

The issuer has to inform the stock exchanges/depositories and the debenture trustee on or before the second working day of April of every financial year on the updated status of payment of the debt securities. In case of any developments that impact the status of default of the debt securities (including restructuring, proceedings under the Insolvency and Bankruptcy Code, 2016, etc.), the issuer/debenture trustee should intimate the depositories and stock exchanges within 1 (one) working day.  

This update has been contributed by Aastha (Partner) and Arhat Chhabra (Associate).