On October 13, 2020, the Securities and Exchange Board of India (“SEBI”) issued a circular standardizing the procedure to be followed by debenture trustee(s) (“DT(s)”) in case of default by issuers of listed debt securities (“Circular”). This Circular is applicable to all issuers who have their debt securities, or propose to have their debt securities, listed as well as all DTs registered with SEBI. 

1. Event of default: 

Under the SEBI (Listing Obligations and Disclosure Requirements), 2015, a ‘default’ has been defined as non-payment of the interest or principal amount in full on the pre-agreed date, which shall be recognized at the first instance of delay in the servicing of any interest or principal on debt. 

In view of the fact that multiple ISINs may have been issued under the same information memorandum (“IM”) or a single ISIN may have been split across multiple IMs, the Circular has clarified that an ‘event of default’ shall be reckoned at the ISIN level since all terms and conditions of issuance of security are same under a single ISIN even though they may have been issued under multiple IMs. 

2. Consent of investors for enforcement of security and for signing the inter-creditor agreement (“ICA”): 

The Reserve Bank of India (“RBI”) had, on June 7, 2019, issued the RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019 (“RBI Directions”). In terms of the RBI Directions, investors in debt securities, being financial creditors, may be approached by other lenders of the issuer to sign an ICA in line with the RBI Directions. 

As the resolution plan (“RP”) under the ICA may involve restructuring, including roll-over of debt securities requiring consent of investors, the process for seeking consent for enforcement of security/ entering into the ICA shall be as follows: 

1. The DTs shall send a notice to the investors within 3 (three) days of an event of default.
2. The aforementioned notice shall contain (a) negative consent for proceeding with the enforcement of security; (b) positive consent for signing the ICA; (c) the time period within which the consent needs to be provided; and (d) date on which meeting will be convened.
3. The DTs shall convene the meeting of investors within 30 (thirty) days of the event of default.
4. In case of debt securities issued by way of public issue, the notice sent by the DT shall not contain the negative consent for proceeding with the enforcement of security and the requirement to convene a meeting for enforcement of security as mentioned above shall not be applicable.
5. The DTs shall take necessary action to enforce security or enter into the ICA as decided in the investors’ meeting. However, (a) in case where the majority of investors express their dissent to enforcement of security, the DT shall not enforce security; (b) in case where majority of the investors express their consent to enter into the ICA, the DT shall enter into the ICA; (c) in case consent is not received for enforcement of security and for signing the ICA, the DT shall take further action, if any, as per the decision taken in the meeting; and (d) the DT may form a representative committee of investors to participate in the ICA to enforce the security as may be decided in the meeting. 

The consent of the majority of investors shall mean the approval of not less than 75% (seventy five percent) of the investors by value of the outstanding debt and 60% (sixty percent) of the investors by number at the ISIN level. 

3. Conditions for signing the ICA by the DT 

As per the Circular, DTs may sign the ICA and consider the RP on behalf of the investors upon compliance of the following: 

1. Signing of the ICA and agreeing to the RP should be in interest of the investors. Further, the ICA and the RP should be in compliance with the Companies Act, 2013, the Securities Contract (Regulations) Act, 1956 and the SEBI Act, 1992 and the rules, regulations and circulars issued thereunder.
2. If the conditions imposed on the DTs are not in compliance with what is mentioned hereinabove, the DT shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA and the RP will not be binding upon the DTs.
3. The RP shall be finalized within 180 (one hundred eighty) days from the end of the review period. If the RP is not finalized within the aforesaid period, the DT shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA and the RP will not be binding upon the DTs. However, if the finalization of the RP extends beyond the aforesaid period, the DTs may consent to an extension beyond 180 (one hundred eighty) days subject to the approval of the investors regarding the total timeline. However, the total timeline shall not exceed 365 (three hundred sixty-five) days from the commencement of the review period.
4. If any terms of the approved RP are contravened by any of the signatories to the ICA, the DT shall be free to exit the ICA and seek appropriate legal recourse/ any other action as may be deemed fir in the interest of investors. 

DTs are required to ensure that the conditions pertaining to exiting the ICA as aforesaid are suitably incorporated in the ICA before signing the ICA. 

Please find a copy of the Circular here.

This update has been contributed by Aastha (Partner) and Radhika Kothari (Associate).