Markets regulator Sebi on Tuesday came out with a uniform procedure that needs to be followed by debenture trustees in case of default by issuers of listed debt securities. The process also includes seeking consent from the investors for enforcement of security or for entering into an inter-creditor agreement (ICA), Sebi said in a circular.

The decision has been taken in consultation with stakeholders, including investors, debenture trustees (DTs) and issuers.

Due to the presence of multiple ISINs which may have been issued under the same Information Memorandum (IM) or a single ISIN which may have been split across multiple IM(s), Sebi said 'event of default' will be reckoned at the ISIN level.

This is because all terms and conditions of issuance of security are same under a single ISIN even though it might have been issued under multiple IMs.

ISIN (International Securities Identification Number), which has 12 characters, is used for uniquely identifying securities like stocks, bonds warrants and commercial papers.

Sebi said the resolution plan in the ICA may involve restructuring, including roll-over of debt securities, requiring consent of the investors.

Under the process for seeking consent for enforcement of security and for signing the ICA, Sebi said DTs will send a notice to the investors within three days of the event of default by a registered post or hand delivery with proof of delivery, or through any other mode and proof of dispatch of such notice will be maintained. Investors in debt securities, being financial creditors, are approached by other lenders to sign an agreement, referred to as the ICA, under specific terms detailed in the framework as stipulated by the RBI.

The notice will contain the negative consent for proceeding with the enforcement of security, positive consent for signing the ICA, the time period within which the consent needs to be provided (consent to be given within 15 days from the date of notice) and the date of meeting to be convened.

Sebi said DTs will convene the meeting of all investors within 30 days of the event of default.

In case the default is cured between the date of notice and the date of meeting, then the convening of such a meeting may be dispensed with, it added.

In case of debt securities issued by way of public issue, Sebi said the notice sent by the DTs will not contain the consent. Besides, the requirement to convene a meeting for enforcement of security will not be applicable. The regulator said DTs will take necessary action to enforce security or enter into the ICA subject to certain conditions.

In case where the majority of investors expressed their dissent against enforcement of the security, DTs will not enforce security. If majority of investors expressed their consent to enter into ICA, DT will enter into the agreement.

In case consents are not received for enforcement of security and for signing ICA, DTs will take further action as per the decision taken in the meeting of the investors.

The DTs may form a representative committee of the investors to participate in the ICA or to enforce the security.

The consent of the majority of investors will mean the approval of at least 75 per cent of the investors by value of the outstanding debt and 60 per cent of the investors by number at the ISIN level. With regard to conditions for signing of ICA by DTs on behalf of investors, Sebi said they can sign the ICA and consider the resolution plan if it is in the interest of investors.

If the resolution plan imposes condition on the DTs that are not in accordance with the provisions of the Companies Act and Sebi Act, then the DTs will be "free to exit the ICA altogether with the same rights as if it had never signed the ICA." Under these circumstances, the resolution plan will not be binding on the DTs.

The resolution plan will be finalised within 180 days from the end of the review period. "If the resolution plan is not finalized within 180 days from the end of the review period, then the DTs shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA and the resolution plan shall not be binding on the DTs," Sebi said.

However, if the finalisation of the resolution plan extends beyond 180 days, the DTs may consent to an extension beyond 180 days subject to the approval of the investors regarding the total timeline. The total timeline will not exceed 365 days from the date of commencement of the review period, Sebi said.

If any of the terms of the approved resolution plan are contravened by any of the signatories to the ICA, the DTs can exit the ICA and seek appropriate legal recourse or any other action as deemed fit in the interest of the investors. Last week, Sebi strengthened the role of debenture trustees by asking them to independently evaluate and monitor the asset cover as part of its effort to protect the interest of debenture holders.

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