SEBI Considers Separating Non-Regulated Activities And Defining 'Cross-Default' For Debenture Trustees

The Securities and Exchange Board of India on Monday proposed that debenture trustees create a new legal entity to separate non-market activities not regulated by watchdogs. The market regulator also aims to define "cross-default" to clarify the roles of trustees in shared security interests.

Additionally, new provisions are being introduced to outline the rights and responsibilities of debenture trustees (DTs), ensuring they align with their fiduciary duties and obligations under SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations. These changes are intended to enhance the timely fulfilment of DT responsibilities, according to a consultation paper.

The SEBI has proposed modifications to the utilisation of the Recovery Expense Fund, which aids in debenture recovery processes, and suggested standardising the format of Debenture Trust Deeds to streamline documentation. These proposals aim to enhance the ease of doing business for debenture trustees.

In its consultation paper, the regulator proposed that DTs should hive off non-SEBI-regulated activities into a new legal entity, which cannot use the DT's brand name after a one-year transition period. This entity can share resources but should have separate legal liability.

The separated entity would fall under the jurisdiction of the relevant financial regulator for those activities. This will clarify who handles investor grievances related to non-SEBI-regulated services. Some DT services are under other financial regulators, but others lack a clear regulatory authority, posing potential risks.

Currently, SSEBI regulations for DTs don't specify restrictions for other services that these entities may perform outside the markets regulator's direct purview. This includes services like securitization trustee, escrow agent, and monitoring agent roles.

DTs handle both SEBI-regulated activities such as listed non-convertible debentures, REITs and non-Sebi activities like securitization and public deposit trusteeship Data from major DTs in fiscals 2023 and 2024 suggested that nearly 30% of their revenue comes from activities under Sebi's purview (like listed NCDs and REIT trustees), and the rest comes from activities regulated by other authorities.

SEBI said that cross-default shall mean specification in a debt security that default in another debt security triggers default in the first mentioned debt security, and therefore in the said ISIN.

Also, it has suggested aggregating debenture holders across different ISINs (International Securities Identification Numbers) for decision-making and voting process.

The SEBI has sought public comments on these proposals by Nov. 18.

(With PTI inputs)