Debenture Trustees Must Create Separate Entities for Non-Sebi Regulated Financial Activities

Sebi has issued new guidelines for Debenture Trustees (DTs) regarding their involvement in non-Sebi regulated financial activities. DTs must establish a separate business entity for these activities, ensuring they are conducted independently from Sebi-regulated functions. This separation is to be maintained through a "Chinese Wall" and ring-fencing measures.

DTs are permitted to engage in activities regulated by other financial-sector authorities such as RBI, IRDAI, PFRDA, IBBI, MCA, and IFSCA. They must comply with the respective regulators' requirements. Additionally, DTs can undertake fee-based, non-fund-based activities related to financial services that are not regulated by any authority.

Non-Sebi Activities and Disclosure Requirements

For non-Sebi activities, DTs must handle complaints separately and maintain distinct records. Staff involved in these activities should be different from those handling Sebi-regulated tasks, although movement across the "Chinese Wall" is allowed under board-approved procedures. Key managerial personnel are exempt from this restriction.

Shared infrastructure like IT systems can be used for both types of activities if approved by the board. DTs must disclose all non-Sebi activities on their website, stating clearly that Sebi's investor protection framework does not apply to them. Existing DTs have 30 days to publish this disclosure.

Client Communication and Regulatory Compliance

Before engaging in non-Sebi activities, DTs must inform clients and beneficiaries that these are not regulated by Sebi and its investor protection mechanisms do not apply. Written confirmation from clients is required, with existing clients needing to complete this within six months.

If a DT is also regulated by the RBI, all debenture trustee functions must be conducted through SBUs following these conditions. When an activity falls under another financial regulator, the DT must specify the relevant authority and adhere to its rules on eligibility, risk management, and grievance handling.

Recovery Expense Fund Framework

Sebi has revised the framework for the Recovery Expense Fund (REF), clarifying its purpose to assist DTs in taking swift enforcement or legal action when an issuer defaults. DTs or Lead DTs can use REF for tasks like obtaining debenture-holder consents, conducting voting, holding meetings, filing court applications, paying legal fees, hiring consultants, and availing asset-recovery services.

For these specified activities, prior approval from debenture holders is not needed; only notification via email and website updates are required. If REF is used for purposes outside this list, debenture holders' prior approval is mandatory, and the stock exchange must be informed.

Lead Debenture Trustee Criteria and Reporting

The circular outlines criteria for identifying a Lead Debenture Trustee and mandates that DTs maintain proper accounts while providing debenture holders with an annual update on REF utilisation. Additionally, Sebi has set new timelines for issuers to submit information to DTs.

Issuers must submit quarterly security cover certificates within 60 days of each quarter's end (75 days for the final quarter). Half-yearly reports like pledged securities value, DSRA details, and personal guarantors' net-worth certificates are due within 60 days of each half-year.

Corporate guarantees require audited financial-based guarantor details annually within 60 days of the financial year-end. Valuation and title-search reports for assets need submission every three years within 60 days of the financial year-end. These requirements will take effect from the quarter ending December 31, 2025.

With inputs from PTI