The Security and Exchange Board of India (SEBI), the capital market regulator, has recently issued guidelines to debenture trustees (DTs) concerning the enhancement of their disclosures for listed debt securities. This move comes as a measure to safeguard the interests of investors. As per this mandate, DTs are required to disclose details regarding their compensation arrangements with clients on their websites. This would include specifics such as minimum fees (expressed either in absolute terms or as a percentage of the issue size) and factors that determine these fees.
Timeline for Disclosure
The SEBI has stipulated timeframes for DTs to display pertinent information on their websites. Details of interest and redemption due on debenture holders, pertaining to all issues during a financial year, should be outlined within five working days from the start of a financial year. In addition, updates for any newly handled issues during the financial year are required to be displayed within five days of closure of the issue. The status of payments must be updated within one day of the due date. This essentially implies that any defaults or delays will be disclosed within a day of the due date.
Special Provisions for Privately-Placed Debt Securities
For privately-placed debt securities, an important clause has been mandated by the SEBI. This clause mandates at least a 2% per annum increment over the coupon rate in the event of a default in meeting payment obligations. The additional interest would be payable by the company for the tenure of the default period.
What is a Debenture?
A debenture is a debt instrument executed by a company, signalling its obligation to repay a certain sum at a specified rate while also carrying an interest. It’s one of various ways through which a company raises loan capital. One key distinction is that when one purchases the company’s shares, they become part owners of the company. Conversely, when one buys debentures issued by the company, they become creditors to the company. This essentially makes a debenture a form of formal loan extended to the company by an individual, and the company is obligated to repay the loan within a specified timeframe, with interest.
| SEBI Guidelines | Responsibilities |
|---|---|
| Disclose compensation arrangements | DTs must detail the nature of their compensation arrangements on their websites. |
| Timeline for Disclosure | Specific deadlines have been stipulated by SEBI for DTs to display pertinent information on their websites. |
| Special Provisions for Privately-Placed Debt Securities | In case of default in payment obligations, a 2% per annum increment over the coupon rate is mandated. |
Role of Debenture Trustee
A Debenture Trustee serves as the holder of debenture stock for the benefit of another party. When a company seeks to raise capital and issues stock as a form of debt obligation, the trustee acts as a liaison between the company that has issued the debentures and the debenture holders that collect interest payments.