The move by the market regulator is aimed at empowering investors in debentures. However, companies that consistently issue debenturesFinancial services groups, in particular, are concerned that this could cause trouble. M&A activity, which involves transactions involving smaller firms, occurs frequently in this area.
According to one of the issuers, the pre-approval amounted to duplication of efforts as the companies would need approval from the National Company Law Tribunal (NCLT) to transact in any case and the court takes into account the interests of all stakeholders. The issuer said that while the objective was to safeguard the interests of the debenture holders, this measure would not serve the purpose. According to some issuers, securing the interests of creditors was the domain of the Reserve Bank of India (RBI) which also required approval.
Debenture issuers enter into a trust deed, which is executed by the debenture trustee (DT). It is the role of the DT to call for periodic reports, take possession of the trust assets, enforce security interests on behalf of the shareholders and ensure that there is no encumbrance on the securities.
“Till now, debenture holders were neglected in the schemes of arrangement. Sanjay Sinha, representative of the debenture trustee industry and former MD and CEO of Axis Trustee Services, said the new rule empowers them to ensure that they do not short-change. He said that the issuers usually contact the lenders in advance, but the debenture holders get to know in the 11th hour. “Now the debenture trustees working for the benefit of the debenture holders will need to be informed in advance so that the consent of all the investors can be taken,” he said.
The trigger for the new rules are some high-profile defaults in the financial sector, where non-banking finance companies (NBFCs) raised funds largely through debentures. Under the Insolvency and Bankruptcy Code (IBC), this process allows all creditors, including debenture holders, to vote on the transaction. The new norms also bring these requirements out of the IBC. “If the objective is to develop bond markets, there is a need to empower debenture holders. Debenture holders, who have invested thousands of crores in some high-profile defaults, have been taken for a ride,” Sinha said.