Consultation paper on proposal to Replace ‘Consent Letter’ with ‘Debenture Trustee Agreement’ under the NCS Regulations, 2021 - MMJC

Consultation  paper  on proposal to Replace ‘Consent Letter’ with ‘Debenture Trustee Agreement’ under the NCS Regulations, 2021

• The Securities and Exchange Board of India (‘SEBI’), through its consultation paper dated August 17, 2024, has proposed an amendment to the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’).
• SEBI proposes to replace the term ‘consent letter’ with ‘debenture trustee agreement’ (DTA) in Clause 3.3.32 of Schedule I of the NCS Regulations, 2021.
• The proposed change is intended to enhance the legal enforceability of the documentation involved in the appointment of debenture trustees. SEBI also proposes to make the said debenture trustee agreement accessible to investors via a Quick Response (QR) code embedded in the offer document, allowing for easy verification and transparency.

Current framework

• Regulation 13 of the SEBI (Debenture Trustee) Regulations, 1993 mandates that all debenture trustees (‘DTs’) enter into a written agreement, known as the Debenture Trustee Agreement (DTA), with the body corporate issuing the debentures before the opening of the subscription list for the debenture issue.
• Clause 3.3.32 of Schedule I of the NCS Regulations, 2021, mandates that the names of the debenture trustee(s) be mentioned, along with a statement confirming that the debenture trustee(s) has consented to the appointment.
• A copy of the ‘consent letter’ from the debenture trustee is required to accompany this statement in the offer document.

Concern

• Upon review, it came to light that the ‘consent letter’ lacks substantial legal standing in the regulatory framework. While issuers typically obtain a consent letter from the DT before the formal execution of the assignment, the legally binding document that affirms the appointment of the debenture trustee is, in fact, the Debenture Trustee Agreement (DTA).
• The working group established by SEBI to examine this issue noted that the DTA is executed at a later stage, after the issuance of the consent letter, and holds the actual legal weight in confirming the trustee’s responsibilities.
• The working group observed that while the consent letter is a preliminary requirement, it does not provide legal sanctity to the appointment of the debenture trustee. It is merely an initial agreement in principle, whereas the formal contractual obligations are outlined in the DTA.

Proposals by SEBI

1. In light of the above concerns, SEBI now proposes to replace the reference to the ‘consent letter’ in Clause 3.3.32 of Schedule I of the NCS Regulations with ‘debenture trustee agreement’.
2. Furthermore, to promote transparency and investor protection, it is recommended that the DTA be made accessible to investors through a Quick Response (QR) code embedded within the offer document.
3. By replacing the consent letter with the debenture trustee agreement, SEBI seeks to enhance the transparency and security of the process, ensuring that investors have access to all relevant information through convenient digital means like QR codes. The amendments also align with SEBI’s broader objective of ensuring a robust and transparent regulatory environment for non-convertible securities.

Actionable:

If the above referred proposal gets approved by SEBI, then issuers of NCS would have to ensure that the DTA is signed before the issue of prospectus. Accordingly, this would lead to change in various timelines before the issue of prospectus.  

This consultation paper is open for comments latest by September 6,2024.

Link: https://www.sebi.gov.in/reports-and-statistics/reports/aug-2024/consultation-paper-on-streamlining-disclosure-in-respect-of-appointment-of-debenture-trustee-dt-in-the-offer-document_85692.html