Market regulator Securities and Exchange Board of India (Sebi) has proposed stricter regulatory framework for corporate bonds, debenture trustees.
A spree of bond failures has shaken the confidence of investors, as such failures have resulted in mark down and side pocketing in many debt mutual fund (MF) schemes by a number of Asset Management Companies (AMCs), resulting in capital loss from investments in the trusted debt funds, which are used to park emergency and short-term money due to perceived safety on account of excellent past records.
To restore the confidence of investors, Sebi has already taken many steps that have reduced the frequency of defaults, but the loopholes are not completely plugged yet. To stop the instances of defaults, Sebi has again proposed stronger framework for governing corporate bonds and debenture trustees, including enhanced disclosure requirements, in order to make investments in debt segment more safe.
Sebi has issued a consultation paper on ‘Review of the Regulatory Framework for Corporate bonds and Debenture Trustees’, in which the markets regulator, among other measures, has suggested that Non-Banking Financial Companies (NBFCs) create charge on the identified assets for every bond issue.
The market regulator has given time till March 17, 2020 for public comments on the consultation paper.
“The increased events of default by a few financial institutions and the lapses/ complications on the part of debenture trustees in the expeditious enforcement of the security has brought to the fore the need for a review of the present regulatory framework for debenture trustees,” said market watchdog Sebi.
In order to enhance transparency, the regulator has also proposed to mandate minimum disclosures, under which, Debenture Trust Deed (DTD) would be bifurcated into two parts for standardisation purpose.
One part should have standard clauses common to all DTDs and the second part should contain specific and customised clauses and covenants relevant to the particular issue for which the DTD is executed.
“An SOP (Standard Operating Procedure) shall be prepared that shall list out the penalties for specific violations by the issuer company for the listed debt,” the market regulator said.