Debenture Trustees Need To Form Separate Entities For Businesses Not Regulated By SEBI

Issuing detailed guidelines for Debenture Trustees (DTs), SEBI on Tuesday said that they need to have a separate business entity for carrying out non-SEBI regulated financial activities.

In its circular, SEBI issued detailed specific conditions DTs are required to follow while undertaking non-SEBI-regulated activities.

It said,'The DT shall undertake such activities that are not regulated by Sebi only at arms' length basis through one or more Separate Business Unit (SBU) of the DT, segregated by a Chinese Wall and ring-fenced from the Sebi regulated activities'.

The regulator had recently added a new rule clarifying what additional activities a DT may undertake apart from Sebi-regulated work.

Under the framework, DTs may carry out activities regulated by other financial-sector regulators such as RBI, IRDAI, PFRDA, IBBI, MCA and IFSCA, provided they comply with those regulators' requirements.

They may also take up activities not regulated by Sebi or any other regulator, but only if such activities are fee-based, non-fund-based and related to financial services.

Among other conditions, the regulator said complaints related to non-Sebi work must be handled independently, and DTs are required to maintain separate records for these functions.

Staff assigned to non-SEBI activities should be different from those handling Sebi-regulated work, although movement across the Chinese Wall is permitted through board-approved procedures, with key managerial personnel exempt from this restriction.

Shared infrastructure such as IT systems can be used, but only with adequate procedures approved by the board.

Also, DTs are required to disclose all non-SEBI activities on their website along with a clear statement that SEBI's investor protection framework does not apply to such activities, and existing DTs must publish this disclosure within 30 days.

Where an activity falls under another financial regulator, the DT must specify the relevant regulator and follow its rules on eligibility, risk management and grievance handling.

In addition, all advertising and website content for non-SEBI activities must remain clearly separate from information related to SEBI-regulated functions.

Before undertaking any non-SEBI activity, DTs must inform clients and beneficiaries that these activities are not regulated by Sebi and that its investor protection mechanisms do not apply.

Also, DTs must obtain written confirmation from clients, and for existing clients, these disclosures and confirmations must be completed within six months.

Further, if a DT is also regulated by the RBI, all debenture trustee activities must be carried out through SBUs in line with these conditions.

In a separate circular, SEBI modified the framework for the Recovery Expense Fund (REF), making it clear that the fund is intended to help DTs take quick enforcement or legal action when an issuer defaults.

DTs or Lead DTs can use the REF for activities such as seeking debenture-holder consents, conducting voting, holding meetings, filing court applications, paying legal fees, hiring legal consultants and availing asset-recovery services.

For these specified activities, DTs do not need prior approval from debenture holders and are required only to notify them by email and update their website, Sebi said.

If REF is to be used for purposes outside this list, prior approval from debenture holders is mandatory, and the stock exchange must be informed.

SEBI asked DTs to request the designated stock exchange to release the funds and provide an auditor's certificate for verification, after which the exchange must release the amount within five working days.

The circular also clarifies the criteria for identifying a Lead Debenture Trustee and requires DTs to maintain proper accounts and give debenture holders an annual update on REF utilisation.

In another circular, SEBI specified new timelines for issuers to submit information to DTs.

Under the timelines, issuers must submit the quarterly security cover certificate within 60 days of each quarter end (75 days for the final quarter), and half-yearly reports such as the value of pledged securities, DSRA details and the net-worth certificate of personal guarantors within 60 days of each half-year.

For corporate guarantees, audited financial-based guarantor details must be submitted annually within 60 days of the financial year-end, SEBI said.

Valuation and title-search reports for immovable or movable assets needs to be submitted once every three years within 60 days of the financial year-end. These requirements will apply from the quarter ending December 31, 2025.