SEBI Empowers Debenture Holders
The market regulator has made way for better protection of bondholders' rights in the event of default by the company.
With a view to protect the interest of debenture holders, the Securities and Exchange Board of India approved changes to its regulations for non- convertible securities.
If the issuer of listed debt securities defaults, its board of directors will have to induct a nominee director of the debenture trustee. Necessary modifications will have to be made to the Articles of Association of the company to facilitate this. It will also require changes in the debenture trust deed, SEBI said.
This move is aimed at protecting bondholders who may not always have the same leverage that institutional banks have vis-a-vis borrowers in default, said Shilpa Ahluwalia, partner at Shardul Amarchand Mangaldas and Co.
A debenture trustee, even today, has the right to nominate a director on the board of an issuer if there is a payment default or default regarding the creation of security. The requirement to incorporate provisions in the Articles of the issuer merely operationalises this right and ensures that the issuer is not able to practically frustrate such an appointment.Shilpa Ahluwalia, Partner, Shardul Amarchand Mangaldas and Co.
The right to appoint a nominee director merely protects bondholders' interest by giving the trustee visibility over decision-making to be able to recover loans in default and should not be viewed as an infringement on board autonomy, Ahluwalia said.
These changes are in line with the legal frameworks such as SARFAESI and the insolvency law, which recognise the right of lenders to step into a management role of a defaulting borrower, she said.
Companies with existing listed non-convertible securities will be required to incorporate the changes by Sept. 30, 2023.