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With a view to boosting bond issuances and build more trust in debenture issues, SEBI has now enhanced disclosures to be made by companies. The move will ease the process of due diligence for debenture trustees.
Debentures are bonds issued by companies to investors. It is nothing but a loan advanced by the debenture holder to the company and so it forms a part of the debt capital of a company. Many large non-banking finance companies used debentures to fund their working capital. But the trust in debentures was eroding on the back of huge corporate defaults.
On encumbrance
Debenture trustees are like a liaison between the issuer company and the debenture holders. The debenture trustee is mainly a scheduled bank, a public financial institution, an insurance company, or a body corporate.
SEBI has now said that it would be mandatory for issuers to include details of assets, movable and immovable property, on which a charge encumbrance is being created. Also, the issuers must disclose whether the underlying assets are encumbered elsewhere or are free from any other liability.
Details of existing charge over the assets, along with details of charge holders must be disclosed. No-objection from existing charge holders for further creation of charge or lien on the assets should be provided. On personal guarantee of the issuer, disclosures are required on guarantor and relationship with the issuer. Also, net worth and assets of guarantor and conditions for invocation of guarantee should be provided.
The debenture trustee must ensure that the assets of the issuer are adequate to discharge/cover principal and interest amount. They would also need to verify that the assets provided by the issuer for creation of security are free from any encumbrance or that necessary permissions or consents have been obtained.
Similar will be the case with corporate guarantee. The debenture trustee will also have to verify and ensure that the assets provided by the issuer for creation of security are free from any encumbrances or necessary permissions or consents has been obtained from existing charge holders.
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