Money & Banking

Some NBFCs’ default on secured debt pushes SEBI to go for reforms

PTI New Delhi | Updated on March 08, 2020

Comments on the proposals can be sent till March 17

A spate of defaults by some NBFCs has forced capital market regulator SEBI to come out with a new set of measures to secure the interest of debenture holders and shore up their confidence in the regulatory mechanism to check any wrongdoings.

In a new consultation paper, the Securities and Exchange Board of India has proposed a detailed review of the regulatory framework for Corporate Bonds and Debenture Trustees (DTs).

According to the consultation paper, non-banking financial companies (NBFCs) will now be required to create an identified charge on the assets, as the pari passu floating charge in case of recent defaults of NBFCs in secured loans has created confusion as to whether the debentures are really secured.

According to the regulator, creation of an identified charge by NBFCs will enable liquidation of asset and return of debt quickly to the investors in the event of any default. Recently, in the case of Reliance Capital, two trustees representing secured lenders had moved the court claiming rights on the same assets. The assets were charged to one trustee as part of the balance sheet and pledged to other trustee also.

“SEBI’s new proposal will help avoid such situations in future and also help identify the charge, especially in case of default or liquidation. This would also expedite further borrowings by NBFCs by obviating the need of obtaining NOCs from existing lender,” said an official with a debenture trustee.

Apprehensions

Some market players have expressed apprehensions as to whether the new form of charge creation would be applicable on existing debentures or future borrowing.

“Apparently, it seems that it would be applicable only on future borrowings so as to avoid operational difficulties,” a market expert said. SEBI has also proposed a transition time of 3-5 years, keeping in mind that the existing charge created over the entire balance sheet would continue till the maturity of already issued debentures, which is mostly between 3-5 years.

Market experts also feel that the creation of an identified charge on the balance sheet will not cause any problem to the existing investors as the issuers would ensure that their asset cover is more than 100 per cent.

SEBI has further proposed creation of a recovery fund by the issuer at the time of issuance of security. This will mitigate delay in receipt of funds to the debenture trustees and ensure enforcement of security. “SEBI’s new proposal will help bring back the confidence of investors in the bond market,” said another expert.

The consultation paper is open for comments till March 17.

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Published on March 08, 2020
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