SEBI introduces a new security cover certificate format and updates the timeframe

Capital markets regulator Sebi released a new format for disclosing security cover to stock exchange and debenture trustees on Thursday, with the goal of providing a comprehensive picture of all borrowings and the status of encumbrance on the assets of listed businesses.

According to a circular, the regulator has also established duties for listed entities and debenture trustees (DT) in terms of security cover format creation and submission. It specifies how listed entities and DT should prepare security cover certificates. Sebi has also changed the deadlines for submitting security cover certificates, valuation reports, and quarterly compliance reports, as well as debenture trustees' regulatory compliance.

      

This follows representations from issuers, debenture trustees, and other market participants on issues related to operational challenges in complying with certain circular rules, as well as ideas on how to enhance such requirements.

The Sebi's Working Group on "Unique Identification Code - Securities and Covenant Monitoring System" considered these issues as well. The regulator updated the Debenture Trustees regulations, LODR (Listing Obligations and Disclosure Requirements) standards, and Sebi (Issue and Listing of Non-Convertible Securities) Regulations last month after taking into account recommendations from the Working Group and feedback from market participants.

Further, "The security cover format has been updated in accordance with the Working Group's recommendations... The redesigned format was created to give a complete view of all borrowings and the state of encumbrances on the listed entity's assets "According to the regulator.

A listed entity will be obliged to prepare a security cover certificate on a quarterly basis, and the listed firm's statutory auditor will certify the book values of the assets specified in such certificate, according to Sebi.

In addition, the debenture trustee must certify the market value of assets on a quarterly basis based on due diligence performed by it or its approved agencies and deliver the security cover certificate in a specific manner.

The calculation of security cover ratios has been established by the regulation.

The Unique Document Identification Number (UDIN) will be generated in the manner stipulated by the relevant regulatory body for certificates certified by the issuer company's statutory auditor and the debenture trustee's empanelled independent CAs.

The DT must ensure that the qualifications/disclaimer (by whatever name it is termed) does not impair the security rights of debenture holders.

In addition, if the DT believes that such qualifications/disclaimers are impacting debenture holders' rights, the DT will be compelled to take corrective action.

In terms of covenant monitoring, Sebi stated that listed entities must report to the debenture trustee on a quarterly basis their compliance status with respect to financial covenants of listed debt securities, as confirmed by the listed entity's statutory auditor.

The debenture trustee must create board-approved internal procedures for proactive and effective monitoring of breach of covenants and such policy in order to ensure effective monitoring.

Debenture Trustee will have to make certain disclosures to stock exchanges, including any breach of the minimum security cover within 48 hours of such breach, in order to improve transparency with respect to no-objection certificates (NOC)/no-dues certificates issued by DT and monitoring of listed entity.

In terms of deadlines, Sebi stated that the DT must submit a security cover certificate to the stock exchange and make a website disclosure of the security cover certificate and quarterly compliance report within 75 days of the end of each quarter, with the exception of the final quarter of the financial year.

Furthermore, the DT must submit the security cover certificate to the exchange and make website disclosure of the security cover certificate and quarterly compliance report for the last quarter of the financial year within 90 days of the end of the financial year, as well as the valuation report and title search report to the exchange once every three years within 75 days of the end of the financial year.

Debenture Trustees will be required to obtain written confirmation from designated stock exchange(s) or any other independent source regarding the creation of REF by the listed entity, rather than relying solely on communication from the listed entity, pending independent verification of the creation of REF by issuer companies.

On a half-yearly basis, the exchange(s) will be required to reveal the REFs created by the listed firms. The details of the debenture trustee to the debt issue will also be disclosed.

The framework for the updated format of the security cover and covenant monitoring will take effect on October 1st. Other aspects of the circular will take effect immediately, according to Sebi.


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