The default of certain NBFCs on guaranteed debt pushes SEBI to opt for reforms

A series of failures by some NBFCs has forced capital market regulator SEBI to come up with a new set of measures to secure the interests of bondholders and boost their confidence in the regulatory mechanism to verify any wrongdoing.

In a new consultation paper, the Securities and Exchange Board of India has offered a detailed review of the regulatory framework for corporate bonds and debenture trustees (TDs).

According to the consultation document, non-bank financial corporations (NBFCs) will now be required to create an identified charge on assets, as the pari passu float charge in recent NBFC defaults in secured loans has created confusion as to whether the debentures are actually secured.

According to the regulator, the creation of a charge identified by the NBFCs will allow the liquidation of assets and the rapid repayment of debt to investors in the event of default. Recently, in the Reliance Capital case, two trustees representing secured lenders went to court to claim rights to the same assets. The assets were charged to a trustee as part of the balance sheet and pledged to another trustee as well.

“SEBI’s new proposal will prevent such situations in the future and will also help identify the charge, especially in the event of default or liquidation. It would also speed up additional NBFC borrowing by avoiding the need to obtain compliance notices from the existing lender, ”said an official at a bond trustee.


Some market participants have expressed concerns as to whether the new form of charge creation would be applicable to existing debentures or to future borrowings.

“Apparently, it seems that this would only be applicable on future borrowing in order to avoid operational difficulties,” said a market expert. SEBI also proposed a transition period of 3 to 5 years, bearing in mind that the existing charge created on the entire balance sheet would continue until the maturity of debentures already issued, which is mainly between 3 and 5 years.

Market experts also believe that creating an identified charge on the balance sheet will pose no problem for existing investors as issuers would ensure their asset coverage is greater than 100 percent.

SEBI also proposed the creation of a recovery fund by the issuer when the security is issued. This will alleviate delays in receiving funds from the Debenture Trustees and ensure performance of the guarantee. “SEBI’s new proposal will help restore investor confidence in the bond market,” said another expert.

The consultation document is open for comments until March 17.

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