SEBI issues Circular for Creation of Recovery Expense Fund (REF)

SEBI issues Circular for Creation of Recovery Expense Fund (REF)

With its latest Circular, the Securities and Exchange Board of India (SEBI) has brought forth the creation of a Recovery Expense Fund. In order to enable the Debenture Trustee(s) to take prompt action for enforcement of security in case of 'default' in listed debt securities, this fund is to be created which will be used in the manner as decided in the meeting of the holders of debt securities.

The creation of this fund will take place by the issuer, who proposes to list debt securities, by depositing an amount equal to 0.01% of the issue size subject to maximum of Rs.25 lakhs per issuer towards REF with the 'Designated Stock Exchange', as identified and disclosed in its Offer Document/Information Memorandum.

At the time of making the application for listing of debt securities the issuer will be depositing cash or cash equivalent(s) including Bank Guarantees towards contribution to this fund. The Designated Stock Exchange shall invest cash in Government Securities or Treasury Bills or Fixed Deposit with a Scheduled commercial bank or gilt fund or debt mutual funds or debt Exchange Trade Funds and the income/interest earned thereof shall be added to the REF of the issuer.

It is very important for the issuer to ensure that the Bank Guarantee remains valid for a period of 6 months post the maturity date of the listed debt security. The issuer has to keep the bank guarantee in force and renew the Bank Guarantee at least 7 working days before its expiry, failing which the Designated Stock Exchange shall invoke such Bank Guarantee.

Moreover, the Circular also specifies that in case of any change in status of issuer of the listed debt securities on account of corporate restructuring by way of Scheme of Arrangement etc., the Designated Stock Exchange shall make sure that the amount maintained in the REF is available before issuing the 'Observation letter' in that regard.

Now, when it comes to Default, the Capital Markets Regulator in this Circular has affirmed that in such cases, the Debenture Trustee/ Lead Debenture Trustee will have to obtain the consent of holders of debt securities for enforcement of security and shall inform the same to the Designated Stock Exchange. The Designated Stock Exchange will then release the amount lying in the REF within 5 working days of receipt of such intimation.

According to the Circular, Debenture Trustee who has been chosen to be the Lead Debenture Trustee by other Debenture Trustees or Debenture Trustee who is the Debenture Trustee of more than 50% of the outstanding value of debt securities will mean a Lead Debenture Trustee.

The balance in the Recovery Expense Fund will have to be refunded to the issuer on repayment to holders of debt securities on their maturity or at the time of the exercise of call or put option, for which a 'No Objection Certificate (NOC)'shall be issued by the Debenture Trustee(s)to the Designated Stock Exchange. The Debenture Trustee(s) also needs to satisfy that there is no 'default' on any other listed debt securities of the issuer before issuing the NOC.

This Circular shall come into force w.e.f. January 01, 2021 and all the applications for listing of debt securities made on or after January 01, 2021 shall comply with the condition of creation of REF. The existing issuers whose debt securities are already listed on Stock Exchange will be given additional time period of 90 days to comply with this circular for creation of REF.