Debenture holders’ nod needed for M&As: Sebi - Times of India

Debenture holders’ nod needed for M&As: Sebi – Times of India


MUMBAI: The Securities and Exchange Board of India (Sebi) has made it mandatory for companies to get the approval of debenture holders before getting any scheme of arrangement cleared. A scheme of arrangement refers to a court-approved merger and acquisition (M&A) transaction between two entities.
The markets regulator’s move is aimed at empowering investors in debentures. However, companies that are frequent issuers of debentures, particularly financial services groups, are worried that this could create hassles. M&A activity, which includes transactions involving small firms, is frequent in this space.
According to one of the issuers, the prior approvals amount to a duplication of effort as the companies would in any case be requiring approval from the National Company Law Tribunal (NCLT) for the transaction and the court takes into account interest of all stakeholders. The issuer said that while the objective was to secure the interest of debenture holders, this measure would not serve the purpose. According to some issuers, securing the creditors’ interest was the domain of the Reserve Bank of India (RBI) whose approval is also required.
Debenture issuers enter into a trust deed, which is executed by debenture trustees (DTs). It is the role of the DTs to call for periodic reports, take possession of the trust property, enforce security interest on behalf of shareholders and ensure that here is no encumbrance on the securities.
“Until now, debenture holders were a neglected lot in the schemes of arrangement. The new rule empowers them to ensure that they do not get short-changed,” said Sanjay Sinha, a representative of the debenture trustee industry and former MD & CEO of Axis Trustee Services. He added that issuers usually approach lenders well in advance, but debenture holders get to know at the 11th hour. “Now debenture trustees, acting for the benefit of debenture holders, will need to be informed in advance so that consent of all investors is taken,” he said.
The trigger for the new rules appears to be a couple of high-profile defaults in the financial sector where non-banking finance companies (NBFCs) had raised funds largely through debentures. In the process under the Insolvency and Bankruptcy Code (IBC) all creditors, including debenture holders, get to vote on the transaction. The new norms bring these requirements outside the IBC too. “If the objective is to develop the bond markets, there is a need to empower debenture holders. In some of the high-profile defaults the debenture holders, who invested thousands of crores, have been taken for a ride,” said Sinha.


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