In order to protect the interest of investors, market regulator SEBI has issued a framework for setting up a recovery expense fund by companies raising fund through issue of debt papers on stock exchanges.
In a circular, SEBI said the issuer proposing to list debt securities have to deposit an amount equal to 0.01 per cent of the issue size subject to a maximum of ₹25 lakh per issuer towards the Recovery Expense Fund (REF) with the designated stock exchange as disclosed in its offer document.
The new directions will come into force from January 1. Companies which have already submitted application for debt fund raising and existing listed issuers on stock exchange would be given an additional time of 90 days to comply with the directions, it said.
SEBI’s move comes on the back of a series of default by large corporates in the recent times, impacting mutual fund investors badly.
The issuer company would create such a fund at the time of issuance of debt securities that may be utilised by Debenture Trustees in the event of default for taking appropriate legal action to enforce the security. The issuer can either deposit cash or cash equivalent, including bank guarantees, towards contribution to this fund at the time of making the application for listing of debt securities, it said.
‘Invest in G-Secs’
The exchanges, in turn, have to invest cash received in the recovery expense fund in government securities or treasury bills or fixed deposit with a scheduled commercial bank or debt mutual funds and the interest earned will be added to the REF of the issuer.
The issuer will ensure that the bank guarantee remains valid for a period of six months post the maturity date of the listed debt security, said SEBI. Further, it said the issuer will keep the bank guarantee in force and renew the bank guarantee at least seven days before its expiry, failing which the designated stock exchange will invoke such a guarantee.
In case of any change in the status of issuer of the listed debt securities on account of corporate restructuring, the designated exchange will make sure that the amount maintained in the REF is available before issuing the ‘Observation Letter’ in that regard. In the event of a default, SEBI said the trustee concerned will obtain the consent of investors for enforcement of security and will inform exchanges to release the amount lying in the REF within five days of receipt of such an intimation.
Trustees have to keep a record of all expenses including legal and cost for hosting meeting. On the exercise of the call or put option, the funds lying in REF will be refunded to the issuer with a No Objection Certificate. “The trustees should ensure that there is no ’default’ on any other listed debt securities of the issuer before issuing the NOC,” SEBI said.