Sharing of the information
between Debenture Trustee and Credit Rating Agencies
Recently SEBI has come out with a new
circular [Circular no. MIRSD/3/2013,
dated 15th March 2013] called sharing of information regarding
issuer companies between Debenture Trustee and Credit Rating Agencies.
What is Debenture Trustee?
A debenture trustee is a person or entity
that serves as the holder of debenture stock for the benefit of another party.
When a company is looking to raise capital, one method of accomplishing this is
by issuing stock as a form of debt with the obligation to repay the debt at a
specific interest rate. The debenture trustee serves as a liaison between the
company that issued the debentures and the debenture holders that are
collecting interest payments.
When lending money through a debenture
offering, an investor will receive a debenture certificate entitling him or her
to a particular sum of money and a specified interest rate. As investors do not
receive an individual bond for their investments, their loans are really a
small portion of one large loan. This can be extremely risky in the event of a
default as the smaller debenture investors may lose their entire investment. As
a result of this, a debenture trustee is appointed when debenture stock is
issued to a large number of investors.
When a large amount of debenture stock is
issued, the company issuing the stock may be required to use its property as
collateral. In this scenario, the property is mortgaged to the purchasers of
the debentures and the deed is placed in a trust. The debenture trustee serves
are the official representative for the debenture investors and is responsible
for liquidating the collateral of the trust in the event that the company
defaults on its debentures.
What is Credit Rating Agency?
A credit rating agency is a company that
assigns credit ratings for issuers of certain types of debt obligations as well
as the debt instruments themselves. A credit rating for an issuer takes into
consideration the issuer's credit worthiness (i.e., its ability to pay back a
loan), and affects the interest rate applied to the particular security being
issued.
Credit ratings are used by investors,
issuers, investment banks, broker-dealers, and governments. For investors, credit
rating agencies increase the range of investment alternatives and provide
independent, easy-to-use measurements of relative credit risk; this generally
increases the efficiency of the market, lowering costs for both borrowers and
lenders. This in turn increases the total supply of risk capital in the
economy, leading to stronger growth. It also opens the capital markets to
categories of borrower who might otherwise be shut out altogether: small
governments, startup companies, hospitals, and universities.
What kind of Information can be share?
The above circular enables now, to share the
information between Debenture Trustee’s and Credit Rating Agencies regarding
their client i.e., issuer company of debentures. The information normally
contains two sides i.e., from credit rating agencies to debenture trustee’s and
from debenture Trustee’s to Credit Rating Agencies.
1. Information from Credit Rating Agencies to
Debenture Trustee’s
a.
Rating
assigned/revised for debt securities along with the rationale for the same.
b.
Press release,
outstanding ratings etc. in respect of debt securities.
c.
Non-cooperation
by the issuers with respect to sharing necessary information for monitoring the
credit quality of the rated instrument with CRAs.
d.
Press
release and separate communication to DT on withdrawal of rating post
redemption of entire amount due towards debenture-holders.
e.
Default of any type committed by the
issuer.
2. Information from Debenture Trustee’s to
Credit Rating Agencies
a.
Whether the
asset in respect of which security has been created is free from any
encumbrance and adequate to ensure asset cover for the debentures or if there
is any breach of the terms of creation of the security. This information shall
be shared on half yearly basis.
b.
Funds
transferred to Debenture Redemption Reserve (DRR), depletion of the
DRR/invocation of guarantee which could affect the payment of debenture
obligations. This information shall be shared annually.
c.
Details of
redemption of the issue.
d.
Any default
committed including the default in payment of interest or redemption of
debentures or delay in creation of security.
e.
Any change or restructuring of the terms
of the issue.
f.
Periodic
reports from lead banks about the progress of the project for which funds have
been raised through debentures and certificate from issuer's auditors in
respect of utilization of funds.
g.
Details of
grievances filed by debenture-holders and action taken to resolve them.
h.
Non-cooperation
by the issuer with respect to furnishing required reports/certificates
/information.
How to share the information?
The Debenture Trustee’s and Credit Rating
Agencies shall assign a separate e-mail ID for sending and receiving such
information and ensure appropriate action, if any, based on such information
received.
What is the effect of sharing the
information?
Debenture Trustee’s duty is protect the
investor’s fund. In case, Issuer Company tries to issue debentures by providing
wrong information, it can be easily identified now. Debenture trustee can be
cross check the Credit Rating Certificate with rating agency and obtain the
rating information with any negative aspects, directly from credit rating
agencies only.
The Credit Rating Agency can obtain the
details in respect of any default in payment of interest on debentures or
repayment of principle amount or breach of terms and conditions in related with
issue, etc., directly from the Debenture Trustee. Therefore, now credit rating
agencies can provide more accurate rating to the issuing companies.
Conclusion
By issuing this circular, SEBI has cross the
another step to protect the investor’s fund. Now, Issue Company should take
more care about repayment of principles, payment of interest on debenture;
comply with terms and condition of the issue, Credit Rating, etc.
CA SHIVA SHANKARA R. SHETTY
CHARTERED ACCOUNTANT
Mobile: +91 9035846043 Email: ca.srshetty@icai.org
www.casrshetty228359.in
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