Description
SEBI modifies provisions for Recovery Expense Fund (REF) utilization by Debenture Trustees, specifying explicit purposes and streamlining reimbursement processes in case of defaults on listed debt securities.
Summary
SEBI has modified Chapter IV of the Master Circular for Debenture Trustees dated August 13, 2025, to clarify and streamline the utilization of Recovery Expense Fund (REF). The modifications explicitly specify the purposes for which REF can be utilized and simplify the reimbursement process for debenture trustees in case of defaults on listed debt securities. These changes follow recommendations from the Working Group of DTs for Ease of Doing Business and discussions in the Corporate Bonds and Securitization Advisory Committee (CoBoSAC).
Key Points
- REF purpose clarified: enables Debenture Trustees to take prompt action for enforcement/legal proceedings in case of defaults in listed debt securities
- Explicit list of permitted REF uses specified, eliminating previous ambiguity
- Prior debenture holder approval not required for explicitly specified purposes
- Debenture Trustees must inform debenture holders via mail and website regarding REF reimbursement
- Stock exchanges must release REF amounts within five working days of receipt of intimation
- Independent auditor’s certificate required for expense verification
- Lead Debenture Trustee concept defined for multi-trustee scenarios
- Annual reporting to debenture holders on REF utilization mandated
Regulatory Changes
Modified REF Purpose Statement
REF shall be created by issuers and used by Debenture Trustees for enforcement/legal proceedings in case of default in listed debt securities.
Explicit REF Utilization Purposes (No Prior Approval Required)
Debenture Trustees may get reimbursed from REF for:
- Obtaining various consents from debenture holders
- Voting processes
- Holding meetings of debenture holders
- Filing court applications
- Legal fees
- Expenses for asset recovery services
- Appointment of legal consultants for enforcement/legal proceedings in case of default
Approval Requirements
- No prior approval needed: For purposes explicitly listed above; DT must inform debenture holders through mail and upload details on website
- Prior approval required: For REF utilization not explicitly mentioned in the specified list; DT must obtain consent from debenture holders and inform Designated Stock Exchange
Release Process
- Debenture Trustee informs Designated Stock Exchange to release REF amount
- DT submits independent auditor’s certificate regarding expenses incurred
- Stock Exchange verifies the certificate
- Stock Exchange releases amount within five working days of receipt of intimation
Lead Debenture Trustee Definition
Lead Debenture Trustee means:
- A Debenture Trustee chosen as Lead DT by other Debenture Trustees, OR
- A Debenture Trustee representing holders of more than 50% of outstanding value of debt securities
Record-Keeping and Reporting
- Debenture Trustees must maintain proper accounts of all expenses from REF
- Annual updates to debenture holders on REF utilization required
Compliance Requirements
For Debenture Trustees
- Maintain proper documentation for all REF reimbursements
- Obtain independent auditor’s certificate for expense verification
- Inform debenture holders via mail and website for reimbursements under explicitly specified purposes
- Obtain prior consent from debenture holders for REF use outside specified purposes
- Inform Designated Stock Exchange when requesting REF release
- Provide annual updates to debenture holders on REF utilization
For Issuers
- Continue creating REF as per existing Master Circular provisions (unchanged)
- Awareness of modified REF utilization framework
For Stock Exchanges
- Verify independent auditor’s certificate before releasing REF amounts
- Release REF amounts to Debenture Trustees within five working days
- Receive and process information on REF utilization
For Debenture Holders
- Receive notifications on REF reimbursements
- Provide consent when required for non-standard REF utilization
- Review annual REF utilization updates
Important Dates
- Circular Reference Date: August 13, 2025 (original DT Master Circular)
- Circular Issue Date: November 25, 2025
- Effective Date: Not explicitly specified in the provided content (document appears truncated)
Impact Assessment
Operational Impact
Positive for Debenture Trustees: The modifications significantly reduce operational friction by:
- Eliminating need for prior approvals for standard enforcement activities
- Providing clear guidelines on permissible REF uses
- Establishing faster release timelines (five working days)
- Reducing uncertainty in obtaining reimbursements
Neutral for Issuers: No changes to REF creation requirements; primarily affects post-default processes.
Positive for Stock Exchanges: Clear procedural framework for REF release verification and timing.
Market Impact
Enhanced Default Resolution Efficiency: Streamlined access to REF enables faster enforcement action by debenture trustees, potentially improving recovery outcomes for debenture holders.
Improved Transparency: Mandatory communication to debenture holders and annual reporting enhances transparency in REF utilization.
Better Debt Market Infrastructure: Addresses ease of doing business concerns for debenture trustees, strengthening the corporate bond market ecosystem.
Investor Protection
Maintained Safeguards: Prior approval requirement retained for non-standard uses of REF while eliminating bureaucratic delays for standard enforcement activities.
Enhanced Information: Regular updates and notifications keep debenture holders informed of REF deployment.
Compliance Burden
Moderate Increase: Annual reporting and auditor certification requirements add compliance steps but are balanced by elimination of case-by-case approvals for standard activities.
Impact Justification
Procedural improvement for debenture trustees to access REF more efficiently during defaults. Reduces ambiguity in fund utilization but primarily impacts operational processes rather than market structure or investor rights.