SEBI comes out with operational framework for transactions in defaulted debt securities, to be implemented from 1 July onwards

New Delhi: Markets regulator SEBI on Tuesday allowed transactions in defaulted debt securities and put in place operational framework for such transactions. This comes after the regulator received representations from market participants and investors to allow transactions in debt securities where redemption amount has not been paid on maturity or redemption date. Consequently, SEBI has decided to introduce an operational framework for transactions in defaulted debt securities and also prescribed the obligations of issuers, debentures trustees, stock exchanges and depositories to allow transactions while permitting such transactions. The regulator has asked exchanges, depositories and debenture trustees to put in place necessary systems and infrastructure for implementation of this framework by 29 June and the new guidelines would come into force from 1 July. As per existing practice, the exchanges suspend trading or reporting of trades on debt securities before the redemption date. Further, depositories impose restriction on off-market transfers on redemption date that restricts transfers on and after the redemption date. It has been proposed to allow these restrictions be lifted on defaulted debt securities. With regard to default in payment of redemption amount and resumption of transaction on defaulted debt securities, SEBI said within two working days from the date of intimation from issuer or debenture trustees that issuer has defaulted on its payment obligations, the depositories in co-ordination with exchanges will update the ISIN master file and lift restrictions on transactions in such debt securities. Further, information regarding resumption of transactions will be disseminated immediately on the websites of both depositories and stock exchanges. Besides, depositories will immediately flag in the corporate bond database such debt securities as “ISIN-defaulted in redemption” and its description will mandatorily reflect that there was default in payment of redemption amount of the concerned debt securities. An ISIN (International Securities Identification Number) has 12 characters, used for uniquely identifying securities like stocks, bonds warrants and commercial papers. Following intimation by depositories that transactions have been permitted in the defaulted debt securities, exchange will simultaneously but not later than two working days of the default intimation from issuer or debenture trustees permit reporting of over-the counter (OTC) trades in the concerned defaulted debt securities on its reporting platform, the regulator said. At the time of reporting of such trades, exchanges will have to ensure that a pop-up window is flashed, specifying that the reported trade is in a defaulted debt security. The trade repository will flag such trades as “trades in ISIN-defaulted in redemptions”. In case of transactions in defaulted debt securities, the depositories will send an intimation to both parties to the transaction that it is “transaction in ISIN-defaulted in redemption” immediately. While sending the periodic account statement to the demat account holders, including Consolidated Account statement (CAS), SEBI said depositories will highlight in such statements that a particular debt securities is an “ISIN –defaulted in redemption”. With regard to continuous assessment of default status, the regulator said the issuer will inform exchanges, depositories and debenture trustees latest by the second working day of April of each financial year on the updated status of payment of the debt securities. In case the issuer fails to intimate the updated status of payment of the concerned debt securities, within the stipulated timelines, the debenture trustees will carry independent assessment and intimate the status of payment of debt securities to the exchanges and depositories within seventh working day of April of each financial year. If issuer or debenture trustees does not intimate the status of payment of debt securities to exchanges and depositories within the stipulated timeline, transactions in such debt securities will be restricted from eighth working day of April of that financial year, until any further intimation is received from issuer or debenture trustees regarding the same. SEBI said in case of any developments that impact the status of default of the debt securities (including restructuring of debt securities, IBC proceedings, its repayment among others), the issuer or debenture trustee will intimate exchanges and depositories within one working day of such development. The regulator said that in case of receipt of intimation or subsequent intimation to the depositories regarding full payment of redemption amount or any developments that impacts the status of default of the concerned debt securities from issuer or from debenture trustees, transactions will be restricted in such debt securities by the depositories immediately. The same will be informed to the exchanges and disseminated on respective depositories’ website, within one working day of such restriction. Further, the concerned ISIN will be extinguished in the depository system on receipt of corporate action documents from the issuer towards its extinguishment. According to SEBI, process related to continuous assessment of default status and payment of debt securities or subsequent payment of defaulted debt will be followed till either issuer has been liquidated and money realised after completion of recovery proceedings or full payment on these securities is made by issuer.