‘Security and Covenant Monitoring’ using Distributed Ledger Technology
- SEBI vide circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/218 and SEBI/HO/MIRSD/CRADT/CIR/P/2020/230 dated November 03, 2020 and November 12, 2020 respectively outlined the process of independent ‘due diligence’ by debenture trustee(s) on assets of an Issuer company for the purpose of creation of security and ‘periodical monitoring’ of security created and enhanced disclosures on the website by debenture trustee(s) on continuous basis.
- In order to strengthen the process of security creation, monitoring of security created, monitoring of asset cover and covenants of the non-convertible securities, a working group comprising of officials from SEBI, Depositories, Stock Exchanges and Trustees Association of India (TAI) was constituted by SEBI. Based on the recommendations of the working group, a platform for ‘Security and Covenant Monitoring System’ (‘system’) hosted by Depositories shall be developed.
- The system shall be used for recording and monitoring of the security created and monitoring of covenants of non-convertible securities. The system shall inter alia capture the process of creation of security (viz. due diligence, charge creation etc.), continuous monitoringof covenants by Debenture Trustees (as applicable), credit rating of the non-convertible securities by the Credit Rating Agencies (CRAs) etc.
- Depositories shall create, host, maintain and disseminate the systemfor security and covenant monitoring using distributed ledger technology. Further, the depositories shall:
4.1.Provide secure login credentials to Issuers, CRAs, debenturetrustees (DTs)etc. for recording and verifying requisite informationon the system.
4.2.Put in place adequate safeguards to ensure the integrity and security of the data on the system.
4.3.Share information with the other depository for integrating and maintaining a compatible system.
4.4.Develop an alert mechanism to be sent to the stakeholdersfor submission, acceptance and rejection of information and alerts for periodic and event based compliances.
4.5.Wherever necessary, provide the feature of document upload by the various stakeholders on the system. 4.6.Provide functionality of maintaininga trail/ log of all the communication/interaction amongst various stakeholders viz. CRAs, DTs, Issuers,depositories etc. and also in the system onaccount of recording and verification of information by the stakeholders.
4.7.Provide functionality in the system to make changes in already recorded information by stakeholders (in case a change is required to be made for rectifying any discrepancy or recording additional information) and verification of same by responsible stakeholder (as applicable).
4.8.Be responsible for the effective and smooth functioning of the system and shall develop a mechanism to establish accountability/ responsibility for the rectification of various issues and glitches that may hamper the effective functioning of the system. - In line with current market practices, related to issuance of non-convertible securities, the system, as per the nature of the non-convertible securities, shall enable various stakeholders to record information for the following aspects:
5.1.Security creation, asset cover and covenants
5.2.Periodical monitoring of security cover, asset cover and covenants
5.3.Interestand redemption payment (part and full) of non-convertible securities
5.4.Credit Rating information
Accordingly, the role and responsibilities of various stakeholders in the system have been defined below
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