Mumbai, May 28: Markets regulator Sebi on Monday tightened the rules for listed bonds. Companies have been asked to pay an additional 2% interest to holders of privately placed bonds in case of a default, and 1% additional interest in case of delay in listing. Aiming to bring in greater accountability among debentures trustees, Sebi also asked companies to disclose remunerations for the trustees and asked them to justify the payments by disclosing the rationale behind them.
The changes to rules for bonds come in the backdrop of a series of defaults and delayed payments by some of the leading companies, which started with IL&FS in September 2018 and continued with DHFL and some companies from the Zee Group and Reliance (Anil Ambani) Group.
Since all the institutional investors like mutual funds and insurance companies are allowed to invest only in bonds that are listed, these additional rules, in effect, would put an additional burden on companies relating to compliance, which in turn would make the bond market a safer place than now, fund managers said.
“In case of default in payment of interest and/or principal redemption on the due dates, additional interest of at least 2% per annum over the coupon rate shall be payable by the company for the defaulting period (to the holders of privately placed bonds),” the Sebi circular said.
“In case of delay in listing of the debt securities beyond 20 days from the deemed date of allotment, the company shall pay penal interest of at least 1% per annum over the coupon rate from the expiry of 30 days from the deemed date of allotment till the listing of such debt securities to the investor,” it said.
Industry players said that at times, if a company delays servicing a bond, debenture trustees, who are required to act on behalf of the investors, do not disclose such delays. The new rules will change such practices. However, they are not very sure how a company, which is in default due to financial difficulties, will be able to pay the 2% extra interest.
“Defaults happen due to financial difficulties and rarely due to fraudulent behaviour on the part of the company. So, it’s difficult to guess how a company in financial difficulty would manage to pay the 2% extra interest,” said a leading fund manager. “Sebi’s intent may be good, but I’m not sure if this is feasible,” the fund manager said.