In a bid to attenuate economic distress being faced by bond issuers in wake of the coronavirus pandemic, market regulator SEBI has permitted transactions in defaulted debt securities and has set up an operational framework for such transactions. The move will enable bondholders to find a market for defaulting debt.

The Securities and Exchange Board of India (SEBI) has come up with this decision after receiving representations from market participants and investors to allow transactions in debt securities wherein the redemption amount has not been paid on maturity or on redemption date (referred to as defaulted debt securities).

"After a detailed consultation with various stakeholders including market participants, investors, Debentures Trustee(s), Stock Exchange(s), Depositories etc., it has been decided to introduce an operational framework for transactions in defaulted debt securities," SEBI stated in circular issued on June 23.

Consequently, SEBI has 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 June 29 and the new guidelines would come into force from July 1.

As per current regulations, stock exchanges suspend trading or reporting of trades on debt securities before the redemption or maturity date. Further, depositories put a restriction on off-market transfers on redemption date that impedes transfers on and after the redemption date. As a result, bondholders, such as mutual fund, used to face restrictions in selling their debt securities in case of any default. SEBI has now proposed to allow lifting of such restrictions on defaulted debt securities with certain riders.

Besides, depositories will immediately flag in the corporate bond database such as debt securities as €œ ISIN-defaulted in redemption€? And it will be requisite for its description to reflect that there was a default in payment of redemption amount of the concerned debt securities.

An ISIN (International Securities Identification Number) has 12 characters, which is used for uniquely identifying securities like stocks, bonds warrants and commercial papers.
At the time of reporting of such trades, exchanges will have to ascertain that a pop-up window is flashed, specifying that the reported trade is in a defaulted debt security.

The trade repository will indicate such trades, and they will be flagged as "trades in ISIN-defaulted in redemptions". In case of transactions in defaulted debt securities, the depositories will send an intimation to both the parties to the transaction that it is a €œtransaction in ISIN-defaulted in redemption€? immediately. This will ensure that both parties are aware of the status of the securities before participating in the transaction.
According to SEBI, the 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 defrayed and the money realised, after completion of recovery proceedings or full payment on these securities is made by the issuer.