Rules to be followed by Listed Companies when appointing ... · appointed to act on behalf of debenture holders and issues in ... Debentures To introduce ... Rules to be followed

Rules to be followed by Listed Companies when appointing Trustees for Debenture Issues and Rules to be followed by Listed Companies in the case of Private Placements

Consultation Paper 04

Securities and Exchange Commission of Sri Lanka

Rules to be followed by Listed Companies when appointing Trustees for Debenture Issues and Rules to be followed by Listed Companies in the case of Private Placements 2009

TABLE OF CONTENTS Page No. 1.0 The Consultation Process 02

2.0 Background 03

3.0 Proposed Rules 03

Securities and Exchange Commission of Sri Lanka Page 1


1. THE CONSULTATION PROCESS. This consultation paper is presented with a view to soliciting public comment on the rules proposed for implementation. Specific questions have been formulated in order to obtain a focused response. The comments received would be subject to consideration by the SEC. The SEC may consider convening consultative meetings as a further step depending on necessity. Comments Received Comments received may be publicly available and will not be treated as confidential unless a special request is made in that respect. Please send in your comments under the title “Rules to be Introduced to the Listing Rules” on or before 12th February 2009 by registered post or e - mail or fax to: Deputy Director General Securities and Exchange Commission of Sri Lanka Level 28, East Tower, World Trade Centre, Echelon Square, Colombo 01. E – mail : [email protected] Fax : 011 2439149


mailto:[email protected]


Disclaimer The contents of this paper do not constitute legal advice. The finalized rules may change from the draft rules consequent to the comments we receive and further deliberations or due to any other reason connected with the same. 2. BACKGROUND The Securities and Exchange Commission of Sri Lanka (SEC) reviews compliance by companies listed on the Colombo Stock Exchange (CSE) with the Listing Rules of the CSE in keeping with its objective of protecting the interests of investors. The Revised Listing Rules of the CSE have introduced the requirement for the appointment of a Trustee for debenture issues in keeping with the requirements of the Companies Act No 07 of 2007 and have included certain requirements for disclosure relating to Private Placements which are to be disseminated to the market. Due to issues which have arisen in the past in connection with the inaction of trustees appointed to act on behalf of debenture holders and issues in connection with private placements of shares by listed companies, the SEC is proposing the inclusion of the rules mentioned below in the Listing Rules of the CSE. In relation to the appointment by listed companies of Trustees for debenture issues, the SEC is proposing the introduction of eligibility criteria for trustees and the enunciation of the obligations of such trustees. These proposals are made in order to ensure the trustees’ capacity to act on behalf of the debenture holders both in terms of closely monitoring the performance of its obligations by the listed company and taking timely action in the case of a default by the listed company. In connection with private placements by listed companies, the rules are proposed, keeping in mind the possibility of listed companies using private placements on the one hand as a method of raising capital and on the other hand as a tool used to the detriment of the minority shareholders and other investors. The SEC seeks your views on the suitability of the inclusion of same. An extract of the relevant revised Listing Rules are annexed herewith as Annexure “A”.



3. PROPOSED RULES

Issue Recommendation Rationale 1) Rules for

Trustees of Debentures

To introduce specific rules for such Trustees. The following is proposed: (i) That the Trustee be incorporated and be

required to have a stated capital of Rs 25 million.

(ii) That trustee companies should have

employees having the requisite educational and professional experience. (CSE will be required to develop guidelines)

(iii) That the trustees should not have any conflicts of interest such as that arising from a shareholder relationship or common directors with the issuer.

(iv) That Trustees so appointed must meet the

“Fit & Proper” criteria approved by the Commission in the context of Market Intermediaries (as set out below)

No Director of a trustee company nor any person carrying out trustee functions shall have been:

(A) convicted by any Court of Law in Sri Lanka or abroad; and/or

(B) found to have committed or been connected i h h i i f hi h

The Companies Act has mandated the appointment of the Trustee. The SEC was of the view that rules should be introduced in order to address the need for specific qualification criteria and to improve the standards of professionalism among trustees. Rs. 25 Million has been proposed in order to ensure that the trustee has a capitalization which will enable it to have the necessary infrastructure to perform its functions as a trustee.



with the commission of any act which involves fraud, deceit or dishonesty by any body with regulatory or supervisory authority;

(i) established by law in Sri Lanka or abroad,

(ii) constituted under law as a commission of inquiry, tribunal or other similar body, or (iii) by any professional association

(v) That the content of the Trust Deed as proposed in Annexure “B” hereto be adopted.

These proposals address the need for the improvement of professional qualifications among trustees and a more effective performance of their duties.

2) Private Placements

Further rules to be introduced to the rules already proposed. (i) Limitation of the percentage of shares which

may be issued by way of Private Placement to fifteen percentum (15%) of the shares in issue.

(ii) That private placements may be carried out

by a particular Issuer only once in every three years.

(iii) That the persons taking shares in a private

placement be required to give a declaration to the SEC as to whether they are or are not connected to each other or with any other substantial shareholder /director.

It is the view of the SEC that this area requires more stringent rules in order to safeguard against the use of this method to dilute the holding of the existing shareholders and to discriminate against minority shareholders. This provision is introduced to safeguard the provisions of the Takeovers and Mergers Code.



Your comments are sought on whether, 1. the proposals mentioned above are adequate to address the issues

described? 2. further requirements should be included and the rationale for any

suggestions ? 3. any proposals should be withdrawn and the rationale for any suggestions

?



Annexure “A” SECTION 2 LISTING OF SHARES AND DEBENTURES 2.2 LISTING DEBT 2.2.1 GENERAL REQUIREMENTS

e. APPOINTMENT OF A TRUSTEE

The applicant Entity shall appoint a Trustee for the benefit of the holders of Debt Securities, which are to be listed.

SECTION 5 FURTHER ISSUE OF SECURITIES OF A LISTED ENTITY 5.1.2 TYPES OF FURTHER ISSUE OF SHARES 5.4 ISSUE OF SHARES BY PRIVATE PLACEMENT

a. A Private Placement is an issue of shares to an identified investor/s or category of investors other than by way of a rights issue offered pro-rata to existing shareholders or a general offer to the public for subscription.

b. The Entity shall obtain shareholder approval by way of a Special Resolution for the issue of shares through a Private Placement at a General Meeting.

c. ANNOUNCEMENT TO THE EXCHANGE The applicant Entity is required in the first instance to make an

announcement to the Exchange of the decision of the Board of Directors to issue shares by way of a Private Placement immediately upon such decision being made.

Such announcement shall include:

(i) maximum number of shares to be issued (ii) name/s of the party/parties to whom the shares will be allotted (if

known) (iii) Price or the minimum price for which the shares are to be issued (iv) current stated capital of the Entity (v) the purpose for which proceeds of the issue are to be utilized, and; (vi) the following statement:

“The issue of shares by way of the Private Placement is subject to



the Exchange approving in principle the issue and listing of shares and obtaining shareholder approval at a General Meeting”.

d. ADDITIONAL LISTING APPLICATION

The Entity shall submit the additional listing application to the Exchange within seven (07) Market Days from and excluding the date of announcement. The application shall contain the following:

(i) The Board resolution authorizing the issue and listing of the shares, certified by the Company Secretary.

(ii) An application in conformity with Appendix 5A of these Rules

(iii) An extract of the Article which specifically permits the Entity to issue new shares or sets out the method by which the Entity is authorised to issue the new shares without such shares being offered pro-rata to the holders of the shares already in issue as required in terms of Section 53(1) of the Companies Act certified by the Company Secretary to be a ‘true copy’.

(iv) An extract of the Board Resolution certified by the Company Secretary that, in the opinion of the Board, the consideration for which the shares are to be issued is fair and reasonable to the Entity and to all existing shareholders as required by the Companies Act.

(v) A circular to shareholders stating, inter alia;

- the purpose for which the proceeds of the issue are to be utilized

- details of the target persons to whom the shares will be issued (if known)

- benefits of the Private Placement to the existing shareholders and to the Entity

- the maximum number of shares to be issued and, - the price or the minimum price at which such issue will take

place. The Circular shall state that the directors have resolved that the price for which the shares are issued is fair and reasonable to the Entity and to all existing shareholders as required by the Companies Act.

(vi) Fee payable to the Exchange for the listing as prescribed by

Section 10 of the Rules. e. DECLARATION TO THE EXCHANGE



The Entity shall submit to the Exchange a ‘Declaration’ as set out in

Appendix 5C of these Rules within two (02) Market Days from and excluding the date of allotment.

ANNEXURE “B” MINIMUM CONTENT OF A TRUST DEED The following shall be included in the Debenture Trust Deed:

Description of Debentures

- The key features of the Debentures constituted by the Trust Deed including the Debenture types, issue price, face value, rate of interest, maturity date or redemption schedule, and the interest payment date.

- Whether Debentures are secured or unsecured and if secured, the nature of the security.

- The ranking of the Debenture holders amongst all other Debenture holders and as against all other obligations of the Applicant Entity.

- Other features embedded to the Debentures and the nature.

Covenants by the Applicant Entity to comply with Trust Deed and Debentures - The Trust Deed shall provide for a covenant by the Applicant Entity to comply

with the provisions of the Trust Deed and terms and conditions of the Debentures.

Covenants by the Applicant Entity to repay principal and interest

- The Trust Deed shall provide for a covenant by the Applicant Entity to pay interest and redeem in full all outstanding Debentures in accordance with the terms and conditions of the Debentures.

- Where the Applicant Entity has an option to redeem the Debentures before the maturity date of such Debentures, the Trust Deed shall provide for a clause setting out the conditions and the procedures by which such an option can be executed.

Reporting covenants by the Applicant Entity

- The Trust Deed shall provide for covenants to ensure that the Applicant Entity shall immediately notify the Trustee in the event that the Applicant Entity becomes aware of the happening of any of the following event/s that has caused or could cause: (i) Any amount secured or payable under the Debenture to become

immediately payable. (ii) The Debenture to become immediately enforceable. (iii) Any other right or remedy under the terms, provisions or covenants of

the Debentures or the Trust Deed to become immediately enforceable.

- The Trust Deed shall provide for a covenant by the Applicant Entity to submit

to the Trustee the interim financial statements (unaudited) and the audited



financial statements within a stipulated timeframe and all published financial and other information, which is normally provided to ordinary shareholders at the time that it is sent to the shareholders.


to the Trustee a certificate in writing to the Trustee that the interest and the principal amount has been paid to the Debenture holders in accordance with the terms or conditions of the Debentures and provisions of the Trust Deed


to the Trustee within one month after the end of every quarter, a certificate that the Entity has complied with each and all of the covenants with the details required. The certificate shall include details of : (i) Whether or not any limitation of liabilities or borrowing as prescribed

by the Trust Deed has been exceeded; (ii) Whether or not the Applicant Entity and the guarantor (if any) have

observed and performed all the covenants and obligations binding upon them respectively pursuant to the Trust Deed;

(iii) Whether or not any event has happened which has caused or could cause the security created by the Trust Deed to become enforceable (for secured Debenture);

(iv) Whether or not any material trading or capital loss has been sustained by the Applicant Entity or any guarantor;

(v) Whether or not any circumstances materially affecting the Applicant Entity or any guarantor have occurred which adversely affect the Debentures;

(vi) Whether any contingent liabilities have been incurred by the Applicant Entity or any guarantor. If so, to state the amount incurred, and whether or not any contingent liability has matured or is likely to mature within the next twelve months, which will materially affect the ability of the Applicant Entity or any guarantor to repay the Debentures;

(vii) Whether the Applicant Entity has assumed a liability of a related body corporate during the quarter. The certificate shall also include details of the extent of the liability assumed during the quarter and the extent of the liability at the end of the quarter;

(viii) Whether or not there has been any change in any accounting method or method of valuation of assets or liabilities;

(ix) Whether or not any circumstances have arisen which render adherence to the existing method of valuation of assets or liabilities misleading or inappropriate;

(x) Any substantial change in the nature of the Applicant Entity's or any guarantor's business since the issue of the Debentures;

(xi) The certificate shall be made in accordance with a resolution of the directors and specify the date on which the certificate was made; and,

(xii) Where an Applicant Entity fails to deliver the certificate to the Trustee, the Trustee shall inform the Debenture holders of that fact.

- The Trust Deed shall provide for a covenant to ensure that, in the event the

Applicant Entity creates a charge, the Entity shall submit to the Trustee the



written details of the charge within 21 days after it is created. Where the amount to be advanced on the security of the charge is indeterminate, the Entity shall submit to the Trustee written details of the amount of each advance within 7 days upon the creation.

Covenants by the Applicant Entity to replace Trustee

- The Trust Deed shall provide for a covenant by the Applicant Entity to take reasonable steps to replace the Trustee as soon as practicable after becoming aware that: (i) The Trustee has ceased to exist. (ii) The Trustee has not been validly appointed. (iii) The Trustee is in the situation of conflicting interests defined. (iv) The Trustee has ceased to perform its function as a Trustee. (v) The Trustee is in the situation of unsuitability defined and does not

eliminate such situation within 90 days, after ascertaining that the Trustee has such situation. The existing Trustee shall continue to act as a Trustee until a new Trustee is appointed.

Other Covenants by the Applicant Entity

- The Applicant Entity shall at all times carry on and conduct its affairs in a proper and appropriate manner.

- The Applicant Entity shall provide a copy of the Trust Deed to the Trustee and the Debenture holders.

- The Applicant Entity shall at all times keep all of its financial and other records and make them available for inspection by the Trustee and the Debenture holders.

- The Applicant Entity shall have a register of Debenture holders (i) The Applicant Entity shall at all time keep a correct Register of

Debenture holders including the names and addresses of all Debenture holders, the value of Debentures held by each Debenture holder and the date on which each Debenture holder became registered as the holder and the date on which he ceased to be so registered.

(ii) The Applicant Entity shall permit the Trustee and the Debenture holders at all reasonable times without payment of any fee to inspect the Register of Debenture Holders and to take any copies thereof.

- The Applicant Entity shall submit to the Trustee any information which the Trustee may require in order to discharge its duties and obligations as Trustee under the Trust Deed relating to the Applicant Entity’s affairs to the extent permitted by law.

Events constituting default and remedy of such default

A list of all events, the occurrence of any of which would entitle or oblige the Trustee to give notice to the Applicant Entity that Debentures become immediately due and payable: - where the Applicant Entity makes default in the payment of any interest due

on the whole or any part of the Debentures after the date such interest is



payable or in the payment of any principal monies payable under these presents in respect of any Debenture.

- where any liquidation, bankruptcy, insolvency, receivership or similar action or proceeding is commenced against the Applicant Entity.

- where a winding up order has been made against or an effective resolution has been passed for the winding up of the Applicant Entity.

- where there is a breach by the Applicant Entity of any terms or conditions in the Debentures or provisions of the Trust Deed or any other documents relating to the issue, offer or invitation in respect of the Debentures.

- where the Applicant Entity stops or threatens to stop payment of its debts or ceases to carry on its business.

- where any other indebtedness of the Applicant Entity becomes due and payable prior to its stated maturity or where security created for any other indebtedness becomes enforceable.

- where there is a revocation, withholding or modification of a license, authorization or approval that impairs or prejudices the Applicant Entity’s ability to comply with the terms and conditions of the Debentures or the provisions of the Trust Deed or any other document relating to the issue, offer or invitation in respect of the Debentures.

- Where any mortgage, charge, pledge, lien or other encumbrance, present or future is created or assumed by the Applicant Entity contrary to the terms or conditions of the Debentures and the provisions of the Trust Deed.

- In any of the events above, the Trustee at its discretion may, and if so

requested in writing by the holders of at least one fifth in nominal value of the Debenture outstanding or if so directed by an Extraordinary Resolution of the holders, shall give notice to the Applicant Entity that Debentures become immediately due and payable at their principal amount, together with accrued interest as provided in the Trust Deed.

Application of monies received by the Trustee Where there are any monies received by the Trustee from the Applicant Entity under the Trust Deed, the Trust Deed shall provide for the manner and order of priority in which these amounts are applied or payable. Remuneration of the Trustee Fees to be paid to the Trustee for the performance of its duties as Trustee and any additional services it may provide.

Powers and Duties of Trustee

- The Trust Deed shall contain a statement by the Trustee that it is duly qualified to act as Trustee.

- The Trust Deed shall set out provisions relating to the powers and duties of the Trustee.

- The Trustee shall exercise reasonable diligence to ascertain whether the property of the Applicant Entity or the guarantor that is or shall be available (whether by way of security or otherwise) will be sufficient to pay the interests and repay the principal amount in an event of default by the Applicant Entity.

- The Trustee shall exercise reasonable diligence to ascertain whether the Applicant Entity or any guarantor has committed any breach of the terms and



conditions of the Debentures or provisions of the Trust Deed or whether an event of default has occurred or is continuing to occur.

- A Trustee may rely upon any certificate or report given or statement made by the auditors or an officer of the Applicant entity or the guarantor, if it has reasonable grounds for believing that the auditor or officer was competent to give or make the certificate, report or statement.

- The Trustee shall exercise reasonable steps to ensure that the Applicant Entity or guarantor remedies any breach known to the Trustee of the terms, provisions, or covenants of the Debentures or the Trust Deed if and as long as the Trustee in good faith determines that the breach will not materially prejudice the Debenture holders’ interests (if the default is of a less serious nature, the Trustee may withhold such notice so long as it determines that course to be in the interest of the Debenture holders. Such determination shall be made in good faith by responsible officers of the Trustee.)

- The Trustee shall give notice in writing to the Debenture holders as soon as practicable if the Applicant Entity or guarantor fails to remedy any breach of terms, provisions or covenants of the Debenture or the Trust Deed.

- In the case where an event of default has occurred and is continuing to occur, the Trustee shall exercise such rights and powers vested in it by the Trust Deed and use a reasonable degree of skill and diligence in exercising such powers.

- The Trustee shall, in the event the Applicant Entity or the guarantor fails to remedy any breach of the terms, provisions or covenants of the Debentures or the Trust Deed:

call a meeting of the Debenture holders with notice to the Applicant Entity;

inform the Debenture holders of the failure at the meeting; and submit proposals for protection of the Debenture holders’

interests at the meeting as the Trustee considers necessary or appropriate and obtain their directions.

- The Trustee shall give notice in writing to the Applicant Entity as soon as practicable if the Trustee discovers that it is not eligible to be appointed or to act as Trustee.

- The matters which are within the powers of the Trustee, the Trustee may decide without reference to the Debenture holders.

- Where there is a breach by the Applicant Entity under the terms and conditions of the Debentures and the provisions of the Trust Deed, the Trustee may authorize or waive such breach provided that the Trustee is satisfied that there is no material prejudice to the interest of the Debenture holders and that the Trustee is authorized to do so by resolution of a stipulated majority of the Debenture holders.

- The Trustee may appoint a person to chair the meeting of Debenture holders. If the Trustee does not exercise this power, the Debenture holders present at the meeting may appoint a person to chair the meeting.

Exemptions and indemnifications of Trustee from liability

- Terms and conditions of Debentures and provisions in the Trust Deed or a term of a contract with the Debenture holders secured by the Trust Deed, shall be void in so far as the term or provision would have the effect of:



(i) exempting a Trustee from liability for the duties for failure to show

the degree of care and diligence required of it as Trustee; or (ii) indemnifying the Trustee against that liability; unless the term or

provision: releases the Trustee from liability for something done or

omitted to be done before the release is given; or • enables a meeting of debenture holders to approve the

release of the Trustee from liability for something done or omitted to be done before the release is given. Such release could be approved by Debenture holders if the Debenture holders who vote for the resolution hold 75% of the nominal value of the Debenture holders present and voting in person or where proxies are permitted, by proxy at a meeting summoned for the purpose.

- A Trustee is not liable for anything done or omitted to be done in accordance with a direction given to the Trustee by the Debenture holders at any meeting called.

Meeting

- The Trust Deed shall contain provisions for setting out the notice period for the meeting of Debenture holders

- The Trust Deed shall contain provisions which states that the meetings may be convened at the request of the Applicant Entity, Trustee or an agreed percentage of Debenture holders to consider any matter affecting their interest.

- There shall be a quorum requirement for the transaction of business at the meetings. The quorum for the passing of special resolutions shall be explicitly stated.

- The Trust Deed shall contain provisions which states that the Debentures held by the Applicant Entity or any related parties of the Applicant Entity shall not be counted for purpose of voting.

Modifications of the Trust Deed

- The conditions under which the provisions of the Trust Deed or the terms and conditions of the Debentures may be modified.

Procedure for appointment of new Trustees and their removal

The conditions for the appointment, resignation and removal of the Trustee. Any removal of a Trustee and subsequent appointment of a replacement Trustee

by the Applicant Entity shall be with the consent of an agreed majority of Debenture holders.

The Applicant Entity is notified of any removal of a Trustee and subsequent appointment of a replacement Trustee by Debenture holders

Enforcement of obligations

Manner in which enforcement of obligations is to take place to be described. Others

- The Applicant Entity to be responsible for paying any stamp duty and other similar duties or taxes on or in connection with the Trust Deed or Debentures (if applicable)



27th January 2009


Documents

Rules to be followed by Listed Companies when appointing ... · appointed to act on behalf of debenture holders and issues in ... Debentures To introduce ... Rules to be followed