Market regulator Securities and Exchange Board of India (SEBI) has notified the operational guidelines for distributed ledger technology used for blockchains to monitor security and covenants of non-convertible securities.
SEBI had laid out a broad framework in August 2021, and has now spelled out its workings. Under the Distributed Ledger Technology (DLT) system, the key participants would be the issuers and intermediaries such as debenture trustees (DTs) and credit rating agencies.
With effect from 1 April 2022, the recording of asset details (and their verification), allotment, listing and payment of interest or redemption shall be available in the DLT system.
The new guidelines on the adoption of distributed ledger technology with unique asset IDs are expected to improve transparency around charges created by institutions on assets while issuing securitised debt instruments. However, there could be practical challenges - for instance DLT will increase the compliance requirement for issuers
How DLT will work
According to SEBI's guidelines, an issuer will feed information into the database. This information is required to be verified, and a process will probably evolve (via smart contracts) where every time an issuer feeds information, an intimation is sent to the relevant intermediary. Only after it is verified, the data will be recorded on the blockchain
A system generated asset ID will be allotted to each asset offered by the issuer as security for the non-convertible securities. To ensure this, the DLT system will provide an alert to the issuer and the debenture trustee for identifying possible duplicate entries by an issuer.
As the backbone of the DLT system would be uniqueness of assets recorded in the system, a unique identifier (asset ID) would be allotted for each asset offered by an issuer as security for the convertible securities. For data exchange and verification across depositories, format for unique asset ID would be a 12-digit alphanumeric string.
The DLT system would provide an alert to the issuer and the DT by having appropriate validation/ duplicate checks in the system for identifying possible duplicate entries for assets of an issuer, SEBI said in a circular. To begin with, certain assets would be tracked at portfolio level and no specific parameters for the underlying assets would be captured. It would include movable assets such as furniture and equipment, and current assets like portfolio of advances/ receivables.
The DLT framework does not contemplate a one-time data entry by an issuer only at the time of listing. Throughout the life of the bond, issuers will have to update the database, alert stakeholders in cases of changes such as a downgrade in credit rating or security valuation. In a significant move, credit rating agencies and trustees, on the other hand, have been entrusted with the obligation to verify and monitor the integrity of the database.
"Depositories shall allot or unfreeze an existing ISIN (in case of re-issuance), as applicable only after confirming recording of above-mentioned information by issuers," SEBI said in a statement.However, SEBI has also given a relaxation till 1 July 2022, to issuers who are unable to record details in the system after explaining depositories, post which ISIN shall not be allotted to an issuer for non-compliance.
All issuers proposing to issue non-convertible securities on or after 1st April should record the details in the system before activation of ISIN. "For existing outstanding non-convertible securities, issuers will be required to enter the details into the DLT system on or before 30 September 2022 and DTs shall verify the same by 30 November 2022," SEBI said.
Last week SEBI had issued the operational guidelines for security and covenant monitoring using DLT. In August 2021, in order to strengthen the process of security creation and monitoring of security created, asset cover and covenants of the non-convertible securities, the market regulator had specified the manner of recording of charges by issuers and manner of monitoring by DTs and credit rating agencies, among others.
