In a move aimed at enhancing transparency, efficiency, and responsiveness in the corporate bond market, the Securities and Exchange Board of India (SEBI) has issued a new circular on November 25, 2025, announcing important modifications to Chapter IV of the Master Circular for Debenture Trustees (DT Master Circular) dated August 13, 2025. The changes focus specifically on the Recovery Expense Fund (REF)—a critical mechanism that supports timely enforcement and legal action in the event of a default on listed debt securities.
These revisions were introduced following recommendations from the Working Group of Debenture Trustees for Ease of Doing Business, deliberations within the Corporate Bonds and Securitization Advisory Committee (CoBoSAC), and subsequent public consultation. The updated provisions aim to remove ambiguity surrounding the utilization of REF and streamline the process for debenture trustees, issuers, and market intermediaries.
Why the Update Was Needed
While the earlier DT Master Circular laid out the broad purpose of the Recovery Expense Fund, it lacked an explicit, detailed list of permissible uses. This lack of clarity often caused delays and confusion, particularly around obtaining debenture holder consent and securing reimbursements. Recognizing the operational friction this created, SEBI has now provided a clearer, more actionable framework.
Key Modifications to REF Utilization
The amendments begin by strengthening the introductory paragraph to reinforce the purpose of REF: enabling debenture trustees to take prompt action for enforcement and legal proceedings in case of a default.
Under the revised Paragraph 2, SEBI now explicitly defines the manner of utilization of the Recovery Expense Fund:
1. Expanded List of Eligible Activities (Paragraph 2.1)
A DT or Lead DT may now seek reimbursement for a comprehensive set of default-related actions, including:
- Obtaining required consents from debenture holders
- Conducting voting processes
- Organizing debenture holder meetings
- Filing court applications
- Legal fees
- Asset recovery services
- Appointing legal consultants
This clarified list reduces ambiguity and empowers DTs to act decisively during enforcement.
2. Streamlined Approval Requirements (Paragraph 2.2)
If REF is used for the activities explicitly listed under Paragraph 2.1, no prior approval from debenture holders is required. DTs must simply inform holders via email and publish the reimbursement details on their website.
For any use outside the list, DTs must obtain prior consent from debenture holders and inform the designated stock exchange.
3. Faster Release of REF Funds (Paragraphs 2.3 & 2.4)
DTs must notify the designated stock exchange, submit an independent auditor’s certificate, and upon verification, the stock exchange must release the funds within five working days. This ensures timely access to critical resources during enforcement proceedings.
4. Definition of Lead Debenture Trustee (Paragraph 2.5)
A Lead DT is defined as one chosen by other DTs or representing more than 50% of outstanding debt value—clarifying leadership in multi-DT scenarios.
5. Accountability and Disclosure (Paragraphs 2.6 & 2.7)
DTs must maintain proper records of all REF-related expenses and provide annual updates to debenture holders.
Strengthening the Investor Protection Framework
All other provisions in Chapter IV remain unchanged. The circular takes effect immediately, issued under SEBI’s statutory powers to safeguard investor interests and strengthen the corporate bond market.
By clearly defining the scope and process for utilizing the Recovery Expense Fund, SEBI has created a more efficient, transparent, and accountable framework that will support swift action during defaults and reinforce investor confidence.