Modifications to Chapter IV of the Master Circular for Debenture Trustees

Introduction

SEBI issued a circular modifying Chapter IV of the Master Circular for Debenture Trustees dated 13 August 2025, specifically in relation to the Recovery Expense Fund (“REF”) for listed debt securities. The amendments address operational difficulties faced by debenture trustees (“DTs”) in accessing and utilizing REF monies to pursue enforcement and legal action in the event of default.

Background: Recovery Expense Fund

SEBI introduced the concept of a REF as part of its broader effort to strengthen the corporate bond market and improve the effectiveness of the DT framework. Earlier board proposals envisioned a small, prefunded contribution by issuers, typically around 0.01% of the issue size, subject to a cap, to create a ready pool of resources that DTs could draw upon for urgent enforcement or legal action in the event of a default.

However, despite this clarity, Chapter IV of the DT Master Circular (August 2025) articulated the purpose of the REF only in broad. It did not enumerate a clear or exhaustive list of permissible uses. This ambiguity created operational challenges. As a result, many trustees hesitated to act without obtaining the consent of debenture holders, which caused delays in enforcement and reimbursement.

The challenges were acknowledged in the recent circular, which notes that DTs face certain difficulties in obtaining consent as well as reimbursement from REF due to a lack of explicit guidance in the earlier framework.

What has SEBI changed?

• Clearer statement of purpose: SEBI, through its revised circular, now explicitly states that the fund exists solely to support enforcement and legal action in the event of a default. This removes earlier uncertainty about whether the REF could be used for broader administrative or monitoring functions.
• A Defined Set of Permissible Uses: SEBI has replaced the earlier, high-level description with a structured list of activities that can be reimbursed from the fund. These include the various procedural steps trustees routinely undertake after a default, such as collecting investor consents, conducting voting processes or meetings, filing court applications, paying legal fees and hiring recovery professionals or legal consultants. Importantly, the list is presented as indicative rather than exhaustive, striking a balance between trustees’ flexibility and the need for clarity.
• No Prior Consent for Standard Enforcement Costs: To prevent delays, SEBI has removed the requirement for debenture holder approval for standard enforcement-related expenses specifically identified in the revised framework. For routine agendas, trustees only need to notify debenture holders and disclose the reimbursement. Consent is required only when the REF is proposed for use in a manner outside the defined list.
• Faster Release of Funds Through a Structured Mechanism: Trustees must now request that the designated stock exchange release the funds and provide an auditor’s certificate verifying the expenses incurred. The stock exchange, in turn, is bound by a short, fixed timeline (5 working days of receipt of intimation) to process and release the amount. This ensures that trustees receive funds quickly when enforcement action cannot wait.
• Clarity on the Role of the Lead Debenture Trustee and Reporting Duties: The amendments also introduce a formal definition of the “Lead Debenture Trustee”, which is essential in issuances involving multiple trustees. This clarifies who is authorised to coordinate enforcement and interact with the stock exchange. Additionally, SEBI now requires trustees to maintain detailed accounts of all expenses met through the REF and to provide annual disclosures to investors on how the fund has been used. These reporting obligations enhance transparency and ensure ongoing investor confidence.

Why Does This Matter in the Indian Context?

India’s corporate bond market has expanded steadily over the past decade. SEBI and market reports suggest that outstanding corporate bonds now account for roughly one-fifth to one-quarter of the total bond market, with the overall bond market size increasing from approximately ₹68 trillion in March 2014 to more than ₹200 trillion by early 2024.

In this context, the REF was considered as a pre-funded pool to enable DTs to move quickly without relying on ad hoc payment from issuers or waiting for multiple investor approvals. The modifications are aimed at making this tool usable in practice:

• Speed and certainty of enforcement
• Operational clarity and governance
• Investor protection in a growing market

Takeaways for Market Participants

For issuers of listed non-convertible debentures, the circular does not change the obligation to create and maintain a REF but clarifies how and when it can be used.

For debenture trustees, the changes offer a clearer framework; treat REF as a readily deployable pool for standard enforcement-related activities listed in paragraph 2.1, ensure robust documentation of expenses and timely auditor certification and deploy systems to meet the annual reporting obligation to debenture holders.​

For investors, the framework provides greater visibility on how recovery-related costs are financed and the checks and balances around the use of REF, which should, over time, support stronger enforcement outcomes and better pricing of credit risk in listed debt instruments.

Conclusion

SEBI’s modifications to the REF are targeted and an important refinement of the debenture trustee regime, aimed at making a pre-funded enforcement pool practically enforceable in the event of defaults. By combining clearer permissible uses, faster release mechanisms and stronger reporting requirements, the framework is designed to enable disciplined trustee action while preserving transparency and confidence in India’s expanding corporate bond market.