[By Himansh Soni and Ankit Kumar Yadav]
The authors are students of Hidayatullah National Law University,Raipur.
Introduction
India’s corporate bond market has been witnessing a pronounced expansion, with outstanding issuances nearing the Rs. 55 trillion mark. Notwithstanding the substantial surge, the limited retail investor participation has been a persistent challenge to the evolving bond market. In response, the Securities and Exchange Board of India (‘SEBI’) has taken steps aimed at broadening retail participation in the market, such as the recent proposal to incentivize the issuance of certain public bonds. However, the effectiveness of these measures’ hinges on the structural soundness of the expansionary reforms and the underlying market structure. In pursuit of structural development in the corporate bond market, the board issued a circular specifying the conditions for debenture trustees (‘DTs’) for carrying out non-regulated activities (‘Circular’). This comes in furtherance of the Securities and Exchange Board of India (Debenture Trustees) (Amendment) Regulations, 2025, which allowed debenture trustees to undertake activities that fall outside the purview of SEBI and are regulated under any other financial sector regulator. The conditions outlined by the regulator mark an unprecedented step, in terms of global regulatory practices, towards building the financial viability of the job of DTs while advancing the board’s objective of making the bond market retail-friendly.
In this blog, the author offers a critical analysis of various aspects of the circular, including the structural segregation adopted by means of the Separate Business Unit (SBU) ring fencing mechanism for DTs. To begin with, it addresses the key implications of the circular, along with their legal context and analysis of global best practices. Secondly, it highlights the potential shortcomings of the segregated mechanism adopted in the circular. Finally, it proposes recommendations by the author to alleviate these challenges, summing up the circular with a way forward.
Decoding The Reforms
The SEBI, exercising its statutory powers under Section 11(1) of the Securities and Exchange Board of India Act 1992, has regulated the undertaking of activities outside its purview by the DTs by the insertion of Regulations 9C and 15A in SEBI (Debenture Trustees) Regulations, 1993 (‘DT Regulations’), which provide for the permitted non-regulated activities and enhanced oversight powers of DTs, respectively. The regulatory intervention aims to resolve the financial unsustainability of the job of the DTs arising out of low income from fees, in contrast to high monitoring costs. However, regulators’ limited resources may be better deployed to protect retail-level and vulnerable consumers than those who have greater levels of experience or net worth.
The SEBI, in furtherance of Regulation 9C of the DT Regulations, specified the conditions for DTs to undertake non-regulated activities. Firstly, the board has mandated that non-regulated activities be conducted on an arm’s-length basis only by the Separate Business Unit (SBU) of DTs. This measure is to prevent potential conflicts of interest that could arise when the monitoring and enforcement functions of DTs owed to debenture holders are superseded by commercially motivated non-regulated activities. It aligns with Schedule III of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, which requires intermediaries to mitigate and disclose any conflict of interest.
The principle of prevention of conflict of interest is also reflected in international legal principles, such as the International Capital Market Association’s note on International Practices of Bond Trustee Arrangements, which expects the trustees to act independently by avoiding conflicts of interest. However, in other global jurisdictions, the principle of prevention of conflict of interest has not been translated into the incorporation of a ring-fenced mechanism for trustees. For instance, Section 310(b) of the US’s Trust Indenture Act of 1939 employs only a time-bound approach by providing DTs with a ninety-day period to eliminate any conflict of interest. The regulator’s prescriptive approach represents a regulatory refinement unique to Indian market conditions, which has a narrow and fragile investor base with a retail participation of less than two percent, in contrast to developed markets such as the US, where retail participation is estimated at 28 percent.
Secondly, Each SBU must have a “Chinese Wall” that insulates it from trustee operations, with dedicated and independent staff, a separate grievance-redressal framework, and individually maintained records. Further, Shared IT systems or infrastructure may be used, but only with explicit board-approved protocols. SEBI has also strengthened transparency requirements, as DTs must display the mandatory disclosures for investors on their websites.
he use of Chinese walls as a segregation mechanism is consistent with international regulatory practices. The Senior Management Arrangements, Systems and Controls Sourcebook (SYSC) 10.2 of the United Kingdom’s Financial Conduct Authority (FCA) requires firms to establish a Chinese wall arrangement to manage conflicts and internal information regulation. The need for the establishment of information barriers has been repeatedly underscored by market failures such as the London Whale scandal, wherein the investigations highlighted the possibility of concealment of losses in the information booklet by chief information office (CIO) employees. Similarly, in the Enron Scandal, the firm exploited the obscurity in both the internal control and accounting loopholes to conceal outstanding debts, leading to the enactment of the Sarbanes-Oxley Act of 2002 to reinforce internal controls and the financial reporting standards.
Shortcomings Of The Framework
While the Circular marks a major step towards building the financial viability of DT’s job in line with market realities in the Indian corporate landscape, which continues to exhibit fragile retail participation, concerns surrounding the expected challenges to its efficiency demand closer examination.
Firstly, whereas the board requires an arm’s length separation structure, the structure does not stipulate operational standards, including the requirement of independent reporting lines. In the absence of independent reporting lines, the segregation risks being merely functional rather than institutional, conflicting with the aim of mitigating conflicts of interest. For instance, if the heads of both the SBUs report to the same senior management, there may be an overlap in managerial decisions over operational decisions, which will influence the outcomes of enforcement. In such a structure, the trustee SBU may hesitate to promptly report and enforce covenant breaches against issuers that also generate advisory revenue for the non-regulated SBU, thereby directly undermining investor protection.
The Indian regulator must take inspiration from the FCA’s SYSC framework, which addresses the drawbacks of a strictly functional segregation by regulating conflict management by formulating independent reporting lines. The SYSC 10.1 has laid a positive requirement on firms to identify, avoid, and regulate conflicts of interest. The obligation gets reinforced by SYSC 6.1, which further requires that the compliance and oversight functions should be independent by outlawing involvement of persons involved in compliance in the execution of services they supervise. Further, it also mandates the appointment of a compliance officer responsible for the compliance and reporting function. Thus, it employs institutional instruments to ensure that regulated functions are not subordinated to commercial incentives.
Hence, to address these concerns, the regulator needs to mandate independent reporting lines and direct reporting by the regulated trustee SBU to an independent board committee instead of common management of the trustee. Further, to prevent exploitation and ensure accountability, key trustee decisions such as breach reporting and default classification must be subject to periodic review by the board or an independent committee, along with the submission of a compliance report mandated in the circular.
Secondly, the circular imposes an obligation on the DTs to disclose a list of unregulated activities on their website within thirty days from the date of the circular. However, the requirement of website disclosure is static in nature and lacks a deadline and directives in case of modification of non-regulated activities by the trustee, thereby risking the dissemination of outdated or incomplete information to investors. It conflicts with international legal principles, such as the International Organization of Securities Commissions (IOSCO)’s Principles for Periodic Disclosure by Listed Entities, which require debt and related public disclosures to be timely and continuous. Additionally, events like the London Capital & Finance mini bond collapse have shown susceptibility of static and misleading website disclosures, which resulted in investor damage worth £237 million. In the Indian context, retail investors in the Indian environment rely greatly on debenture trustees as an indicator of regulatory compliance and as an indicator of risk. Since they have little access to information at the issuer level, they depend on the disclosure of trustees. In case such disclosures are inactive or obsolete, investors can be misled to think that the issuers are well managed. This has the potential to distort investment choices and undermine trust in the trustee system.In order to address those concerns, it is essential to develop robust timelines regarding the disclosure requirements on websites. The regulator may also be inspired by its other regulatory interventions, like Regulation 30 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, that impose the disclosure deadline of 24 hours. Moreover, the global practices emphasise timely disclosure. For instance Article 17 of the European Union’s Market Abuse Regulation (MAR) requires public disclosure “as soon as possible”. Incorporating a similar provision can aid further the object of keeping issuers informed..
Conclusion
The Indian corporate bond market stands at a critical juncture, as regulatory interventions aim to expand retail participation amid enduring structural constraints. In this context, SEBI’s circular represents a significant step to reconcile the financial sustainability of DTs with the imperative of retail investor protection. By permitting trustees to undertake specified non-regulated activities, the regulator acknowledges the economic reality of high monitoring and enforcement costs borne by trustees in return for relatively modest fee income. With the adoption of an unprecedented prescriptive approach to such recognition, the circular marks a beginning in the structural expansion of the Indian corporate bonds.
However, the efficiency of this framework depends on the development of enforceable governance standards that evolve in tandem with the needs of retail investors. Without structural reinforcements, concerns relating to the subordination of trustee oversight to commercial considerations are likely to persist, potentially constraining the confidence necessary for sustained retail participation. As the market evolves, SEBI must supplement functional segregation with enforceable standards, such as independent reporting lines, dynamic disclosure obligations, and board-level oversight, to ensure that ring-fencing operates as a substantive protection rather than a formal compliance exercise.