Fiduciary services firms have always been in question, for efficacy of their role as custodian of stakeholder’s interest. Trusteeship Industry is one of the most important fiduciary players in the lending ecosystem and act as an interface between lenders and borrowers for preserving investors interest.
Recently SEBI prescribed guidelines for adoption of Distributed Ledger Technology for monitoring the lending Covenant. Distributed Ledger applications are type of block chain technology and can enable smart contracts between various players.
SEBI plans to tighten the rules of the game by bestowing greater responsibility on the firms providing Debenture Trustee Services. Lender, Borrower, Trustee and Credit Rating firms are key players of the lending ecosystem. Under the current system, there are various points of disconnect in communication between the players, as a result timely flagging of areas of concern can be challenge.
SEBI constituted a working group of Depositories, Stock Exchanges and Trustees Association of India (TAI) along with SEBI. Working group gave its recommendation for developing the platform for comprehensive monitoring platform of the covenants. Platform will be developed by Depository and it will be interoperable with platforms developed by peer depositories.
Under the current system, there are gaps in the charge creation process and timely available of information with the trustee. The proposed system intends to fix it. The issuer will create charge and upload details of charge creation with CERSAI, Information Utility of IBBI etc in the shared infrastructure. Trustee will validate the date and system will record the trail for any subsequent modifications and the related approval process. All the covenants of the financial transactions will be recorded and validated in the system for timely observation, ratification and communication to stakeholders.
In order to keep a check on the timely servicing of the debt and related interest, borrower will upload it in the system within one working day from the due date and trustee will validate the information within two working days after cross verifying it directly from Registrar and Transfer Agent. In case borrower fails to inform the trustee, onus will lie with the trustee to complete the assessment within prescribed timelines and initiate the proceedings in case of default. Similarly, Credit Rating agency also has to ratify the ratings uploaded in the system.
These guidelines will help the entire lending eco-system to work in cohesion and will impose the requirement of fiduciary services firm to work in tandem with borrower for safeguarding Investors Interest.
On the other hand, this is an indication that Block Chain technologies are here to stay and ready to fundamentally transform the financial sector. Today what we are seeing is the application of technology in lending system, however day is not far when we may soon see the technology getting applied in stock market settlement system, tokenisation of debt, digital identities, land records, healthcare etc. Further in times to come, CDSL can one of the biggest beneficiaries of these developments and may create huge wealth for investors.