As of 2021, the Securities and Exchange Board of India (SEBI) has introduced new regulations regarding inter creditor agreements (ICAs) for lenders. These updated guidelines are crucial for any financial institution who intends to engage in corporate debt restructuring and insolvency resolution activities.
An intercreditor agreement is a contractual arrangement between creditors of a company that outlines how they will interact with one another during bankruptcy proceedings. The agreement lays out the hierarchy of creditors, the distribution of proceeds and how decisions will be made.
The new SEBI regulations have been introduced to establish a framework for the implementation of ICAs to ensure that the interests of all stakeholders are protected, especially in cases of a default by an issuer.
SEBI mandates that each ICA be approved by a minimum of 75% of the lenders, by value and by the number of lenders. Additionally, the intercreditor agreement must also have a dispute resolution mechanism in case of any disagreements.
These updated guidelines help to provide a framework for a structured resolution process that considers all parties involved in the restructuring plans. The SEBI guidelines aim to balance the interests of all creditors involved and make sure that they have a say in the resolution process.
Furthermore, the guidelines include a penalty for non-compliance with SEBI`s intercreditor regulations. Lenders who do not adhere to the updated guidelines will face penalties ranging from financial fines to a ban on participating in the insolvency resolution process.
In summary, the introduction of SEBI`s updated guidelines on intercreditor agreements introduces much-needed clarity and structure into the resolution process, supporting creditors and providing a solid framework for resolving corporate debt crises. These agreements create a more organized process for handling default and establish clear communication between creditors, significantly reducing the likelihood of disputes. By adhering to SEBI`s guidelines, lenders can ensure that they play a fair and beneficial role in the debt restructuring and insolvency resolution process.