Before going into who a Debenture Trustee is, the term will be broken down into two parts and examine the key concepts separately and then see them as a whole.
A debenture is basically a debt instrument issued by a company, known as the issuer company, and those who subscribe to such debentures are known as the debenture holders.
A debenture is a clear acknowledgement of a debt i.e a loan advanced by the debenture holder to the company and so it forms a part of the capital structure i.e as a debt capital of the company. Such debenture holders are repaid along with a fixed interest.
A Debenture is usually medium term to long term.
Debentures are of many types. They can be secured or unsecured. This means that a Debenture is secured by the creation of charge on the asset/s of the issuer company which serves as a collateral or security and a debenture is unsecured when this isn’t the case.
Now, a Trust is created by an author of the trust whereby the trust property/trust money is transferred to a trustee, who will act in the interests of the beneficiary, for whose benefit the trust is created. If there is any breach in the trustee’s duties as imposed by the law for the time being in force, it will be regarded as a breach of trust.
Therefore a Trustee must not go against the trust agreement entered into or against the law for the time being in force.
Reason for the appointment of a Debenture Trustee
A Debenture Trustee is appointed by the issuer company and is given the task to protect the interests of the debenture holders and he will also serve as a mediate factor between the issuer company and the debenture holder.
Typically, the issuer company will mortgage its property in the name of the Debenture Trustee and he shall solely exercise his powers as a trustee over it. This means that the Debenture Holders can’t use such mortgaged property and they can benefit from it when the Debenture Trustee sells such property in order to redeem their debentures.
”The concept of debenture trustees was evolved due to the difficulties being faced by an issuer company while dealing with each debenture holder separately for obtaining their consent on various matters and carrying out compliances when the debentures were issued to multiple debenture holders. In order to overcome this practical difficulty, the need for a single point of contact was felt, which would deal with the issuer company and perform its duties on behalf of numerous debenture holders as per the directions given by the debenture holders in terms of the provisions of the debenture trust deed.”
In India, SEBI regulates the Debenture Trustees by way of the SEBI (Debenture Trustees) Regulations 1993.
A broad overview of the Regulations is given below:
Chapter I – Preliminary
Chapter II – Registration of Debenture Trustees
Chapter III – Responsibilities and Obligations of Debenture Trustees
Chapter IV – Inspection and Disciplinary Proceedings
Chapter V – Procedure for action in case of default.
Schedule I –
Form A – Application for grant of certificate of initial/permanent registration as Debenture Trustee
Form B – Certificate of initial/permanent registration
Schedule II – Fees
Schedule III – Code of conduct
Schedule IV – Contents of Trust Deed
How a Debenture Trustee is Appointed and other Connected Regulations
The appointment of a Debenture Trustee, with reference to the Regulations, may be sketched as follows:
1. Who can apply?
Regulation 7 provides for persons eligible for being appointed a Debenture Trustee
- A scheduled bank carrying on commercial activity
- A public financial institution
- An insurance company
- A body corporate
2. Application for certificate
As u/s.3 of the regulations, an application shall be made to the Board of the Company in Form A for grant of certificate. For such an application, the applicant shall be required to pay a non-refundable application fee of Rs.50,000/- by demand draft in favour of SEBI which will be payable at Mumbai.
3. Certificate of Registration
Such certificate may be:
A certificate of initial registration – Regulation 8
A certificate of permanent registration – Regulation 8A
Regulation 12 mandates that fees for such registration shall be paid as specified in Schedule II. Failure to do so will result in the suspension of the certification unless the Board permits on sufficient cause shown.
The fees payable for such registration shall be
For Initial Registration – Rs.20,00,000/- for a tenure of 5 years
For Permanent Registration – Rs.9,00,000/- after the completion of the above initial period.
4. Registration Conditions
Regulation 9A provides for the conditions of the registration (whether initial or permanent), such as
- Prior approval of the board when a change in control is proposed
- Fees to be paid in the manner provided in the regulations
- Adequate steps for grievance redressal of investors within 1 month of receipt of the complaint and also to keep Board informed about the details of the same.
- To maintain capital adequacy requirements specified in regulation 7A at all times during the period of registration, whether initial or permanent.
- To abide by the regulations under the Act
5. Board Considerations
Regulation 6- The Board shall consider the application on points, given briefly below:
- Whether the applicant has the necessary infrastructure
- Past experience or in his employment, minimum of 2 experienced persons
- Or any person, directly or indirectly connected with the application, not been granted registration
- Has in his employment at least one person possessing a professional qualification in law from a government recognized institution.
- Whether convicted of any offence involving moral turpitude
- Or guilty of any economic offence
- Fit and proper person (Regulation 6A provides that the criteria are in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
- Fulfils capital adequacy requirements as specified in Regulation 7A
6. The Trust Deed
A trust deed has to be compulsorily entered into.
Regulation 2 (ia) explains that a trust deed is a deed executed by the body corporate in favour of the trustees named therein for the benefit of the debenture holders.
Regulation 13(a)(i) clearly provides that the debenture trustee shall act as such when he has agreed to do so under the trust deed in order to secure the issue of debentures for the body corporate. He will agree to do so in the written agreement before the opening of the subscription list for the issue of debentures.
The contents of the Trust Deed are provided for under Schedule IV of the Regulations.
A brief overview of the same is given below:
- A preamble which shall state the rights of the Debenture Holders and how these rights came to be vested
- Description of the instruments – details such as the purpose, amount, tenure, interest and so on.
- The details of the charged securities which may be existing or future.
- A section providing for the events of default i.e when action can be taken by the Debenture Trustees and the steps to be taken in such events.
- Rights of Debenture Trustees
-To inspect the registers
-And to make copies and extracts thereof;
-Right to appoint a nominee director
- Obligations of a body corporate which means the duties that the Company owes towards the Debenture Holders and the Debenture Trustees
It is mandated by Regulation 14 that the Debenture Trustee shall accept the trust deeds containing the matters specified in Schedule IV to the regulations. Similarly, a Debenture Trustee is also bound by the duties under Regulation and also the specified code of conduct laid down in Schedule III. There are also regulations specifying certain duties such as:
- Regulation 17 Maintenance of books of accounts
- Regulation 17A Appointment of compliance officers
- Regulation 18 Information to the Board
- Regulation 21 Obligations of Debenture Trustee on inspection by the Board
He shall also comply with Rule 18 (3) and Rule 18(4) of the Companies (Share Capital And Debentures) Rules, 2014 (inapplicable to public offer of debentures)
8. Whether such appointment is compulsory
The appointment of a Debenture Trustee has been made compulsory as per s.71(5) of the Companies Act 2013 and the conditions of appointment (inapplicable to public offer of debentures) laid down in Rule 18(2) of the Companies (Share Capital and Debenture Rules) 2014 will have to be complied with
Such an appointment will not be compulsory for debentures with a maturity period of 18 months or less.
The importance of the appointment of a Debenture Trustee and his role could be seen in the erstwhile Companies Act of 1956 as well.
This appointment of the Debenture Trustee by the issuer company has to be done carefully, after all the appropriate considerations and with no lapse in the procedure, and also mainly because as this role serves as a continual source of assurance to the Debenture Holders. It instils in them a sense of confidence and trust over the issuer company.
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