This article is written by Priyanka Chauhan, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).

This article has been published by Abanti Bose.


A company can either use debt or equity to raise money to fund its operations. Debt capital comes in the form of loans or debentures and equity capital comes in the form of money in exchange for ownership in the company through stock. Debenture holders receive interest on the amount lent by them and equity shareholders rely on stock appreciation or dividends for their return. 

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Debt capital is also called debt funding and is a liability to the company. Debt funding is when a company borrows a certain amount and agrees to pay it back at a later date as per the terms agreed in the contract. The creditors charge interest on the amount which is paid periodically as per the terms of the contract. The most common way of raising debt capital is by taking loans from banks or raising money from the public by issuing debentures.

What are debentures?

Debentures are financial instruments through which a company raises funds in the nature of the debt. A debenture is a written instrument acknowledging the debt to the company that will be paid back along with the principal and interest at regular intervals or after a specified period. Section 2(30) of the Companies Act, 2013 defines debenture as – “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. A person or an organization that lends money to the company is called a debenture holder. Debenture holders receive interest at a specified rate and fixed intervals. 

What is a debenture trust deed?

A debenture trust deed is an instrument that a company executes in favour of a debenture trustee, thereby appointing them and defining their role and duties to protect the interest of debenture holders before debentures are offered for public subscription. A company before issuing a prospectus or a letter of offer to the public for the subscription of its debentures is required to appoint one or more debenture trustees for such debentures to look after the interest of debenture holders. A company has to execute a debenture trust deed within sixty days from the date of allotment of debentures. As per the circular issued by the SEBI, The company will have to create a charge as specified in the offer document in favour of the debenture trustee. It contains terms and conditions of debentures as well as rights of debenture holders. The terms of the creation of such security have to be mentioned in the trust deed. The format of the debenture trust deed is given in Form No. SH.12.

As per Section 71(5) of the Companies Act, 2013 when a company wants to issue debentures to more than 500 members then the company has to execute a debenture trust deed appointing trustees to protect the interests of debenture holders. 

If there is any provision in the debenture trust deed exempting it from any liability or indemnifying it against any breach of trust would be void except in cases as agreed upon by debenture holders holding at least three-fourths in value of the total debentures. 

As per Rule 8 of the Share Capital and Debenture Rules, 2014 members as well as debenture holders can inspect the deed and can also get a copy of it by paying a certain fee. The company has to forward the debenture trust deed within seven days of making the payment. 

Who is a debenture trustee?

Debenture Trustee is appointed by way of Debenture Trust Deed to safeguard debenture holders’ interests and to address their grievances. Debenture trustee is appointed before prospectus or letter of allotment is issued or within 60 days after the allotment of debentures. A company can have more than one debenture trustee. The debenture trustee should not be in any way associated with the company. Debenture holders do not get any voting rights in the company so to ensure that their money is not misused by the company, a debenture trustee is appointed to look after their interests. 

SEBI issued Debenture Trustee Regulations, 1993 to lay down eligibility criteria to become debenture trustees and regulate the conduct of debenture trustees. The company creates a charge on the movable or immovable assets of its subsidiary and holding company and this charge is created in favour of the debenture trustee. Trustees become custodians of the assets on which charge has been created. As per the Companies Act, 2013 every company issuing debentures to more than 500 members has to appoint a debenture trustee. Further, it is mandatory to appoint a trustee when debentures are issued publicly, public issue of non-convertible debentures, private placement of non-convertible debentures which are proposed to be listed, public issue of convertible debentures. This is further deliberated upon in the latter part of this article.

As per Rule 18(2)(e) of the Share Capital and Debenture Rules, 2014, debenture holders can remove a debenture trustee from the office before completion of its tenor when it is approved by the debenture holders holding at least three fourth in value of the debentures outstanding

In which cases it is mandatory to appoint a debenture trustee?

Following are the cases where the appointment of debenture trustees is mandatory:

Section 71 of the Companies Act, 2013

The appointment of debenture trustee is made compulsory under Section 71(5) of the Companies Act, 2013 when the issuer company is making an offer to the public or more than 500 members. 

Every company issuing prospectus or making an offer or an invitation to the public to subscribe to its debentures has to appoint a debenture trustee before issuing such prospectus or offer. The same rule is applicable when a company is making an offer to more than 500 members of the company to subscribe to its debentures. 

Public issue of non-convertible debentures

As per the provisions of SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021 it is mandatory to appoint a debenture trustee in case of public issue of non-convertible debentures by the company.

Private placement of non-convertible debentures which are proposed to be listed

According to Chapter IV of SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021, it is mandatory to appoint a debenture trustee for a private placement of non-convertible securities which are proposed to be listed. 

Public issue of convertible debentures

Following Regulation 10 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 it is mandatory for every publicly listed company to appoint a debenture trustee for issuing convertible debentures.

Who can become a debenture trustee?

Only entities registered with SEBI can become debenture trustees. Regulation 7 of SEBI Debenture Trustee Regulations, 1993 lays down the eligibility criteria for becoming a debenture trustee. Any person willing to be a debenture trustee should be:

  1. a scheduled bank carrying on commercial activity; or
  2. a public financial institution within the meaning of Section 4A of the Companies Act, 1956; or
  3. an insurance company; or 
  4. a body corporate

SEBI while considering the grant of application of Debenture Trustees considers the following conditions:

  1. Whether the applicant is willing to become a debenture trustee should have the necessary infrastructure to conduct its activities, 
  2. Whether the applicant has any prior experience as a debenture trustee, 
  3. Whether the applicant or any of the director/principal officers of the debenture trustee were at any time convicted for any offense involving moral turpitude, or economic offenses, 
  4. Whether the applicant is a fit and proper person as per Schedule II of the SEBI (intermediaries) Regulations, 2008.
  5. Whether the applicant has a legal professional,
  6. Whether the applicant has a net worth of at least two crore rupees. 

Regulation 12 of the SEBI (Debenture Trustee) Regulations, 1993 mandates the debenture trustee to pay the fees as mentioned in Schedule II of the SEBI (Debenture Trustee) Regulations, 1993 once SEBI has granted the certificate of registration. Failure to pay the fees will lead to suspension of the registration.

The company has to take written consent from the debenture trustees indicating their willingness to be appointed as the debenture trustee of the company. The name and details of the debenture trustees have to be mentioned in the offer letter of the debentures. 

Duties of debenture trustees

Duties of debenture trustees are set out in the SEBI (Debenture Trustee) Regulations, 1993. Duties of debenture trustee, inter alia, includes:

  1. To ensure that the trust deeds contain all provisions given in Schedule IV; 
  2. Call for periodical reports from the company;
  3. Take possession of trust property as per the provisions of the trust deed;
  4. Resolve grievances of debenture holders;
  5. Comply with the provisions of the Companies Act, 2013 for dispatch of allotment letter and debenture certificate after registration of charge;
  6. To ensure security in the interest of debenture holders;
  7. To carry out independent due diligence ensuring that the assets which are charged to the debenture are available and adequate at all times to pay the interest of the debenture holders;
  8. To make sure that the assets charged to the debentures are free from any encumbrances except those as agreed by the debenture trustee;
  9. To ensure that the interest warrants for interest due on the debentures have been dispatched to the debenture holders on or before the due dates;
  10. To take appropriate measures for protecting the interests of the shareholders;
  11. The debenture trustee shall call a meeting of debenture holders, on the happening of an event which constitutes a default or in the opinion of debenture trustee affects the interest of debenture holders, by a requisition in writing which is signed by at least one-tenth of debenture holders in value
  12. To ascertain that debentures have been converted or redeemed as per the terms under which they were offered;
  13. Obtain reports from the lead bank regarding the progress of the report;
  14. Monitor the funds raised from the issue by obtaining a certificate from the issuer’s auditor;
  15. A debenture trustee shall maintain its net worth as specified in Schedule II at all times;
  16. Appoint compliance officer for monitoring the compliance of the Companies Act, 2013 along with the rules and regulations, guidelines, circulars, notifications issued by SEBI or Central Government.

Grounds for disqualification from appointment

The Companies (Share Capital and Debenture) Rules, 2014 lays down the grounds on which a person would be ineligible to be appointed as a debenture trustee of the issuer company. Following are the seven grounds:

If the debenture trustee,-

  1. beneficially holds shares in the company;
  2. is a promoter, director, key managerial personnel, any other officer or employee of the issuer company;
  3. is beneficially entitled to money other than remuneration;
  4. is indebted to the issuer company or its associate, holding or subsidiary company or a subsidiary of such holding company;
  5. has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
  6. has a pecuniary relationship with the company amounting to two per cent of gross revenue or any amount as may be prescribed, whichever is lower during the preceding two financial years or during the current financial year;
  7. is a relative of any promoter or any employee of the issuer company.


Since debenture holders do not have voting rights in the company, debenture trustees are appointed to protect the interests of debenture holders. A debenture trustee has to be independent and unattached to the issuer company. A debenture trustee addresses the grievances of debenture holders and carries out necessary due diligence to keep a check on any misuse of the debenture holders’ money and keep the company’s assets charged against debentures to pay the interest and principal amount of debenture holders. If a debenture trustee commits any breach of trust, fails to show a degree of care and diligence as expected, commits a breach of any terms of the trust deed, contravenes any provision of the Companies Act, 2013 or any rules and regulations made thereunder would be liable and action would be taken against the debenture trustee under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.


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