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DEBENTURE TRUSTEE
Submitted to:
Mr. Vikas Gupta
Faculty-in-charge
Course: Investment Law
Course Code: LAW 455
Submitted by:
Kunal Basu
Enrol. No: A3256113116
Course: LL.B
Batch: 2013-16
Date of Submission: Feb. 25, 2015
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Contents
What is a Debenture?................................................................................................................... 2
Different Types of Debentures....................................................................................................... 4
Who is a Debenture Trustee?........................................................................................................ 4
Relevant Rules / Procedure in the Companies (Share Capital and Debentures) Rules, 2014 ............... 5
Who can be appointed a Debenture Trustee? ................................................................................ 6
What is the role of Debenture Trustee?......................................................................................... 7
Rights..................................................................................................................................7
Liabilities............................................................................................................................. 7
Contents of the Debenture Trustee Agreement.............................................................................. 9
Code of Conduct for Debenture Trustees(Regulation 16 & Sch. III)................................................ 10
Who can Appoint a Debenture Trustee? ...................................................................................... 11
Debenture Redemption Reserve.................................................................................................. 11
When can a nominee director be appointed?............................................................................... 12
Can a debenture issuebe transferred?If so,whencana debenture trustee relinquishhis
assignments?............................................................................................................................. 12
Contents of the Debenture Trustee Agreement............................................................................ 12
Role of debenture trustee with respect to creation or enforcing securityin a debenture issue........ 13
Is appointment of Debenture Trustee compulsory?...................................................................... 14
Regulator of Debenture Trustees................................................................................................. 14
Courts in India on the Role of Debenture Trustees........................................................................ 14
Author’s Viewpoint.................................................................................................................. 15
Citations……………………………………………………………………………………………………………………………………………..
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What is a Debenture?
A debenture is an instrument of debt executed by the company acknowledging its
obligation to repay the sum at a specified rate and also carrying an interest. It is one of the
methods of raising the loan capital of the company. A debenture is thus like a certificate of
loan or a loan bond evidencing the fact that the company is liable to pay a specified amount
with interest and although the money raised by the debentures becomes a part of the
company's capital structure, it does not become share capital. Debenture is essentially a
Corporate debt instrument acknowledging money lent and guaranteeing repayment with
interest and creating security on the assets of the company for due performance of its
obligation. A debenture is a type of debt instrument that is not secured by physical assets or
collateral. Debentures are backed only by the general creditworthiness and reputation of the
issuer. Both corporations and governments frequently issue this type of bond in order to
secure capital. Like other types of bonds, debentures are documented in an indenturei.
Debentures have no collateral. Bond buyers generally purchase debentures based on the
belief that the bond issuer is unlikely to default on the repayment. An example of a
government debenture would be any government-issued Treasury bond (T-bond) or Treasury
bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at
worst, can print off more money or raise taxes to pay these type of debts. This is a debt
instrument and is the commonest method of raising loan capital, as part of project financing.
A loan is a bilateral instrument, and is therefore a contract. A debenture is a securitised loan.
It becomes marketable. The contract between a debenture holder and debenture issuer is
inherent in the terms of issue of a debenture.
The basic distinction being, when one buys the shares of the company he becomes the
part owner of the company, but when one buys debentures issued by the company he
becomes a creditor to the company. We can conclude that debenture is a kind for formal loan
given to the company by another individual. The company is under obligation to repay the
loan within a specified period of time with interest. The advantage of being of being a
debenture holder is that, in case of winding-up/bankruptcy the debenture holders are
considered to be the creditors and they are the ones who would be repaid first.
Issuance of debentures is one of the ways of raising debt finance for a company.
Debenture is a recognized instrument used by the companies, which evidences creation of a
debt, whether such debt creates a charge on the assets of the company or not. Under the
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Companies Act, 2013, debentures being a security, it can be issued by a private company
only through the route of private placement. A company can issue debentures with an option
to convert such debentures into shares, either partially or fully, at the time of redemption of
the shareii. However, before such option is given, it must be approved by the shareholders of
the company by a special resolution in the general meeting of the company. Issuance of such
debentures does not give the debenture holder any voting rights.
On the basis of convertibility the debentures are of two types:
CONVERTIBLE: these are the debentures that can be converted into equity of the company
on the expiry of the specified period of time.
NON-CONVERTIBLE: these are the debentures that in no case can be converted into
equity shares of the company.
In case, the company opts for issuance of secured debentures, it needs to meet the following
conditions:
 The date of redemption of such secured debentures should be made within 10 years
from the date of issue. However, companies involved in infrastructure projects,
infrastructure finance companies, infrastructure debt fund non-banking finance
company can issue debentures which can be redeemed within a period not exceeding
30 years.
 Such issuance shall be secured by the creation of a charge in favour of the debenture
trustee, on the properties or assets of the company (including specific movable and
immovable property of the company), which must be of a sufficient value needed for
the due repayment of the amount of debentures and the interest.
 The company shall appoint a debenture trustee before the issue of prospectus or letter
of offer for subscription of its debentures.
 The company shall execute a debenture trust deed to protect the interest of the
debenture holders within sixty days from the date of allotment.
The company issuing debenture must create a debenture redemption reserve (DRR) account
out of the profits of the company, which will be utilized only for the redemption of
debentures. However, All India Financial Institutions (AIFIs) regulated by Reserve Bank of
India and Banking Companies are not required to maintain DRR account for both public as
well as privately placed debentures. NBFCs and companies engaged in manufacturing and
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infrastructure enjoys certain relaxation regarding maintenance of DRR account reserves. If a
company is issuing secured debentures or making an offer, or issue prospectus for more than
500 subscriptions of its debentures, it must appoint one or more debenture trustee as per the
conditions laid down in the Companies (Share Capital and Debentures) Rules, 2014iii.
Different Types of Debentures
The following diagram shows different types of debentures:
Who is a Debenture Trustee?
A debenture trustee is a person or entity that serves as the holder of debenture stock for the
benefit of another party. When a company is looking to raise capital, one method of
accomplishing this is by issuing stock as a form of debt with the obligation to repay the debt
at a specific interest rate. The trustee serves as a liaison between the company that issued the
debentures and the debenture holders that are collecting interest payments. When lending
money through a debenture offering, an investor will receive a debenture certificate entitling
him or her to a particular sum of money and a specified interest rate. As investors do not
receive an individual bond for their investments, their loans are really a small portion of one
large loan. This can be extremely risky in the event of a default as the smaller debenture
investors may lose their entire investment. As a result of this, a debenture trustee is appointed
when debenture stock is issued to a large number of investors. When a large amount of
debenture stock is issued, the company issuing the stock may be required to use its property
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as collateral. In this scenario, the property is mortgaged to the purchasers of the debentures
and the deed is placed in a trust. The debenture trustee serves are the official representative
for the debenture investors and is responsible for liquidating the collateral of the trust in the
event that the company defaults on its debentures.
The benefits of using a debenture trustee are that a professional trust company will
have extensive experience with this form of investment structure and will know what
information is needed from the issuing company in order to make an informed decision about
the debenture investment. The trustee will also be able to determine if a company is in
compliance with the terms and agreements set forth by the debenture offering. The company
issuing the debenture also benefits from using a debenture trustee in that it only has to work
with one person as opposed to the hundreds of investors who purchased its debentures.
The powers and duties of a debenture trustee will vary with each transaction. Generally, the
deed will contain a variety of parameters specifying the power, duties, and responsibilities of
the trustee. Although the rules and regulations surrounding a debenture trustee will vary from
country to country, there are clear benefits to using a trustee when dealing with a debenture
offering.
Relevant Rules / Procedure in the Companies (Share Capital and
Debentures) Rules,2014
A person shall not be appointed as a debenture trustee, if he-
(i) Beneficially holds shares in the company;
(ii) Is a promoter, director or key managerial personnel or any other officer or an employee of
the company or its holding, subsidiary or associate company;
(iii) Is beneficially entitled to moneys which are to be paid by the company otherwise than as
remuneration payable to the debenture trustee;
(iv) Is indebted to the company, or its subsidiary or its holding or associate company or a
subsidiary of such holding company;
(v) has furnished any guarantee in respect of the principal debts secured by the debentures or
interest thereon;
(vi) Has any pecuniary relationship with the company amounting to two per cent. or more of
its gross turnover or total income or fifty lakh rupees or such higher amount as may be
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prescribed, whichever is lower, during the two immediately preceding financial years or
during the current financial year;
(vii) is relative of any promoter or any person who is in the employment of the company as a
director or key managerial personnel
(d) The Board may fill any casual vacancy in the office of the trustee but while any such
vacancy continues, the remaining trustee or trustees, if any, may act:
Provided that where such vacancy is caused by the resignation of the debenture trustee, the
vacancy shall only be filled with the written consent of the majority of the debenture holders.
(e) Any debenture trustee may be removed from office before the expiry of his term only if it
is approved by the holders of not less than three fourth in value of the debentures outstanding,
at their meetingiv.
Who can be appointed a Debenture Trustee?
To act as debenture trustee, the entity should either be a scheduled bank carrying on
commercial activity, a public financial institution, an insurance company, or a body
corporate. The entity should be registered with SEBIv to act as a debenture trustee. In India
Whenever any Issuer is issuing Debenture / Bonds with tenure of over 12 months requires
appointing a Professional Debenture Trustee. A Body Corporate registered with Securities
and Exchange Board of India (SEBI) as Debenture Trustee (intermediary) is called
Professional Trusteevi. As per SEBI guidelines, Trustee should not act or associate with any
Debenture / Bond Issue where he is associated as Investor or Lender. All and sundry cannot
be appointed as trustees. A person holding shares beneficially in the issuer company or
beneficially entitled to receive moneys from that company and has provided any guarantee in
respect of principal debts secured by the debentures or interest thereon cannot be appointed as
a trustee, as specified in the Act. SEBI (Debenture Trustee) Regulations, 1993 additionally
provide that no entity shall be entitled to act as debenture trustee unless at is either a
scheduled bank carrying on commercial activity or a public financial institution within the
meaning of section 4A of the Act or an insurance company, or a body corporate. It is also
necessary that such an entity should have capital adequacy of net worth of one crore of rupees
and have been licensed by SEBI to act as a debenture trustee.
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What is the role ofDebenture Trustee?
All appointments to be made of the debenture trustee(s) shall be made under S. 71 of the
Companies Act, 2013.
Rights
 Section 18 (c) a company in no cases can issue debentures before appointment of a
debenture trustee.
 The company cannot issue debentures before obtaining the consent of the debenture
trustee.
 The company has to specify the name of the name of the debenture trustee in the offer
letter.
 The debenture trustee can call for periodical performance report of the company
 The trustee can call for reports regarding the use of funds raised through issue of
debentures.
 The trustee can communicate promptly to the debenture holders’ defaults, if any, with
regard to payment of interest or redemption of debentures and action taken by the
trustee therefor.
 The trustee can appoint a nominee to board of director of the company.
 Before the trustee appoints the nominee the conditions must be satisfied:
1. Two consecutive defaults in payment of interest to the
debenture holders; or
2. Default in creation of security for debentures; or default in
redemption of debentures
Liabilities
 No one can be appointed as a debenture trustee if he has a share ownership in the
company.
 He cannot be appointed if he is a promoter of the company, employee or the manager.
 No appointment for Creditor to the company.
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 The vacancy of the debenture can be filled by the company by the consent of the other
trustees.
Duties
 The trustee ensures that there is no breach in the terms of issue of debentures.
 The trustee can take steps to remedy the breach (above mentioned).
 The trustee is the person who informs the debenture holders about such breach.
 The trustee ensures that all the condition regarding creation of security for debentures
is met
 The trustee convenes the meeting between the company and the debenture holders
 The trustee is the person who ensures that the debentures are redeemed as per the
conditions agreed upon.
 The trustee can take steps to resolve the dispute between the company and the holders
 The trustee has to take necessary steps to ensure the interest of the debenture holders
Regulation 15 of SEBI (Debenture Trustees) Regulations, 1993 prescribes the following
duties of the Debenture Trustee:
(a) Call for periodical reports from the body corporate, i.e., issuer of debentures.
(b) Take possession of trust property in accordance with the provisions of the trust deed.
(c) Enforce security in the interest of the debenture holders.
(d) Ensure on a continuous basis that the property charged to the debenture is available and
adequate at all times to discharge the interest and principal amount payable in respect of the
debentures and that such property is free from any other encumbrances save and except those
which are specifically agreed with the debenture trustee.
(e) Exercise due diligence to ensure compliance by the body corporate with the provisions of
the Companies Act, the listing agreement of the stock exchange or the trust deed.
(f) To take appropriate measures for protecting the interest of the debenture holders as soon
as any breach of the trust deed or law comes to his notice.
(g) To ascertain that the debentures have been converted or redeemed in accordance with the
provisions and conditions under which they are offered to the debenture holders.
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(h) Inform the Board immediately of any breach of trust deed or provision of any law.
(i) Appoint a nominee director on the board of the body corporate in the event of : -
(i) two consecutive defaults in payment of interest to the debenture holders; or
(ii) default in creation of security for debentures, or
(iii) default in redemption of debentures.
(j) No debenture trustee shall relinquish its assignments as debenture trustee in respect of the
debenture issue of any body corporate, unless and until another debenture trustee is appointed
in its place by the body corporate.
Rule 17A of the aforesaid Regulation provides that every debenture trustee should
appoint a compliance officer and he shall be responsible for monitoring the compliance of the
Act, rules and regulations, notifications, etc., issued by the Board or the Central Government
for redressing of investor’s grievances. Thus a Debenture Trustee occupies a pivotal position
of trust and confidence between the company which issues debentures and the debenture
holders who subscribe for the debentures.
Contents of the Debenture TrusteeAgreement
Schedule IV to SEBI Regulations lists some of the clauses which are to be included in
the Debenture Trustee Agreement. They are:
(a) Preamble
(b) Description of the Instrument
(c) Details of charged securities
(i) Nature of charge
(ii) Examination of title
(iii) Rank of the charge, i.e., whether first, second, or pari passu charge, etc.
(iv) Charging of future assets
(v) Time limit for creation of charge,
(vi) Minimum security cover required
(vii) Valuation of security
(viii) Circumstances in which security becomes enforceable
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(ix) Method and preservation of secured property etc.
(d) Events of default
(e) Rights of Debenture Trustee
(f) Obligations of the body corporate (i.e. Issuer of debentures)
Apart from the above, the Agreement will have to include the following provisions:
(i) Definition and Interpretation
(ii) Appointment of Debenture trustee and its powers
(iii) Remuneration of Debenture Trustee
(iv) Appointment of debenture Trustee as Attorney
(v) Negative pledge i.e. not to create additional encumbrances on the secured asset
(vi) Description of Events of Default, which may arise due to Non-payment to
debenture holders, breach of any undertaking, avoidance or repudiation, etc.
(vii) Notice of exercise of trustee powers
(viii) Indemnity of trustee
(x) Retirement of trustee & appointment of new trustee
(xi) Reimbursement of expenses incurred by the trustee
(xii) General covenants etc.
Code ofConduct for Debenture Trustees (Regulation16& Sch. III)
1. Every debenture trustee shall maintain high standard of integrity, dignity and fairness
in discharging his functions as debenture trustees.
2. Every debenture trustee shall fulfil his obligations in an ethical manner.
3. Every debenture trustee shall at all times exercise due diligence, ensure proper care
and exercise independent professional judgement.
4. Every debenture trustee shall disclose to the Issuer Company his possible source or
potential areas of conflict of duties and interest while acting as debenture trustee.
5. Debenture trustee shall not indulge in any unfair competition, which is likely to be
harmful to the interest of other debenture trustees or debenture holders.
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6. No debenture trustee shall make any statement, either oral or written, which would
misrepresent the services that the debenture trustee is capable of performing for the,
or has rendered to other Issuer Company subject to the secrecy he is expected to keep
about Issuer Company's affairs;
7. No debenture trustee shall wilfully make untrue statement or suppress any material
fact in any documents, reports, papers or information furnished to the Board.
8. (a) A debenture trustee or any of his employees shall not render, directly or indirectly,
any investment advice about any security in the publicly accessible media, whether
real-time or non real-time unless a disclosure of his interest including long or short
position in the said security has been made, while rendering such advice.
8. (b) In case, an employee of the debenture trustee is rendering such advice, he shall
also disclose the interest of his dependent family members and the employer including
their long or short position in the said security, while rendering such advicevii.
Who can Appoint a Debenture Trustee?
Creation of security means mortgaging the property in favor of Debenture Trustee for the
benefit of debenture holders. This is an incidence of ownership of property and creation of
security has to be done by the owner of the property. However, the debenture holders are
beneficiaries and they have no access to mortgaged property. The Debenture Trustee holds
the secured property on behalf of issuer of security and for benefit of debenture holders. In
the event of default by the issuer of security, the Debenture Trustee will have the power and
authority to bring the secured property to sale following the procedure in the Transfer of
Property Act and the proceeds of sale will have to be applied to redeem the debentures. This
is one of the powers conferred on the Debenture Trustee by the SEBI Regulations. Effective
use of this power is possible if this power is included in the Debenture Trustee Agreement
and a suitable power of attorney is executed by the issuer of debentures in favor of Debenture
Trustee. This document has to be executed as a trust deed and not as a Mortgage deed or
bond.
Debenture RedemptionReserve
The Companies Act requires that every company issuing debentures should create DRR for
the purpose of redemption of debentures to which adequate amounts should be credited from
the profits of the company until debentures are redeemed. This is a mandatory provision.
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SEBI regulations also require companies issuing debentures to provide for DRR as required
under the Companies Act. It is the obligation of body corporate to create Debenture
Redemption Reserve as per SEBI DIP guidelines and SEBI (Debenture Trustees)
Regulations, 1993. DT has to ensure that the issuer furnishes an auditor’s certificate to it for
the same. Where debentures are compulsorily convertible into equity shares of the debenture
issuing company, as in the case of FEMA, creation of DRR is unavoidable till the date of
conversion. However, after conversion of debentures, the amount in the DRR may be
transferred to general reserve or in such other manner as the Board thinks fit and proper. The
amount credited to DRR cannot be utilized except for the redemption of debenturesviii.
When can a nominee director be appointed?
A nominee director can be appointed in the event of : -
(i) Two consecutive defaults in payment of interest to the debenture holders; or
(ii) Default in creation of security for debentures, or
(iii) Default in redemption of debentures.
Can a debenture issue be transferred? Ifso, when can a
debenture trusteerelinquishhis assignments?
A debenture issue can be transferred. A debenture trustee can relinquish its assignments in
respect of the debenture issue of any body corporate only when another debenture trustee is
appointed in its place by the body corporateix.
Contents of the Debenture TrusteeAgreement
Debenture Trustee Agreement should include the following:
(a) Preamble,
(b) Description of the Instrument,
(c) Details of charged securities
(i) Nature of charge,
(ii) Examination of title,
(iii) Rank of the charge, i.e., whether first, second, or pari passu charge, etc.
(iv) Charging of future assets,
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(v) Time limit for creation of charge,
(vi) Minimum security cover required,
(vii) Valuation of security,
(viii) Circumstances in which security becomes enforceable,
(ix) Method and preservation of secured property etc.
(d) Events of default.
(e) Rights of Debenture Trustee.
(f) Obligations of the body corporate (i.e., Issuer of debentures).
Apart from the above, the Agreement will have to include the following provisions:
(i) Definition and Interpretation,
(ii) Appointment of Debenture trustee and its powers
(iii) Remuneration of Debenture Trustee,
(iv) Appointment of debenture Trustee as Attorney,
(v) Negative pledge i.e. not to create additional encumbrances on the secured asset,
(vi) Description of Events of Default, which may arise due to Non-payment to debenture
holders, breach of any undertaking, avoidance or repudiation, etc.
(vii) Notice of exercise of trustee powers,
(viii) Indemnity of trustee,
(x) Retirement of trustee & appointment of new trustee,
(xi) Reimbursement of expenses incurred by the trustee,
(xii) General covenants etc.
Role of debenture trusteewithrespect to creationor enforcing
security in a debenture issue
Creation of security means mortgaging the property in favor of Debenture Trustee for
the benefit of debenture holders. This is an incidence of ownership of property and creation
of security has to be done by the owner of the property. However, the debenture holders are
beneficiaries and they have no access to mortgaged property. The Debenture Trustee holds
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the secured property on behalf of issuer of security and for benefit of debenture holders. In
the event of default by the issuer of security, the Debenture Trustee will have the power and
authority to bring the secured property to sale following the procedure in the Transfer of
Property Act and the proceeds of sale will have to be applied to redeem the debentures.
Is appointment of Debenture Trusteecompulsory?
As per the provisions of companies act, appointment of debenture trustee is
mandatory. However, issue of debentures / bonds with maturity of 18 months or less are
exempt from the requirement of appointment of Trustee.
(a) In case of debenture / bonds with maturity beyond 18 months, a trustee or an agent, by
whatever name called shall be appointed to take care of the interest of debenture / bond
holders irrespective of whether or not the debentures / bonds are secured.
(b) Where the debentures / bonds are unsecured, these are treated as fixed deposits, if
received from individual investors
10. Who pays to the Debenture Trustee?
In India, the issuer pays to the Debenture Trustee.
Regulator of Debenture Trustees
In India, Debenture Trustees are regulated by SEBI. The SEBI (Debenture Trustees)
Regulations, 1993 govern the Debenture Trustees and provide for eligibility criteria for
registration of Debenture Trustees, monitoring and review, registration, Code of Conduct,
procedure of action in case of defaults, avoidance of conflict of interest and inspection of
Debenture Trustees by SEBI, amongst other things. Public issues and issues proposed to be
listed are covered under the said regulations. A debenture trustee cannot act for any issue of
debentures of its associate or if it has lent and the loan is not yet fully repaid or is proposing
to lend money to the body corporate.
Courts in India on the Role ofDebenture Trustees
In Central Bank Of India vs Tadepalli Padmaja And Ors., the National Consumer
Disputes Forum, on Jul 4, 2008, held that “the Petitioner-Bank failed to discharge its
fiduciary duty with special care and skill as is expected from professional corporate trustee
and had not taken appropriate steps as contemplated under the SEBI Regulations.” In Baroda
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Rayon Corporation Ltd. vs ICICI Ltd.1 (Debenture Trustees), the Bombay High Court upheld
the right of the debenture trustee, i.e. ICICI Ltd. to sell off an unit of Baroda Rayon for the
benefit of the debenture-holders in respect of certain debentures. A similar situation happened
in Bombay High Court ICICI Ltd. (Debenture Trustees) v. Kothari Industrial Corporation2.
In Canara Bank (Debenture Trustees) vs Apple Finance Ltd3 the suit was filed by
Canara Bank as a Debenture Trustee for amounts due and payable by the Defendants Apple
Finance Limited (AFL) in respect of 7500 14% Secured Redeemable Rated Non-Convertible
Debentures (AAAIII) series for Rs. 75 crores together with interest, costs, charges thereon.
AFL failed to redeem the debentures and pay off the various loans granted by the Debenture
Holders. Consequently the Plaintiffs sued to obtain interim reliefs including appointment of
the Court Receiver. AFL mortgaged their immovable property to secure the said debentures.
AFL issued the said debentures of 75 crores to 6 debenture holders being 5 Nationalized
Banks and to a Limited Company. A first charge on the right, title and interest, inter alia, of
the suit property together with the plot on which it stood and the furniture, fittings and
fixtures thereon came to be created in favor of Canara Bank as the Debentures Trustee who
filed the Suit. The Bombay High Court upheld Canara Bank’s right to sell AFL’s mortgaged
property in the interest of debenture holders. In Administrator of the Specified Undertaking of
the Unit Trust of India (debenture trustee) v. Bank of Baroda, the Gujarat High Court upheld
the right of UTI as debenture trustee to draw Rs. 4 crore from the liquidation proceeds of Shri
Vallabh Glass Works Ltd., a company in liquidation.
Author’s Viewpoint
Issue of Debentures, whether redeemable or convertible, involves compliance with the
substantive and procedural aspects of law. Documentation is equally important .The benefit
of raising loan capital lies in the fact that it does not disturb equity structure of the company
and consequently the existing management. However, the success of a debenture issue be
they private or public issue, depends, to a large extent, on the goodwill and rapport built up
by the company with the investing public. Another aspect of the matter is the protection of
interest of debenture holders. This is sought to be achieved by an independent Debenture
Trustee who is required to be appointed by listed companies in regard to public issue or
further issue of capital as the number of debenture holders are considerably large. Creation of
1 2002 (2) BomCR 608, (2002) 2 BOMLR 915, 2003 113 CompCas 466 Bom, 2002 (2) MhLj 322
2 IV (2006) BC 34, 2005 (5) BomCR 213
3 AIR 2008 Bom 16, 2007 77 SCL 92 Bom
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DRR which is a statutory obligation is intended to provide liquid resource built out of profits
of a company for redemption of debentures. Recently, SEBI asked credit rating agencies
(CRAs) to share with the debenture trustees all relevant information about the ratings
assigned by them for debt securities and about the issuers of such instruments. This has
enabled a two-way information sharing arrangement between the credit rating agencies and
debenture trustees (DTs) to help them effectively discharge their respective functions. In
addition, rating agencies can also ask for periodic reports from lead banks about the progress
of the project for which funds have been raised through debentures. They can also ask for
certificates from issuer's auditors in respect of the utilization of fundsx. In fine, as debentures
have remained an easy source of finance for companies, the pace of their accountability has
increased concomitantly.
Citations
i Extracted on Feb 25, 2015 from http://www.investopedia.com/terms/d/debenture.asp
ii MoCA: Companies (Share Capital and Debentures) Rules, 2014 extracted on Feb 25, 2015 from
http://www.mca.gov.in/Ministry/pdf/NCARules_Chapter4.pdf.
iii Gupta, Mridul: Debentures and debenture trustees under Companies Act, 2013, extracted on Feb 25, 2015
from http://blog.ipleaders.in/debentures-and-debenture-trustees-under-companies-act-2013/
iv Arora, Navneet: Analysis of Debentures extracted on Feb 25, 2015 from http://www.navneetaroracs.com/wp-
content/uploads/2014/04/An-Analysis-on-Issue-of-Debentures.pdf.
v SEBI: The Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, extracted on Feb
25, 2015 from http://www.sebi.gov.in/acts/DebentureTrustees.html.
vi Extracted on Feb 25, 2015 from http://www.sbicaptrustee.com/main/faqs.aspx
vii Kannan, R: Capital Market of India - Role of SEBI Registered Intermediaries -
Debenture Trustees extracted on Feb 25, 2015 from
http://kannanpersonal.com/content/stock/intermediary/debenture-trustee.html
viii D K Prahlada Rao: All about Debentures :An Appraisal extracted on Feb 25, 2015 from
http://www.icsi.edu/cs/March2008/Articles/All%20about%20Debentures%20An%20Appraisal%20by%20D%2
0K%20Prahlada%20Rao%201.pdf.
ix SEBI: FAQs on Debenture Trustee extracted on Feb 25, 2015 from
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1315462260419.pdf.
x NDTV: Sebi allows debenture trustees to seek credit rating details extracted on Feb 25, 2015 from
http://profit.ndtv.com/news/market/article-sebi-allows-debenture-trustees-to-seek-credit-rating-details-319587

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Debenture Trustees

  • 1. 0 DEBENTURE TRUSTEE Submitted to: Mr. Vikas Gupta Faculty-in-charge Course: Investment Law Course Code: LAW 455 Submitted by: Kunal Basu Enrol. No: A3256113116 Course: LL.B Batch: 2013-16 Date of Submission: Feb. 25, 2015
  • 2. 1 Contents What is a Debenture?................................................................................................................... 2 Different Types of Debentures....................................................................................................... 4 Who is a Debenture Trustee?........................................................................................................ 4 Relevant Rules / Procedure in the Companies (Share Capital and Debentures) Rules, 2014 ............... 5 Who can be appointed a Debenture Trustee? ................................................................................ 6 What is the role of Debenture Trustee?......................................................................................... 7 Rights..................................................................................................................................7 Liabilities............................................................................................................................. 7 Contents of the Debenture Trustee Agreement.............................................................................. 9 Code of Conduct for Debenture Trustees(Regulation 16 & Sch. III)................................................ 10 Who can Appoint a Debenture Trustee? ...................................................................................... 11 Debenture Redemption Reserve.................................................................................................. 11 When can a nominee director be appointed?............................................................................... 12 Can a debenture issuebe transferred?If so,whencana debenture trustee relinquishhis assignments?............................................................................................................................. 12 Contents of the Debenture Trustee Agreement............................................................................ 12 Role of debenture trustee with respect to creation or enforcing securityin a debenture issue........ 13 Is appointment of Debenture Trustee compulsory?...................................................................... 14 Regulator of Debenture Trustees................................................................................................. 14 Courts in India on the Role of Debenture Trustees........................................................................ 14 Author’s Viewpoint.................................................................................................................. 15 Citations…………………………………………………………………………………………………………………………………………….. 15
  • 3. 2 What is a Debenture? A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is one of the methods of raising the loan capital of the company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Debenture is essentially a Corporate debt instrument acknowledging money lent and guaranteeing repayment with interest and creating security on the assets of the company for due performance of its obligation. A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenturei. Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts. This is a debt instrument and is the commonest method of raising loan capital, as part of project financing. A loan is a bilateral instrument, and is therefore a contract. A debenture is a securitised loan. It becomes marketable. The contract between a debenture holder and debenture issuer is inherent in the terms of issue of a debenture. The basic distinction being, when one buys the shares of the company he becomes the part owner of the company, but when one buys debentures issued by the company he becomes a creditor to the company. We can conclude that debenture is a kind for formal loan given to the company by another individual. The company is under obligation to repay the loan within a specified period of time with interest. The advantage of being of being a debenture holder is that, in case of winding-up/bankruptcy the debenture holders are considered to be the creditors and they are the ones who would be repaid first. Issuance of debentures is one of the ways of raising debt finance for a company. Debenture is a recognized instrument used by the companies, which evidences creation of a debt, whether such debt creates a charge on the assets of the company or not. Under the
  • 4. 3 Companies Act, 2013, debentures being a security, it can be issued by a private company only through the route of private placement. A company can issue debentures with an option to convert such debentures into shares, either partially or fully, at the time of redemption of the shareii. However, before such option is given, it must be approved by the shareholders of the company by a special resolution in the general meeting of the company. Issuance of such debentures does not give the debenture holder any voting rights. On the basis of convertibility the debentures are of two types: CONVERTIBLE: these are the debentures that can be converted into equity of the company on the expiry of the specified period of time. NON-CONVERTIBLE: these are the debentures that in no case can be converted into equity shares of the company. In case, the company opts for issuance of secured debentures, it needs to meet the following conditions:  The date of redemption of such secured debentures should be made within 10 years from the date of issue. However, companies involved in infrastructure projects, infrastructure finance companies, infrastructure debt fund non-banking finance company can issue debentures which can be redeemed within a period not exceeding 30 years.  Such issuance shall be secured by the creation of a charge in favour of the debenture trustee, on the properties or assets of the company (including specific movable and immovable property of the company), which must be of a sufficient value needed for the due repayment of the amount of debentures and the interest.  The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures.  The company shall execute a debenture trust deed to protect the interest of the debenture holders within sixty days from the date of allotment. The company issuing debenture must create a debenture redemption reserve (DRR) account out of the profits of the company, which will be utilized only for the redemption of debentures. However, All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies are not required to maintain DRR account for both public as well as privately placed debentures. NBFCs and companies engaged in manufacturing and
  • 5. 4 infrastructure enjoys certain relaxation regarding maintenance of DRR account reserves. If a company is issuing secured debentures or making an offer, or issue prospectus for more than 500 subscriptions of its debentures, it must appoint one or more debenture trustee as per the conditions laid down in the Companies (Share Capital and Debentures) Rules, 2014iii. Different Types of Debentures The following diagram shows different types of debentures: Who is a Debenture Trustee? A debenture trustee is a person or entity that serves as the holder of debenture stock for the benefit of another party. When a company is looking to raise capital, one method of accomplishing this is by issuing stock as a form of debt with the obligation to repay the debt at a specific interest rate. The trustee serves as a liaison between the company that issued the debentures and the debenture holders that are collecting interest payments. When lending money through a debenture offering, an investor will receive a debenture certificate entitling him or her to a particular sum of money and a specified interest rate. As investors do not receive an individual bond for their investments, their loans are really a small portion of one large loan. This can be extremely risky in the event of a default as the smaller debenture investors may lose their entire investment. As a result of this, a debenture trustee is appointed when debenture stock is issued to a large number of investors. When a large amount of debenture stock is issued, the company issuing the stock may be required to use its property
  • 6. 5 as collateral. In this scenario, the property is mortgaged to the purchasers of the debentures and the deed is placed in a trust. The debenture trustee serves are the official representative for the debenture investors and is responsible for liquidating the collateral of the trust in the event that the company defaults on its debentures. The benefits of using a debenture trustee are that a professional trust company will have extensive experience with this form of investment structure and will know what information is needed from the issuing company in order to make an informed decision about the debenture investment. The trustee will also be able to determine if a company is in compliance with the terms and agreements set forth by the debenture offering. The company issuing the debenture also benefits from using a debenture trustee in that it only has to work with one person as opposed to the hundreds of investors who purchased its debentures. The powers and duties of a debenture trustee will vary with each transaction. Generally, the deed will contain a variety of parameters specifying the power, duties, and responsibilities of the trustee. Although the rules and regulations surrounding a debenture trustee will vary from country to country, there are clear benefits to using a trustee when dealing with a debenture offering. Relevant Rules / Procedure in the Companies (Share Capital and Debentures) Rules,2014 A person shall not be appointed as a debenture trustee, if he- (i) Beneficially holds shares in the company; (ii) Is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company; (iii) Is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee; (iv) Is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company; (v) has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon; (vi) Has any pecuniary relationship with the company amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be
  • 7. 6 prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year; (vii) is relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel (d) The Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee or trustees, if any, may act: Provided that where such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders. (e) Any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less than three fourth in value of the debentures outstanding, at their meetingiv. Who can be appointed a Debenture Trustee? To act as debenture trustee, the entity should either be a scheduled bank carrying on commercial activity, a public financial institution, an insurance company, or a body corporate. The entity should be registered with SEBIv to act as a debenture trustee. In India Whenever any Issuer is issuing Debenture / Bonds with tenure of over 12 months requires appointing a Professional Debenture Trustee. A Body Corporate registered with Securities and Exchange Board of India (SEBI) as Debenture Trustee (intermediary) is called Professional Trusteevi. As per SEBI guidelines, Trustee should not act or associate with any Debenture / Bond Issue where he is associated as Investor or Lender. All and sundry cannot be appointed as trustees. A person holding shares beneficially in the issuer company or beneficially entitled to receive moneys from that company and has provided any guarantee in respect of principal debts secured by the debentures or interest thereon cannot be appointed as a trustee, as specified in the Act. SEBI (Debenture Trustee) Regulations, 1993 additionally provide that no entity shall be entitled to act as debenture trustee unless at is either a scheduled bank carrying on commercial activity or a public financial institution within the meaning of section 4A of the Act or an insurance company, or a body corporate. It is also necessary that such an entity should have capital adequacy of net worth of one crore of rupees and have been licensed by SEBI to act as a debenture trustee.
  • 8. 7 What is the role ofDebenture Trustee? All appointments to be made of the debenture trustee(s) shall be made under S. 71 of the Companies Act, 2013. Rights  Section 18 (c) a company in no cases can issue debentures before appointment of a debenture trustee.  The company cannot issue debentures before obtaining the consent of the debenture trustee.  The company has to specify the name of the name of the debenture trustee in the offer letter.  The debenture trustee can call for periodical performance report of the company  The trustee can call for reports regarding the use of funds raised through issue of debentures.  The trustee can communicate promptly to the debenture holders’ defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee therefor.  The trustee can appoint a nominee to board of director of the company.  Before the trustee appoints the nominee the conditions must be satisfied: 1. Two consecutive defaults in payment of interest to the debenture holders; or 2. Default in creation of security for debentures; or default in redemption of debentures Liabilities  No one can be appointed as a debenture trustee if he has a share ownership in the company.  He cannot be appointed if he is a promoter of the company, employee or the manager.  No appointment for Creditor to the company.
  • 9. 8  The vacancy of the debenture can be filled by the company by the consent of the other trustees. Duties  The trustee ensures that there is no breach in the terms of issue of debentures.  The trustee can take steps to remedy the breach (above mentioned).  The trustee is the person who informs the debenture holders about such breach.  The trustee ensures that all the condition regarding creation of security for debentures is met  The trustee convenes the meeting between the company and the debenture holders  The trustee is the person who ensures that the debentures are redeemed as per the conditions agreed upon.  The trustee can take steps to resolve the dispute between the company and the holders  The trustee has to take necessary steps to ensure the interest of the debenture holders Regulation 15 of SEBI (Debenture Trustees) Regulations, 1993 prescribes the following duties of the Debenture Trustee: (a) Call for periodical reports from the body corporate, i.e., issuer of debentures. (b) Take possession of trust property in accordance with the provisions of the trust deed. (c) Enforce security in the interest of the debenture holders. (d) Ensure on a continuous basis that the property charged to the debenture is available and adequate at all times to discharge the interest and principal amount payable in respect of the debentures and that such property is free from any other encumbrances save and except those which are specifically agreed with the debenture trustee. (e) Exercise due diligence to ensure compliance by the body corporate with the provisions of the Companies Act, the listing agreement of the stock exchange or the trust deed. (f) To take appropriate measures for protecting the interest of the debenture holders as soon as any breach of the trust deed or law comes to his notice. (g) To ascertain that the debentures have been converted or redeemed in accordance with the provisions and conditions under which they are offered to the debenture holders.
  • 10. 9 (h) Inform the Board immediately of any breach of trust deed or provision of any law. (i) Appoint a nominee director on the board of the body corporate in the event of : - (i) two consecutive defaults in payment of interest to the debenture holders; or (ii) default in creation of security for debentures, or (iii) default in redemption of debentures. (j) No debenture trustee shall relinquish its assignments as debenture trustee in respect of the debenture issue of any body corporate, unless and until another debenture trustee is appointed in its place by the body corporate. Rule 17A of the aforesaid Regulation provides that every debenture trustee should appoint a compliance officer and he shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, etc., issued by the Board or the Central Government for redressing of investor’s grievances. Thus a Debenture Trustee occupies a pivotal position of trust and confidence between the company which issues debentures and the debenture holders who subscribe for the debentures. Contents of the Debenture TrusteeAgreement Schedule IV to SEBI Regulations lists some of the clauses which are to be included in the Debenture Trustee Agreement. They are: (a) Preamble (b) Description of the Instrument (c) Details of charged securities (i) Nature of charge (ii) Examination of title (iii) Rank of the charge, i.e., whether first, second, or pari passu charge, etc. (iv) Charging of future assets (v) Time limit for creation of charge, (vi) Minimum security cover required (vii) Valuation of security (viii) Circumstances in which security becomes enforceable
  • 11. 10 (ix) Method and preservation of secured property etc. (d) Events of default (e) Rights of Debenture Trustee (f) Obligations of the body corporate (i.e. Issuer of debentures) Apart from the above, the Agreement will have to include the following provisions: (i) Definition and Interpretation (ii) Appointment of Debenture trustee and its powers (iii) Remuneration of Debenture Trustee (iv) Appointment of debenture Trustee as Attorney (v) Negative pledge i.e. not to create additional encumbrances on the secured asset (vi) Description of Events of Default, which may arise due to Non-payment to debenture holders, breach of any undertaking, avoidance or repudiation, etc. (vii) Notice of exercise of trustee powers (viii) Indemnity of trustee (x) Retirement of trustee & appointment of new trustee (xi) Reimbursement of expenses incurred by the trustee (xii) General covenants etc. Code ofConduct for Debenture Trustees (Regulation16& Sch. III) 1. Every debenture trustee shall maintain high standard of integrity, dignity and fairness in discharging his functions as debenture trustees. 2. Every debenture trustee shall fulfil his obligations in an ethical manner. 3. Every debenture trustee shall at all times exercise due diligence, ensure proper care and exercise independent professional judgement. 4. Every debenture trustee shall disclose to the Issuer Company his possible source or potential areas of conflict of duties and interest while acting as debenture trustee. 5. Debenture trustee shall not indulge in any unfair competition, which is likely to be harmful to the interest of other debenture trustees or debenture holders.
  • 12. 11 6. No debenture trustee shall make any statement, either oral or written, which would misrepresent the services that the debenture trustee is capable of performing for the, or has rendered to other Issuer Company subject to the secrecy he is expected to keep about Issuer Company's affairs; 7. No debenture trustee shall wilfully make untrue statement or suppress any material fact in any documents, reports, papers or information furnished to the Board. 8. (a) A debenture trustee or any of his employees shall not render, directly or indirectly, any investment advice about any security in the publicly accessible media, whether real-time or non real-time unless a disclosure of his interest including long or short position in the said security has been made, while rendering such advice. 8. (b) In case, an employee of the debenture trustee is rendering such advice, he shall also disclose the interest of his dependent family members and the employer including their long or short position in the said security, while rendering such advicevii. Who can Appoint a Debenture Trustee? Creation of security means mortgaging the property in favor of Debenture Trustee for the benefit of debenture holders. This is an incidence of ownership of property and creation of security has to be done by the owner of the property. However, the debenture holders are beneficiaries and they have no access to mortgaged property. The Debenture Trustee holds the secured property on behalf of issuer of security and for benefit of debenture holders. In the event of default by the issuer of security, the Debenture Trustee will have the power and authority to bring the secured property to sale following the procedure in the Transfer of Property Act and the proceeds of sale will have to be applied to redeem the debentures. This is one of the powers conferred on the Debenture Trustee by the SEBI Regulations. Effective use of this power is possible if this power is included in the Debenture Trustee Agreement and a suitable power of attorney is executed by the issuer of debentures in favor of Debenture Trustee. This document has to be executed as a trust deed and not as a Mortgage deed or bond. Debenture RedemptionReserve The Companies Act requires that every company issuing debentures should create DRR for the purpose of redemption of debentures to which adequate amounts should be credited from the profits of the company until debentures are redeemed. This is a mandatory provision.
  • 13. 12 SEBI regulations also require companies issuing debentures to provide for DRR as required under the Companies Act. It is the obligation of body corporate to create Debenture Redemption Reserve as per SEBI DIP guidelines and SEBI (Debenture Trustees) Regulations, 1993. DT has to ensure that the issuer furnishes an auditor’s certificate to it for the same. Where debentures are compulsorily convertible into equity shares of the debenture issuing company, as in the case of FEMA, creation of DRR is unavoidable till the date of conversion. However, after conversion of debentures, the amount in the DRR may be transferred to general reserve or in such other manner as the Board thinks fit and proper. The amount credited to DRR cannot be utilized except for the redemption of debenturesviii. When can a nominee director be appointed? A nominee director can be appointed in the event of : - (i) Two consecutive defaults in payment of interest to the debenture holders; or (ii) Default in creation of security for debentures, or (iii) Default in redemption of debentures. Can a debenture issue be transferred? Ifso, when can a debenture trusteerelinquishhis assignments? A debenture issue can be transferred. A debenture trustee can relinquish its assignments in respect of the debenture issue of any body corporate only when another debenture trustee is appointed in its place by the body corporateix. Contents of the Debenture TrusteeAgreement Debenture Trustee Agreement should include the following: (a) Preamble, (b) Description of the Instrument, (c) Details of charged securities (i) Nature of charge, (ii) Examination of title, (iii) Rank of the charge, i.e., whether first, second, or pari passu charge, etc. (iv) Charging of future assets,
  • 14. 13 (v) Time limit for creation of charge, (vi) Minimum security cover required, (vii) Valuation of security, (viii) Circumstances in which security becomes enforceable, (ix) Method and preservation of secured property etc. (d) Events of default. (e) Rights of Debenture Trustee. (f) Obligations of the body corporate (i.e., Issuer of debentures). Apart from the above, the Agreement will have to include the following provisions: (i) Definition and Interpretation, (ii) Appointment of Debenture trustee and its powers (iii) Remuneration of Debenture Trustee, (iv) Appointment of debenture Trustee as Attorney, (v) Negative pledge i.e. not to create additional encumbrances on the secured asset, (vi) Description of Events of Default, which may arise due to Non-payment to debenture holders, breach of any undertaking, avoidance or repudiation, etc. (vii) Notice of exercise of trustee powers, (viii) Indemnity of trustee, (x) Retirement of trustee & appointment of new trustee, (xi) Reimbursement of expenses incurred by the trustee, (xii) General covenants etc. Role of debenture trusteewithrespect to creationor enforcing security in a debenture issue Creation of security means mortgaging the property in favor of Debenture Trustee for the benefit of debenture holders. This is an incidence of ownership of property and creation of security has to be done by the owner of the property. However, the debenture holders are beneficiaries and they have no access to mortgaged property. The Debenture Trustee holds
  • 15. 14 the secured property on behalf of issuer of security and for benefit of debenture holders. In the event of default by the issuer of security, the Debenture Trustee will have the power and authority to bring the secured property to sale following the procedure in the Transfer of Property Act and the proceeds of sale will have to be applied to redeem the debentures. Is appointment of Debenture Trusteecompulsory? As per the provisions of companies act, appointment of debenture trustee is mandatory. However, issue of debentures / bonds with maturity of 18 months or less are exempt from the requirement of appointment of Trustee. (a) In case of debenture / bonds with maturity beyond 18 months, a trustee or an agent, by whatever name called shall be appointed to take care of the interest of debenture / bond holders irrespective of whether or not the debentures / bonds are secured. (b) Where the debentures / bonds are unsecured, these are treated as fixed deposits, if received from individual investors 10. Who pays to the Debenture Trustee? In India, the issuer pays to the Debenture Trustee. Regulator of Debenture Trustees In India, Debenture Trustees are regulated by SEBI. The SEBI (Debenture Trustees) Regulations, 1993 govern the Debenture Trustees and provide for eligibility criteria for registration of Debenture Trustees, monitoring and review, registration, Code of Conduct, procedure of action in case of defaults, avoidance of conflict of interest and inspection of Debenture Trustees by SEBI, amongst other things. Public issues and issues proposed to be listed are covered under the said regulations. A debenture trustee cannot act for any issue of debentures of its associate or if it has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate. Courts in India on the Role ofDebenture Trustees In Central Bank Of India vs Tadepalli Padmaja And Ors., the National Consumer Disputes Forum, on Jul 4, 2008, held that “the Petitioner-Bank failed to discharge its fiduciary duty with special care and skill as is expected from professional corporate trustee and had not taken appropriate steps as contemplated under the SEBI Regulations.” In Baroda
  • 16. 15 Rayon Corporation Ltd. vs ICICI Ltd.1 (Debenture Trustees), the Bombay High Court upheld the right of the debenture trustee, i.e. ICICI Ltd. to sell off an unit of Baroda Rayon for the benefit of the debenture-holders in respect of certain debentures. A similar situation happened in Bombay High Court ICICI Ltd. (Debenture Trustees) v. Kothari Industrial Corporation2. In Canara Bank (Debenture Trustees) vs Apple Finance Ltd3 the suit was filed by Canara Bank as a Debenture Trustee for amounts due and payable by the Defendants Apple Finance Limited (AFL) in respect of 7500 14% Secured Redeemable Rated Non-Convertible Debentures (AAAIII) series for Rs. 75 crores together with interest, costs, charges thereon. AFL failed to redeem the debentures and pay off the various loans granted by the Debenture Holders. Consequently the Plaintiffs sued to obtain interim reliefs including appointment of the Court Receiver. AFL mortgaged their immovable property to secure the said debentures. AFL issued the said debentures of 75 crores to 6 debenture holders being 5 Nationalized Banks and to a Limited Company. A first charge on the right, title and interest, inter alia, of the suit property together with the plot on which it stood and the furniture, fittings and fixtures thereon came to be created in favor of Canara Bank as the Debentures Trustee who filed the Suit. The Bombay High Court upheld Canara Bank’s right to sell AFL’s mortgaged property in the interest of debenture holders. In Administrator of the Specified Undertaking of the Unit Trust of India (debenture trustee) v. Bank of Baroda, the Gujarat High Court upheld the right of UTI as debenture trustee to draw Rs. 4 crore from the liquidation proceeds of Shri Vallabh Glass Works Ltd., a company in liquidation. Author’s Viewpoint Issue of Debentures, whether redeemable or convertible, involves compliance with the substantive and procedural aspects of law. Documentation is equally important .The benefit of raising loan capital lies in the fact that it does not disturb equity structure of the company and consequently the existing management. However, the success of a debenture issue be they private or public issue, depends, to a large extent, on the goodwill and rapport built up by the company with the investing public. Another aspect of the matter is the protection of interest of debenture holders. This is sought to be achieved by an independent Debenture Trustee who is required to be appointed by listed companies in regard to public issue or further issue of capital as the number of debenture holders are considerably large. Creation of 1 2002 (2) BomCR 608, (2002) 2 BOMLR 915, 2003 113 CompCas 466 Bom, 2002 (2) MhLj 322 2 IV (2006) BC 34, 2005 (5) BomCR 213 3 AIR 2008 Bom 16, 2007 77 SCL 92 Bom
  • 17. 16 DRR which is a statutory obligation is intended to provide liquid resource built out of profits of a company for redemption of debentures. Recently, SEBI asked credit rating agencies (CRAs) to share with the debenture trustees all relevant information about the ratings assigned by them for debt securities and about the issuers of such instruments. This has enabled a two-way information sharing arrangement between the credit rating agencies and debenture trustees (DTs) to help them effectively discharge their respective functions. In addition, rating agencies can also ask for periodic reports from lead banks about the progress of the project for which funds have been raised through debentures. They can also ask for certificates from issuer's auditors in respect of the utilization of fundsx. In fine, as debentures have remained an easy source of finance for companies, the pace of their accountability has increased concomitantly. Citations i Extracted on Feb 25, 2015 from http://www.investopedia.com/terms/d/debenture.asp ii MoCA: Companies (Share Capital and Debentures) Rules, 2014 extracted on Feb 25, 2015 from http://www.mca.gov.in/Ministry/pdf/NCARules_Chapter4.pdf. iii Gupta, Mridul: Debentures and debenture trustees under Companies Act, 2013, extracted on Feb 25, 2015 from http://blog.ipleaders.in/debentures-and-debenture-trustees-under-companies-act-2013/ iv Arora, Navneet: Analysis of Debentures extracted on Feb 25, 2015 from http://www.navneetaroracs.com/wp- content/uploads/2014/04/An-Analysis-on-Issue-of-Debentures.pdf. v SEBI: The Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, extracted on Feb 25, 2015 from http://www.sebi.gov.in/acts/DebentureTrustees.html. vi Extracted on Feb 25, 2015 from http://www.sbicaptrustee.com/main/faqs.aspx vii Kannan, R: Capital Market of India - Role of SEBI Registered Intermediaries - Debenture Trustees extracted on Feb 25, 2015 from http://kannanpersonal.com/content/stock/intermediary/debenture-trustee.html viii D K Prahlada Rao: All about Debentures :An Appraisal extracted on Feb 25, 2015 from http://www.icsi.edu/cs/March2008/Articles/All%20about%20Debentures%20An%20Appraisal%20by%20D%2 0K%20Prahlada%20Rao%201.pdf. ix SEBI: FAQs on Debenture Trustee extracted on Feb 25, 2015 from http://www.sebi.gov.in/cms/sebi_data/attachdocs/1315462260419.pdf. x NDTV: Sebi allows debenture trustees to seek credit rating details extracted on Feb 25, 2015 from http://profit.ndtv.com/news/market/article-sebi-allows-debenture-trustees-to-seek-credit-rating-details-319587