MAHARASHTRA NATIONAL LAW UNIVERSITY

AURANGABAD
B.A.LL.B. (HONS.)

SEMESTER - 5

PROJECT
FOR
CORPORATE LAW -I

On the topic:

DEBENTURE TRUSTEE: RIGHTS, DUTIES AND

POWERS

BY: Devansh Kathuria Submitted to:

17BALLB56 Mr. Kondaiah Jonnalagadda
Dean Professor of Law
 ABSTRACT

A debenture trustee is a person or an entity who is responsible for issuance and distribution of
debentures and that serves as the holder of debenture stock for the benefit of another party. He
shall play a role of a guardian to the debenture holders. The debenture trustee shall be unbiased
and shall maintain the principle of independence in exercising his duties. If the company is
issuing secured debentures or making an offer, or issues a 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, 2014. The
company issuing a 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. To
protect the interest of the debenture holder, market regulator Securities and Exchange board of
India (SEBI) has proposed few changes in the existing regulation for the debenture trustee (DT).
 INTRODUCTION

What is a debenture?

Debenture is the most common form of long term loan and debt instrument that is not secured by
physical assets or collateral and is used by large companies to borrow money. They are normally
repayable on a fixed date and at a fixed rate of interest, acknowledging a loan to the company. It
is a company’s assets. It is an important source of finance and most common method of raising
funds for the company. The interest paid to the debenture holders is a charge against profit in the
company’s financial statements. The basic difference between shares and debentures is that the
shares represent ownership in a company and a debenture acknowledges loan or debt to a
company. Interest on debenture is tax deductible expenditure and thus it saves income tax for the
company. Debentures are issued to trade on equity but too much dependence on debentures
increases the financial risk of the company. Under the Companies Act 20131, debenture being a
security, it can be issued by a private company only through the route of private placement. In
India, Debenture Trustees are regulated by SEBI2. The SEBI (Debenture Trustees) Regulations,
1993 govern the debenture trustees, monitoring and review, registration, appointment, code of
conduct and inspection of debenture trustees by SEBI, amongst other things. In India, the issuer
pays to the debenture trustee.

Issue and Redemption of Debentures

Debentures are issued in 3 ways:

1. At par- debentures are said to have been issued at par when the amount collected for it is
equal to the nominal value of debentures.
2. At premium- debentures are said to have been issued at premium when the amount
collected for it is more than the nominal value of debentures.
3. At discount- debentures are said to have been issued at discount when the amount
collected for it is less than the nominal value of debentures.

1
http://ebook.mca.gov.in.
2
http://indianexpress.com/article/business/banking-and-􀃒nance/sebi-provides-clarity-to-boi-ondebenture-
trustee-norms-2985680.
Debentures are redeemed in 3 ways:

1. Redeemable at par- when debentures are said to be redeemed at their face value they are
said to be redeemable at par.
2. Redeemable at a premium- when debentures are said to be redeemed at an amount higher
than their face value, they are said to be redeemable at a premium.
3. Redeemable at a discount- when debentures are said to be redeemed at an amount lower
than their face value, they are said to be redeemable at a discount.

Different types of debentures

1. Convertible debentures: are those debentures which carry an option to be converted into
equity shares.
They are of various forms:
 Partly convertible debenture- there is an option to convert part of the debentures
into equity shares at the option of the debenture holders.
 Fully convertible debenture- debentures which are fully converted into equity
shares at the option of the debenture holders.
 Optionally convertible debenture- convertibility available at the option of
debenture holders.
2. Non-Convertible debenture: they are the debentures without the convertibility feature
attached to them; there is no option for its conversion into equity shares. They carry
higher interest rates than their convertible counterparts and the debenture holders remain
debenture holders till maturity.

Other forms:

 Secured and Unsecured debentures.

 Registered and Unregistered debentures.
Who is a debenture trustee?

A debenture trustee is a person or an entity who is responsible for issuance and distribution of
debentures and that serves as the holder of debenture stock for the benefit of another party.
According to SEBI Rules, 1993- “debenture trustee” means a trustee of a trust deed for securing
any issue of debentures of a body corporate [section 2(bb)] (Applicable to public companies
only). The trustee serves as the liaison between the company that issued the debentures, when
debenture stock is issued to a large number of investors and the debenture holders that are
collecting interest payments. The debenture trustee serves as the official representative for the
debenture investors and is responsible for liquidating the collateral of the trust in the event the
company defaults on its debentures. 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 a 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.

In Baroda Rayon Corporation Ltd vs. ICICI Ltd3

The Bombay H.C. 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.

Duties of a debenture trustee:

1. The trustee ensures that there is no breach in the terms of issue of debentures.
2. The trustee can take steps to remedy the breach (above mentioned).
3. The trustee is the person who informs the debenture holders about such breach.
4. The trustee ensures that all the conditions regarding creation of security for debentures is
met.
5. The trustee convenes the meeting between the company and the debenture holders.
6. The trustee is the person who ensures that the debentures are redeemed as per the
conditions agreed upon.
7. The trustee can take steps to resolve the dispute between the company and the holders.
8. The trustee has to take necessary steps to ensure the interest of the debenture holders.

3
2002(2) BomCR 608, 2002(2) BOMLR 915
 9. Appoint a nominee director on the Board of the company in the event of—
 Two consecutive defaults in payment of interest to the debenture holders; or
 Default in creation of security for debentures; or
 Default in redemption of debentures.
10. Call for periodical status or performance reports from the company.
11. Satisfy himself that the letter of offer does not contain any matter which is inconsistent
with the terms of the issue of debentures or with the trust deed

Contents of a Trust Deed4:

1. Preamble
2. Description of instruments
3. Details of Charged Securities (Existing or future)
3.1. Nature of charge, examination of title.
3.2.Rank of charge of assets viz. first, second, pari passu, residual etc
3.3.Charging of future assets.
3.4.Time limit within which the future security for the issue of debentures shall be
created as specified in SEBI (Disclosure and Investor Protection) Guidelines,
2000.
3.5.Minimum security cover required.
3.6.Valuation of security
4. Events of defaults
5. Rights of debenture trustees
6. Obligations of the body corporate

4
[Schedule IV Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 [Regulation 14]
Rights and liabilities of debenture trustee:-

Rights:

1. Section 71(5) a company in no cases can issue debentures before appointment of a

debenture trustee.
2. The company cannot issue debentures before obtaining the consent of the debenture
trustee.
3. The company has to specify the name of the debenture trustee in the offer letter.
4. The debenture trustee can call for periodical performance report of the company.
5. The trustee can call for reports regarding the use of funds raised through issue of
debentures.

Liabilities:

1. No one can be appointed as a debenture trustee if he has a share ownership in the

company.
2. He cannot be appointed if he is a promoter of the company, employee or the manager.
3. No appointment for creditor to the company.
4. The vacancy of a debenture Trustee can be filled by the company by the consent of the
other trustees.

Code of conduct for debenture trustee (Regulation 16 and Schedule III)5

1. A Debenture Trustee shall make all efforts to protect the interest of debenture holders.
2. A Debenture Trustee shall maintain high standards of integrity, dignity and fairness in the
conduct of its business.
3. A Debenture Trustee shall fulfill its obligations in a prompt, ethical and professional
manner.
4. A Debenture Trustee shall at all times exercise due diligence, ensure proper care and
exercise independent professional judgment.

5
[SCHEDULE III Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 [Regulation 16]
 5. A Debenture Trustee shall avoid conflict of interest and make adequate disclosure of its
interest.
6. A Debenture Trustee shall make appropriate disclosure to the client of its possible source
or potential areas of conflict of duties and interest while acting as debenture trustee which
would impair its ability to render fair, objective and unbiased services.
7. A Debenture Trustee shall not indulge in any unfair competition, which is likely to harm
the interests of other trustees or debenture holders or is likely to place such other
debenture trustees in a disadvantageous position.
8. A Debenture Trustee shall share information available with it regarding client companies,
with registered credit rating agencies.
9. A Debenture Trustee shall endeavor to ensure that—
 inquiries from debenture holders are adequately dealt with;
 grievances of debenture holders are redressed in a timely and appropriate
manner;
 Where a complaint is not remedied promptly, the debenture holder is advised of
any further steps which may be available to the debenture holder under the
regulatory system.

Debenture redemption reserve (DRR):

The company issuing debenture must create a DRR Account of the profits of the company which
will be utilised only for the redemption of debentures. However All Indian 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 private placed debentures. NBFCs and companies
engaged in manufacturing and infrastructure enjoy certain relaxations regarding maintenance of
DRR Account services. If the company is issuing secured debentures or making an offer, or
issues 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, 20146. It is the obligation of the body corporate to create DRR as per SEBI
DIP GUIDELINES and SEBI (Debenture Trustees) Regulation, 1993. The Debenture Trustee

6
http://www.sebi.gov.in/legal/rules/apr-2014/companies-share-capital-and-debentures-rules-
2014.
has to ensure that the issuer furnishes an auditors certificate to it for the same. The amount
credited in DRR cannot be utilized except for the redemption of debentures.7

SEBI proposes changes in the debenture trustee rules

To protect the interest of the debenture holder, market regulator Securities and Exchange board
of India (SEBI) has proposed a slew of changes in the existing regulation for the debenture
trustee (DT).
According to it, a person cannot be appointed as a DT if he beneficially owns shares in the
company, is a promoter, director or key managerial person (KMP) or an employee of the
company or its holding, subsidiary or associate company. To enable the DTs to perform the task
of securing investors’ interest more effectively, SEBI had set up a task force comprising of SEBI
officials and representative of (DTs) for examining the “challenges in performing the obligations
and duties as Debenture Trustees to protect the interests of the debenture holders”.
Among other changes, SEBI has also proposed to change the definition of the principal officer,
who is entrusted with overseeing the activities of the DT, to include key management personnel
who in turn can be a chief executive officer, managing director, company secretary, whole-time
director or such other officer. At present, a person cannot act as a DT in the case of any issue of
debentures by an associate. Besides, it has also proposed changes in the provisions relating to the
liability for action against the DTs with regard to default or non- compliance required to be
modified to streamline them with other SEBI regulations so as to have consistency.

Key amendments proposed

Set out below are the key changes proposed to be introduced by the amendments:
 Single form of Trust Deed – The amendments seek to do away with Schedule IV of the
DT Regulations which set out the contents of the debenture trust deed leaving only a
cross reference to the contents of the form of the debenture trust deed set out in Form SH-
12 under the Companies (Share Capital and Debentures) Rules 2014.
 Eligibility criteria of Debenture Trustee aligned – The amendments seek to specifically
align the DT Regulations to Rule 18 of the Companies (Share Capital and Debentures)

7
D.K. Prahlada Rao : All about debentures : An appraisal extracted on Feb 25,2015.
 Rules, 2014 (Debenture Rules) which sets out several restrictions on who can be
appointed as a debenture trustee for a given debenture issue.
 Enhanced Liability in respect of defaults by debenture trustee: In addition to the existing
liability in case of default, the scope has been widened to include the failure by the
debenture trustee to furnish any information relating to its activity as required by SEBI or
furnishing incorrect or misleading information to SEBI. Further, failure by the debenture
trustee to resolve the complaints of the investors or providing unsatisfactory responses to
SEBI in this trustee to monitor, inter alia, compliances of the debenture trustee with the
various rules and regulations framed by the SEBI will now need to obtain a certificate in
terms of SEBI (Certification of Associated Persons in the Securities Markets)
Regulations, 2007 (Certification Regulation).
 Duties and Obligations of the Debenture Trustee streamlined – In the proposed
amendments, SEBI has sought to harmonize the duties and obligations of the debenture
trustee with the provisions of the Companies Act, 2013 and Rule 18 of the Debentures
Rules.
 Definitions aligned with Companies Act, 2013 – A number of definitions under the DT
Regulations will be aligned with those under the new Companies Act, 2013. Definitions
like ‘associate’, ‘debenture’ and ‘Companies Act’ are proposed to be amended to
synchronize it with the new Companies Act, 2013. The definition of ‘body corporate’ is
sought to be amended to include non-banking financial companies and public sector
undertakings under central and state enactments.
 Fixed timeframe for document submission – In terms of submission of information by the
issuers to the debenture trustees, the proposed amendments mandate that they be
submitted within crystallized timelines, for example periodical reports / performance
reports are now required to be obtained within 7 days of the relevant board meeting of the
issuer or 45 days of the respective quarter, whichever is earlier.
 ‘Change in Control’ aligned with Takeover Code – The definition of ‘change in control’
is sought to be modified to bring it in line with the new Takeover Code. As such,
Regulation 2(ae)(i) will now refer to the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 instead of the repealed regulation of 1997.
 Definition of ‘insurance company’ aligned with Insurance Act – Whilst the Companies
Act, 1956 contained a definition of ‘insurance company’, there is no corresponding
definition in the new Companies Act, 2013 and hence the definition of ‘insurance
company’ in the proposed amendments has been aligned to Insurance Act, 1938.
 Maintenance of records by Debenture Trustee – To further safeguard the interest of the
debenture holders, a debenture trustee will henceforth be required to maintain books of
accounts, records, documents, etc. in respect of the debentures for a period of not less
than 5 financial years from the date of redemption of debentures (this was previously
taken as 5 financial years preceding the current financial year).