DEBENTURE TRUSTEE

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
indenture.

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

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 share. 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

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, 2014

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 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 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.

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.
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 meeting.

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 SEBI 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 Trustee.

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.

What is the role of Debenture Trustee?

All appointments to be made of the debenture trustee(s) shall be made under S. 71 of

the Companies Act, 2013.

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 therefore 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. 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.

(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 : -

(1) two consecutive defaults in payment of interest to the debenture holders; or

(2) default in creation of security for debentures, or

(3) default in redemption of debentures.

(j) No debenture trustee shall relinquish its assignments as debenture trustee in respect
of the debenture issue of anybody 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.

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;
No debenture trustee shall wilfully make untrue statement or suppress any material
fact in any documents, reports, papers or information furnished to the Board.

(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.

(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 advice

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.

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.

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 debentures.

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?

If so, when can a debenture trustee relinquish his assignments?

A debenture issue can be transferred. A debenture trustee can relinquish its

assignments in respect of the debenture issue of anybody corporate only when another
debenture trustee is appointed in its place by the body corporate.

Contents of the Debenture Trustee Agreement

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,

(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.

Rights of Debenture Trustee

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.

Is appointment of Debenture Trustee compulsory?

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.
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