"Debenture Trustee" - Position, Powers and Duties - It Is The Law

2/22/2018 “Debenture Trustee”- Position, Powers and Duties - It Is The Law
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“Debenture Trustee”- Position, Powers and Duties
 About the Author  Latest Posts  Message the Author
About Ms. Ria Jaiswal
Ms. Ria Jaiswal is currently pursuing BBA LLB from KIIT School of Law,
Bhubaneswar. Her articles have appeared in a number of e-journal sites
and most of her articles focus on Corporate 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 bene t 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 o er, 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
bene ts 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).
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 xed date and at a xed rate of interest, acknowledging a loan to the company. It is a
http://itisthelaw.in/articles/debenture-trustee-position-powers-and-duties/ 1/13
type of debt certi cate executed under the common seal of a company. Debentures are
advantageous in that they do not result in dilution ofHOME
interest of equity
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have right either to vote or take part in management of the company. There is no security of any
charge on the shares but debentures are secured and bear a oating or a xed charge over the
company’s assets[1]. It is an important source of nance and most common method of raising funds
for the company. The interest paid to the debenture holders is a charge against pro t in the
company’s nancial statements. The basic di erence 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 nancial risk of the company[2]. Under the Companies Act 2013[3], 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 SEBI[4]. 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.
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.
Di erent types of debenture[5]
Redeemable debentures: those debentures which are redeemed at a predetermined date and at
predetermined price. HOME LOG IN REGISTER 
Irredeemable debentures: those debentures which are not redeemed during the lifetime of the
company. They are also termed as Perpetual Debt.
Convertible debentures: are those debentures which carry an option to be converted into equity
shares.
They are of various forms:
1. Partly convertible debenture- there is an option to convert part of the debentures into equity
shares at the option of the debenture holders.
2. Fully convertible debenture- debentures which are fully converted into equity shares at the
option of the debenture holders.
3. Optionally convertible debenture- convertibility available at the option of debenture holders.
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 bene t 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 o cial representative for the debenture investors
and is responsible for liquidating the collateral of the trust in the event the company defaults on its
debentures.
Bene ts of having a debenture trustee:

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 o ering. The company
issuing a debenture also bene ts 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 Ltd[6].
The Bombay H.C. upheld the right of the debenture trustee, i.e. ICICI Ltd. to sell o an unit of Baroda
Rayon for the bene t 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
Rights and liabilities of debenture trustee:-
Rights:
1. Section 18 (c) 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 o er 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.
6. The trustee can communicate promptly to the debenture holders about defaults, if any, with
regard to payment of interest or redemption of debentures and action taken by the trustee
there for.
7. The trustee can appoint a nominee to the Board of DirectorsLOG
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8. Before the trustee appoints the nominee the following conditions must be satis ed:
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.
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 lled by the company by the consent of the other
trustees.
Duties of debenture trustee[7]:
In Administrator of the speci ed undertaking of the Unit Trust of India vs Bank of Baroda
Gujarat H.C. upheld the right of UTI as debenture trustee to draw Rs.4 crore from the liquidation
proceeds of Sri Vallabh Glass Works Ltd., a company in liquidation.
It shall be the duty of every debenture trustee to-
1. Ensure that there is no breach in the terms of issue of debentures.
2. Perform such acts as are necessary for the protection of the interest of the debenture holders
3. Inform the debenture holders about such breach.
4. Ensure that all the conditions regarding creation of security for debentures is met
5. Convene the meeting between the company and the debenture holders
6. To ensure that the debentures are converted or redeemed as per the conditions agreed upon.
7. Resolve disputes between the company and the holders

8. Call for reports on the utilization of funds raised by the issue of debentures
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.
1. Call for periodical status or performance reports from the company
2. Satisfy himself that the letter of o er does not contain any matter which is inconsistent with
the terms of the issue of debentures or with the trust deed

Contents of debenture trustee agreement[8]
Every debenture trustee shall ensure that the trust deed executed between a body corporate and
debenture trustee shall amongst other things provide for the following matters namely: —
1. Preamble
2. Description of instruments
3. Details of Charged Securities (Existing or future)
4. Nature of charge, examination of title.
5. Rank of charge of assets viz. rst, second, pari passu, residual etc.
Charging of future assets.
2000. Time limit within which the future security for the issue of debentures shall be created as
speci ed in SEBI (Disclosure and Investor Protection) Guidelines, 2000.

2001. Minimum security cover required
2002. Valuation of security
Circumstances when security becomes enforceable

Methods and preparation of secured property
4. Events of default
5. Rights of debenture trustee
6. Obligations of the body corporate
Apart from the above the agreement will have to include the following provisions:
1. De nition and interpretation
2. Appointment of debenture trustees and its powers
Remuneration of debenture trustee
1. Appointment of debenture trustee as attorney
2. Negative pledge i.e. not to create additional encumbrances on the secured asset.
3. Description of events of default, which may arise due to non payment to debenture holders,
breach of any undertaking, avoidance or repudiation
Notice of exercise of trustee powers
Code of conduct for debenture trustee (Regulation 16 and Schedule III)[9]
1. A Debenture Trustee shall make all e orts to protect the interest of debenture holders.
2. A Debenture Trustee shall maintain high standards
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conduct of its business.
3. A Debenture Trustee shall ful l 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. A Debenture Trustee shall avoid con ict 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 con ict 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 endeavour to ensure that—
(a) inquiries from debenture holders are adequately dealt with;
(b) grievances of debenture holders are redressed in a timely and appropriate manner;
(c) 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 pro ts 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 o er, 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, 2014[10]. 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 has to ensure that the issuer furnishes an
auditors certi cate to it for the same. The amount credited in DRR cannot be utilized except for the
redemption of debentures[11].
Appointment of debenture trustee[12]

All appointment to be made of the debenture trustee’s should be made under section 71 of the
Companies Act, 2013.
The company shall appoint debenture trustees under sub-section (5) of section 71, after complying
with the following conditions, namely:-
(a) the names of the debenture trustees shall be stated in letter of o er inviting subscription for
debentures and also in all the subsequent notices or other communications sent to the debenture
holders;
(b) before the appointment of debenture trustee or trustees, a written consent shall be obtained
from such debenture trustee or trustees proposed to be appointed and a statement to that e ect
shall appear in the letter of o er issued for inviting the subscription of the debentures;
(c) A person shall not be appointed as a debenture trustee, if he—
(i) bene cially holds shares in the company;
(ii) is a promoter, director or key managerial personnel or any other o cer or an employee of the
company or its holding, subsidiary or associate company;
(iii) is bene cially 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;
1. vi) has any pecuniary relationship with the company amounting to two per cent or more of its
gross turnover or total income or fty lakh rupees or such higher amount as may be
prescribed, whichever is lower, during the two immediately preceding nancial years or during
the current nancial 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 ll any casual vacancy in the o ce of the trustee but while any such vacancy
continues, the remaining trustee or trustees, if any,HOME

may act: Provided
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caused by the resignation of the debenture trustee, the vacancy shall only be lled with the written
consent of the majority of the debenture holders.
(e) any debenture trustee may be removed from o ce 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. SEBI (Debenture Trustee) Regulations, 1993[13] additionally provide that no entity
shall be entitled to act as debenture trustee unless at is either a scheduled bank carrying on a
commercial activity or a public nancial 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 one crore of rupees and have been licensed by SEBI to act as debenture
trustee.
Where at any time the debenture trustee comes to a conclusion that the assets of the company are
insu cient or are likely to become insu cient to discharge the principal amount as and when it
becomes due, the debenture trustee may le a petition before the Company Law Board and the
Company Law Board may, after hearing the company and any other person interested in the matter,
by an order, impose such restrictions on the incurring of any further liabilities as the Company Law
Board thinks necessary in the interests of holders of the debentures[14].
As per the provisions of Companies Act, appointment of debenture trustee is mandatory. However
issue of debentures with maturity of 18 months or less are exempt from the requirement of
appointment of trustee.
In case of debenture with maturity beyond 18 months, a trustee or an agent, by whatever
name called shall be appointed to take care of the interest of the debenture holders
irrespective of whether or not the debentures are secured.

Where the debentures are unsecured, these are treated as xed deposits, if received from
individual investors.
SEBI proposes changes in the

debenture trustee rules[15]
In Central Bank of India vs Tadepalli Padmaja and Ors.
The National Consumer Dispute Forum on July 4, 2008 held that the petitioner bank failed to
discharge its duciary duty with special care and skill

HOME as is expected
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trustee and had not taken appropriate steps as contemplated under the SEBI Regulation.
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 bene cially 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 e ectively, SEBI had set up a task force comprising of SEBI o cials 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”.
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Among other changes, SEBI has also proposed to change the de nition of the principal o cer, who
is entrusted with overseeing the activities of the DT, to include key management personnel who in
   
turn can be a chief executive o cer, managing director, company secretary, whole-time director or
such other o cer. 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 modi ed 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 speci cally align the
DT Regulations to Rule 18 of the Companies (Share Capital and Debentures) 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
regard shall make the debenture trustee liable for actions under Securities and Exchange
Board of India (Intermediaries) Regulations,HOME

2008 whichLOG
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suspension and
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cancellation of certi cate of registration of the debenture trustee.
Certi cation by the Compliance O cer: The compliance o cer appointed by the debenture
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 certi cate in terms of SEBI
(Certi cation of Associated Persons in the Securities Markets) Regulations, 2007 (Certi cation
Regulation).
Duties and Obligations of the Debenture Trustee streamlined – In the proposed amendments,
SEBI has sought to harmonise the duties and obligations of the debenture trustee with the
provisions of the Companies Act, 2013 and Rule 18 of the Debentures Rules.
De nitions aligned with Companies Act, 2013 – A number of de nitions under the DT
Regulations will be aligned with those under the new Companies Act, 2013. De nitions like
‘associate’, ‘debenture’ and ‘Companies Act’ are proposed to be amended to synchronise it
with the new Companies Act, 2013. The de nition of ‘body corporate’ is sought to be amended
to include non-banking nancial 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 crystallised 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 de nition of ‘change in control’ is sought
to be modi ed 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.
De nition of ‘insurance company’ aligned with Insurance Act – Whilst the Companies Act, 1956
contained a de nition of ‘insurance company’, there is no corresponding de nition in the new

Companies Act, 2013 and hence the de nition 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
nancial years from the date of redemption of debentures (this was previously taken as 5
nancial years preceding the current nancial year).
[1] https://e nancemanagement.com/sources-of- nance/how-is-debenture-di erent-from-bank-

loans-equity-shares-and-bond. HOME LOG IN REGISTER 
[2] http://www.yourarticlelibrary.com/ nancial-management/debentures-meaning-features-
advantages-disadvantages.
[3] http://ebook.mca.gov.in.
[4] http://indianexpress.com/article/business/banking-and- nance/sebi-provides-clarity-to-boi-on-
debenture-trustee-norms-2985680.
[5] http://www.gktoday.in/blog/debentures.
[6] 2002(2) BomCR 608, 2002(2) BOMLR 915
[7] Companies (Share Capital and Debentures) Rules, 2014.
[8] Schedule IV Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993
[Regulation 14]
[9] Schedule III Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993
[Regulation 16]
[10] http://www.sebi.gov.in/legal/rules/apr-2014/companies-share-capital-and-debentures-rules-
2014.
[11] D.K. Prahlada Rao : All about debentures : An appraisal extracted on Feb 25,2015.
[12] Companies (Share Capital and Debentures) Rules, 2014.
[13] SEBI (Debenture Trustee) Regulations, 1993.
[14] Sec 117B – Appointment of debenture trustees and duties of debenture trustees, Companies
Act, 1956
[15] http://www.business-standard.com/article/markets/sebi-proposes-changes-in-the-debenture-
trustee-rules
AA-00004-13/10/2017
October 13th, 2017 | Tags: Debenture Redemption Reserve, Debenture Trustee, Debentures, Redemption, Trust
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